Dealing with Supplier Risk – Part Two

In part one of this series, we looked at several drivers of supplier risk. In this post, we’ll look at some ways to mitigate this risk.

We listed down three major causes: improper supplier selection, over reliance on one/few suppliers and perpetuation of fraud by one or both parties. Here are some ways we can alleviate these:

Clear guidelines for supplier selection across the organization: Instead of randomly inviting bids from suppliers, clearly define who your ideal supplier would be. Brainstorm with stakeholders and come up with a checklist of sorts that you would use to rank all potential suppliers. Ensure that all the parameters important to you are covered in this list, whether they are about service, transportation, costs, delivery timelines, or support. Ask everyone who deals with procurement to follow this religiously.

Supplier performance assessment: This is not so different from the performance assessment of your employees. Define Key Performance Indicators (KPIs), or in this case Key Risk Indicators (KRIs), and metrics that you would use to assess your suppliers and carry out performance assessments and reviews periodically. Be flexible in assigning these metrics; revisit and review them periodically.

Develop a risk threshold: Regardless of the steps taken, it is almost impossible to completely eliminate supplier risk. Instead of hoping for a Utopian world, develop a risk threshold for your organization that will help it deal with any risks that might creep in.

Put technology to work: There is no question that technology can enhance your organization’s procurement process. If you have the wherewithal, develop an Enterprise Risk Management (ERM) framework that looks at all the risks faced by the organization holistically. Or deploy an online procurement solution that lets you automate parts of the supplier selection and management processes and pull detailed reports on all matters pertaining to selection and management.

An added benefit of procurement software is that every stakeholder will have complete visibility into the process, mitigating the risks that arise due to fraud or lack of communication.