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November 29, 2016

Concentric Supplier Risk Management

Today, executives in all functions and lines of business are driven to create shareholder value. Nothing can destroy the perceived value of an investment faster than negative press, which can do irreparable damage to a brand. In some cases, the cause of the criticism may not even be due to a company’s own actions, but rather those of their suppliers (or suppliers’ suppliers).

When a supply chain extends across the globe, procurement may have to extend the scope of their efforts beyond specific suppliers to include the industry or country that a supplier operates in. Rooting out supplier risk due to regulatory non-compliance, child labor violations, or corruption requires proactive monitoring on multiple levels in the supply chain. In order to gain this expanded view, procurement must move outward in concentric circles; making each supplier the center point,  then expanding to include other relevant sources of risk for further investigation.

Circle 1: Supplier

Risks that are supplier-based are most likely due to decisions made by the leadership team at that supplier and the other organizations they interact with. Signs of potential risk include pending litigation, poor or falling credit ratings, and sudden or significant changes to the executive team / leadership structure. Procurement should be proactively monitoring for indications of risk during the sourcing, onboarding and performance management processes; not just before a contract is signed, but during the entire length of the contract. Primary sources of information include news and financials coming directly from the supplier, along with media coverage of their business, legal transactions, and financial performance.

Circle 2: Industry

Industry-associated risks are more systemic in nature. All of the companies in a given industry are subject to similar risks; the degree to which they are affected relates to their relative ability to satisfy regulatory compliance, environmental concerns associated with raw material consumption or hazardous waste disposal, or even handle competitive shifts within the industry itself. While supplier-based risks are likely to be due to decisions that a company makes, industry-driven risks can be the result of decisions not made or actions not taken. Every industry has its leaders and laggards. Procurement should want to partner with leaders, and must invest the time and effort required to determine what position a supplier holds in their market and how they are functioning relative to other companies in their space over time. When managing industry-related risks, procurement should consult analyst reports, reputable news sources dedicated to the space, and oversight organizations such as OSHA, the EPA, and diversity representatives.

Circle 3: Geography

Broadening procurement’s information-gathering scope to include geography introduces an entirely new perspective on risk. If supplier-based risk is likely due to specific supplier actions, and industry risks are shared across a group of suppliers, geographically-based risk levels may have nothing to do with the supplier’s actions or competitive landscape at all. Whether these risks take such forms as natural disasters, civil unrest, or political instability, the supplier located where these events occur can not be expected to plan for these circumstances in advance. And since such disruption rarely comes with much warning, procurement will want to leverage the combined power of watchlists and automated alerts in order to stay informed and maximize response time.

We’ve discussed different risk structures, as well as the sources of information and authority that procurement can consult when managing broadening circles of risk, but there is a collaborative element to this effort as well. Suppliers have varying levels of control over these different sources of risk. In cases where they have control, procurement can work to monitor potential impact through standard performance management efforts. If, however, the risk is either at the industry level or associated with the supplier’s geographical location, procurement has the opportunity – and the responsibility – to work side-by-side with the supplier to understand, monitor, and prepare for potential disruptions.

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