In an age where supply chains are increasingly global and complex, companies are struggling to mitigate supplier risk in a timely manner. In January 2016, Toyota faced the threat of a production shutdown due to a fire at an Aichi (a Toyota subsidiary) steel plant in Japan.
It has become vital for companies to have a proper and consistent supplier risk management practice in place, which ensures that any potential risks at each level of the supply chain are effectively anticipated, managed, and monitored. Companies are increasingly instating enterprise risk management and other analytical frameworks to mitigate potential supply disruptions in the long run.
Tackling Supplier Risk – Key Best Practices
Develop a Comprehensive View of the Entire Supply Base
It is vital that companies maintain an all-encompassing view of their supply base on an ongoing basis to not only identify active suppliers, but also tier 2 (and all other downward) suppliers, distributors, etc., that the company may indirectly rely on heavily. This visibility will enable the company to better guide its risk management initiatives.
Segment Suppliers Based on Relative Risk
The prime aim of this exercise is to identify suppliers that account for the highest potential risk to the company, thus raising the following pertinent questions:
Which suppliers can disrupt ongoing operations in case of interrupted deliveries?
Which of these suppliers are the most critical?
Where are these suppliers located?
Which suppliers pose the highest risk to the company’s reputation and brand image, regulatory compliance, and health, safety, and sustainability measures?
To effectively answer such questions, companies should regularly obtain and analyze supplier data to attain insights into key criteria—such as suppliers’ financial health, production of critical components, value addition to the company, switching time required, and industry outlook—allowing them to assign a different risk level to each supplier. High-risk suppliers may be reviewed more often to ensure that critical issues are identified early on, and quick remedial action is taken.
For example, GM relied on Clark-Cutler-McDermott (CCM) for the supply of 175 automotive parts, exposing the former to high supplier risk (due to high dependency). Hence, when CCM filed for bankruptcy in July 2016, GM was impacted.
To facilitate such an exercise regularly, some companies track and monitor relevant data, providing real-time visibility into potential risk factors, along with actionable recommendations. This enables the company to formulate a comprehensive risk catalog, complete with various risk parameters categorized at the regional/category/supplier level, which ultimately guides the company’s risk mitigation programs (e.g., supplier audits).
Collaborate with Key Suppliers
In case of a supply emergency, complex global supply chains face the risk of major delays, which may lead to operational and financial challenges for the company. Hence, it is vital that companies collaborate actively with suppliers to manage supply chain risk.
For example, in the GM–CCM case, the latter had been GM’s “Supplier of the Year” four times since 2009. Yet, the relationship was impacted as CCM started incurring losses worth $30,000 a day due to its contract with GM, ultimately forcing it to file for bankruptcy.
Conduct On-site, Internal Audits of Suppliers
This will allow the company to closely monitor its suppliers’ practices and facilitate a regular dialog with them in terms of maintaining quality control, operational efficiency, and regulatory compliance.
For instance, in 2007, Mattel was forced to recall 967,000 toys when it was found that a contract supplier had used lead-based paint on the toys supplied, organizations such as Nickelodeon and Sesame Street instated third parties to monitor and assess all the companies (including Mattel) that produced toys for their brands.
Develop Strategy Plans to Swiftly Mitigate Supplier Risk
Companies must develop contingency plans that outline key actions for quick and effective risk mitigation during supply disruptions. These plans should be refreshed on a regular basis in light of emergence of new risks or potentially helpful measures. An example of a useful strategy is the formalization of an alternative sourcing strategy wherein the company regularly documents existing competitive suppliers while continually exploring for new suppliers.
How Can TSC Help?
Understanding supplier risk in the context of threatened business functions and revenue streams is necessary for prioritizing and devising appropriate strategies. To enable this, it is important to have a comprehensive supplier risk monitoring solution with customized procurement and risk management support that helps save costs and develop appropriate risk mitigation strategies.
TSC’s proprietary risk monitoring solution, based on the “man plus machine” model, allows clients to track their supplier base. It provides a clear view of external risks through a systematic process of identifying and evaluating external events at the industry/country/supplier level, and offers ad hoc detailed risk analysis reports for critical suppliers.