5 Ways to Manage Supplier Risk

Dec 15, 2015

Obtaining greater visibility and control over your existing supply chain can be the most valuable effort you can make to your supplier risk mitigation. The use of online Software-as-a-Service systems that specifically focus on supplier management and control can be the most effective method of achieving your desired visibility and control over supplier risk. In implementing or deciding on a Supplier Management System, there are 5 key methods that need to be explored, as outlined below.

Effective Supplier Selection

In implementing your supplier management system, an initial key component is always the selection of your suppliers. A majority of your risk can be mitigated prior to the contract being awarded through the effective use of supplier questionnaires. The supplier questionnaire will ask each supplier to provide evidence of appropriate licenses, certifications, business references and provide specific work methods and/or procedures that demonstrate they are a mature and responsible organization. An unwillingness to participate in the supplier questionnaire is an obvious red flag and may lead to that supplier not being awarded a contract.

Set Clear Communication Procedures

Many supplier relationships have been eroded from simple misunderstandings due to a breakdown in communication. You can’t expect your suppliers to know the ins and outs of your business and vice versa. It’s your responsibility as the principal to set out clear expectations and define regular communication channels, be they face-to-face or electronic. Remember also that communication is a two-way street, collaboration with your suppliers may bring surprising insights into their business or yield greater innovation.

The Carrot and the Stick

Building rewards and penalties into your contracts and communicating it well among your suppliers is an effective way of mitigating supplier risk. Some penalties may include missed deadlines, number of incident/accidents, and poor quality of service or product. Once you have established KPI’s for the contract such as those just mentioned, working out rewards is just the opposite. For example, consistently exceeding deadlines may result in a financial bonus. Or you may provide a bonus for staying within reportable limits such as having less or no incidents.

Don’t put all your Eggs in One Basket

As Murphy’s Law famously states “whatever can go wrong, will go wrong”. Sometimes there will be incidents or issues completely out of your control and your supplier’s control. When these happen, don’t be left stranded with a warehouse full of stock and no one to move it. Always have another supplier or several ready to pick up the pieces if need be. Having an effective supply chain is all about having the right risk mitigation in place. Risk mitigation is nothing more than having a backup plan. Relying on one supplier these days is risky business. If you have under-performing suppliers, you can simply start to allocate extra work to the others. This serves not only as a back plan in case things go wrong but also as a disincentive to those under-performing suppliers. In other words, spread your risk around

Focus on your Supplier’s Risk Management

Your own risk management program or safety management system should include regular auditing of your suppliers. Using your supplier questionnaire and assessment tools allows you to select the suppliers that have a greater focus on risk management activities. Obviously, during the selection phase of the contract you will want to avoid those suppliers that contribute the greatest risk to your operations and focus more attention to those suppliers that have similar safety attitudes and culture to your own organization. As a result, you will reduce your overall risk mitigation expenses.

Category: risk management