Managing Supplier Risk

Globally integrated and complex supply chains lead to barriers in identifying risk concentration. Dependence on a select supplier, in case of a single-sourcing strategy has increased the supply risks. Weak links in a supply chain can result in significant costs. As such, it is essential to conduct a thorough business and financial stability review to identify weak links in the existing supply chain or for evaluating new suppliers. Procurement is almost always under pressure to lead the way in managing supply chain and supplier risk.   Effective supply chain risk assessment demand scrutiny of the following three factors:

  • Commodity value chain along from raw material inputs, to conversion process to transportation and distribution
  • Underlying cost and risk drivers that influence product supply
  • Key market trends, externalities along the value chain that can affect category risk and cost

  Supplier risk assessment for critical, single-sourced supplier should go well beyond financials and past performance and include:

  • Industry analysis
  • Customer analysis
  • Supplier analysis
  • Operations outlook
  • Ownership structure

  Additionally, some organizations mandate that all items procured from single source are listed and approved at the highest level of the procurement organization. Such approvals are taken every year and rationale for single source purchases as well as action plan for broadening the supply base are documented. There can be legitimate grounds for single source vendors. This would include vendors with whom there is a strategic alliance on grounds of leveraging innovation or if the cost of developing a second vendor outweighs associated benefits (for low purchase, for example).  Single vendor situations present complexity in terms of establishing fairness in price. As such, efforts must be taken to conduct price benchmarking within realms of legitimate assumptions and comparable goods / services. Lastly, adequate credit risk mitigation techniques must be adopted for single source suppliers. This may include a combination of performance bonds, bank guarantee, parent company guarantee, and advance payment bonds.  

Comments

Nice article. An assessment of risk involved in engaging a single supplier should consider the opportunity cost of losing out on innovations through a rigorous industry analysis. Depending on the changing industry dynamics and change in a company's strategic direction, choosing the right supplier is a strategic imperative for companies to gain competitive advantage.

Cool! That's a clever way of looking at it!

Great thinking! That really breaks the mold!

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