8 Conditions to Control Supplier Risk

Business Risk

Today, Supplier Risk Management is a real strategic challenge for the companies, whatever their size. This theme is more than ever a contemporary concern being addressed in numerous seminars as well as in Procurement literature or in Procurement press and of course in business schools where Procurement is teached.

The Procurement function in general and the supplier relationship approach in particular are still evolving. This evolution also concerns the terminology you may use. Thus, we observe that the term Manage Supplier Risk is sometime a bit overused.

Some time ago, you tended to use the term Supplier Relationship Management to designate supplier relationship as a whole, and when using the term Supplier Risk you thought almost exclusively to the financial health of the supplier or to its dependency ratio with respect to the company that bought its goods & services, which is obviously very simplistic.

Supplier Risk Management is being more and more used and will naturally be the most appropriate term to designate the whole of the supplier relationship, because a contemporary supplier relationship is necessarily conducted according to a risk driven approach.

Meanwhile terminology’s standardization, we observe that the terms that are used in the field of supplier relationship are quite varied (supplier relationship, supplier risk, SRM, supplier performance, supplier assessment, supplier evaluation, SPM, supplier pre-qualification, contracting with suppliers, ), some of these terms have close meanings or are not always used wisely.

This situation often generates some confusion in people’s minds. In particular, within the company, the internal customers of the Procurement department have a confused view of the extent of actions the buyer has vis-à-vis the suppliers. The confusion exists because on one hand the internal clients do not fully understand the language of the buyers and secondly because the buyers themselves do not always use the appropriate vocabulary.

So, what do you mean by Supplier Risk Management?

  1. Generally and theoretically speaking, it is about implementing the actions that enable to identify and reduce methodically the risks relating to the activities of the company’s suppliers, regardless of the nature of the origin of these risks.
  2. More precisely and practically – i.e. considering the steps of the Procurement process where the company interacts with its potential suppliers, its new suppliers and its active suppliers – it is about reducing the risk (1) at the pre-qualification step, then (2) at the contracting step and (3) at the performance management step.

This being said, what are the conditions enabling the company to manage at the best – thus to control – supplier risk?

  1. Always keep in mind that you have the suppliers you deserve
  2. Always consider that supplier risk management concerns potential suppliers as well as the active suppliers; reducing the risk upstream with potential suppliers can indeed save you some downstream inconvenience with your active suppliers.
  3. Rely on a supplier risk matrix aligned with the company values; if the company has a pretty well developed risk management approach then – avoid reinventing the wheel – and develop your matrix on the base of the general risk matrix of your company
  4. Rely on a supplier pre-qualification approach aligned with the company values
  5. Rely on a contract management approach that enables you to have purchasing contracts adapted to accurately cover the interests of your company 
  6. Rely on a supplier performance management approach that enables to make sure their performance is at the right level of company’s requirements
  7. Act continuously, ie reassess the risk periodically and adjust the corresponding actions if necessary; again, in the long run, you have the suppliers you deserve
  8. Implement an appropriate IT solution that covers all or part of three essential components of supplier risk (pre-qualification, contracting, performance); this is definitely the best way to structure the process and ensure data integrity

And of course, Have Fun!

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