Why Supply Chain Risk Management is Key to Supplier Management

While brand damage can be quite costly to the businesses whose sales rely strongly on the customer loyalty they generate from their brand strength, cost volatility and supply disruption is very costly to all manufacturers. In fact, in the latest 2015 study by the Business Continuity Institute, supply chain disruption is double in priority relative to other enterprise disruptions and over three-fourths of respondents cited that they had at least one recent (significant) disruption. The same percentage didn’t have full visibility of their supply chains.

While category management can address and even reduce supply chain risk by ensuring a chosen strategy has the right level of resiliency, prevention and agility, it cannot prevent risk or do much to eliminate the source of risk once something has happened. That can only be done by each party in the supply chain doing everything they can to eliminate the risk. In particular, a supplier needs to do all they can to minimize the risk on their end.

However, not all suppliers are as advanced in supply chain management, and in particular, risk management as the buying organization. That’s why good supplier management combined with SCRM is key. Good risk management is a combination of risk prevention and risk mitigation when a risk is detected. Risk prevention involves selecting suppliers, products and services that are low risk and risk mitigation involves taking action as soon as an indicator is detected.

A supplier is not always good at mitigating or even detecting risk in its supply chain, or may overlook an obvious sign that an observant buyer would not, which is why proper supplier management is key. This begins even when qualifying suppliers. Including risk criteria related to the supplier and supplier location gives a good indication of a supplier’s the risk level. Besides the supplier qualification criteria, supply location-related risks provide an overview on potential threats like natural disasters, political situation, sanctions or economic risk. This gives buyers the chance to take preventive actions.

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5 Critical Supply Risk Mitigation Principles for Your Sourcing Process

Supply chain risk management (SCRM) is becoming a top priority in procurement, as organizations lose millions because of cost volatility, supply disruption, non-compliance fines and incidents that cause damage to the organizational brand and reputation.
Bribes to shady government officials, salmonella in the spinach and forced labor in the supply chain can all result in brand-damaging headlines that can cost an organization tens of millions in sales and hundred of millions in brand damage. And while reputation may only be important for name brands, cost volatility and supply disruption affect all manufacturers.

In fact, in the latest 2015 study by the Business Continuity Institute, supply chain disruption doubled in priority relative to other enterprise disruptions (48% of firms are concerned or extremely concerned). Roughly three-quarters of respondents said they had at least one disruption, and the same amount lack full visibility of their supply chains.

In the same study, 14% had losses from supply chain disruptions (e.g., natural hazards, labor strikes, fires, etc.) that cost over €1 million, and these disruptions can easily go up to nine figures. For example, Toyota estimates the costs for the recent Kumamoto earthquakes to be nearly $300 million. Imagine being out of stock on a product line that does $12 million in annual sales for two months. That’s $2 million in immediate lost sales and longer-term brand damage.

Risk management, and what is necessary for ongoing risk management, never gets operationalized, and as new suppliers get added, supply shifts and supply chains change, new risk enters the picture — risks that go undetected unless risk management is embedded in all key procurement activities, including sourcing. It is important to remember that:

1. When You are Sourcing, You are Really Changing Your Supply Chain Network

2. Supplier Risk is Only One Aspect of Supply Chain Risk

3. Your Sourcing Criteria Must Be ‘Protected’ and Risk Must Be Factored In

4. You Need to Cost the Risk” and Also Get It in the Contract

5. You Must Design a Monitoring System That is Part of Onboarding

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