Risk evaluation is a basic necessity in any comprehensive supplier management program. Before incorporating risk into your plan, you must first identify which suppliers represent the greatest risk to your supplier chain during times of crisis or disaster. Ask yourself these questions:
- Does the material you buy come from countries with high socio/economic risk factors or locations with volatile weather conditions?
- Is your material custom, or does it have a limited supply base?
- Does the product come into ports with low capacity or logistical issues?
If the answer to one or more of these questions is yes, then you need to develop a risk mitigation plan with your supply base. That said, getting suppliers to share information about risk factors can be difficult. Suppliers aren’t always forthcoming about their own supply chain challenges, typically because they don’t want to disclose risk factors that could result in them not fulfilling contractual obligations, fear that they will be replaced by a supplier with less risk, or are concerned that they will be perceived as a low-value middle man in the supply chain.
It is important to realize that time and effort required to fully engage in risk discussions can be substantial, and should not be utilized in every supply relationship. The starting point should be with three types of suppliers – finished goods, raw material/work in progress, and capital equipment maintenance providers. These are the suppliers that keep your business running and they are often the most essential. They also represent the biggest risk.
Still, this supplier list can be a long one and unmanageable unless further prioritization occurs as, even within the confines of raw material suppliers, those that provide ancillary and supplemental products should be given lower priority. To further narrow down the supplier(s) to focus on, ask the following questions:
- Which suppliers provide materials that support star/cash cow product lines?
- Which suppliers provide materials that give your company a competitive advantage?
- Which suppliers provide materials that support products lines important to long term organizational objectives?
Ultimately, you will find that there are two types of suppliers – those that are willing to engage in a comprehensive risk management plan, and those that are not. For circumstances where suppliers are unwilling to engage, the only options are developing a secondary source of supply or warehousing excess inventory.
For those that are willing to engage, the first step is putting all your cards on the table by sharing risk factors with them. Discussion topics should include:
- Where do you perceive bottlenecks in the supply chain are? Where does the supplier perceive bottlenecks?
- Where is the supplier’s highest risk of supply outage issues?
- What are they doing to ensure supply? What can be done differently through joint contingency planning?
- Does the supplier have backup logistical plans? Is there a way to restructure the logistics to eliminate risk or gain necessary redundancies?
The end result is a better understanding of key supplier supply chains, including the lines of communication, chain of command, logistical backup plans, and the sharing of SOP’s at the highest levels between organizations. The conversation about supply chain risk isn’t an easy one, but the reward for engaging the suppliers in this way can be substantial.