Concentric Supplier Risk Management
Executives in all functions and lines of business are driven to create shareholder value, a challenge that increasingly requires them to take calculated risks that often involve the supply chain. From a shareholder’s perspective, nothing destroys the perceived value of an investment faster than negative press, even when it is the unintended result of ‘pushing boundaries’. In some cases, the criticism may not even be due to a company’s own actions, but rather those of their suppliers (or suppliers’ suppliers).
When a supply chain extends across the globe, procurement has to extend the scope of their risk management efforts beyond specific suppliers to include the industry or country that a supplier operates in. Rooting out supplier risk resulting from regulatory non-compliance, child labor law violations or corruption requires proactive monitoring on multiple levels in the supply chain. In order to achieve this expanded view, procurement must move outward in concentric circles; making each supplier the center point, then expanding to include additional relevant sources of risk for further investigation.
Circle 1: Supplier
Risks that are supplier-based are most likely due to decisions made by the leadership team at that supplier and the other organizations they interact with. Signs of potential risk include pending litigation, poor or falling credit ratings, and sudden or significant changes to the executive team / leadership structure. Procurement should be proactively monitoring for indications of risk during the sourcing, onboarding and performance management processes – not just before a contract is signed, but during the entire length of the contract. Primary sources of information include news and financials coming directly from the supplier, along with media coverage of their business, legal transactions and financial performance.
Circle 2: Industry
Industry-associated risks are more systemic in nature and often defy procurement’s efforts to avoid disruption. Most of the companies in a given industry will be subject to similar risks; the degree to which they are affected is determined by their relative ability to satisfy regulatory compliance, environmental concerns associated with raw material consumption or hazardous waste disposal, or even handle competitive shifts within the industry itself. Every industry has its leaders and laggards. Procurement should want to partner with leaders and must invest the time and effort required to determine how a company is functioning relative to other companies in their space over time. When managing industry-related risks, procurement should consult analyst reports, reputable news sources and trade journals dedicated to the space, and oversight organizations such as OSHA, the EPA, and diversity representatives.
Circle 3: Geography
Broadening procurement’s information-gathering scope to include geography introduces an entirely new perspective on risk. If supplier-based risk is likely due to specific company actions, and industry risks are shared across a group of suppliers, geographically-based risk levels may have nothing to do with the supplier’s actions, their competitive landscape or the product / service they offer. Whether the risk stems from natural disasters, civil unrest, or political instability, the supplier located where these events occur cannot be expected to plan for these circumstances in advance or control them once they happen. Since these disruptions rarely come with much warning, procurement will want to leverage the combined power of watchlists and automated alerts in order to stay informed and maximize their response time.
We’ve discussed different risk structures as well as the sources of information and authority that procurement can consult when managing broadening circles of risk, but there is a collaborative element to this effort as well. Suppliers have varying levels of control over each source of risk. In cases where they have control, procurement can work to monitor the potential impact through standard performance management efforts. If, however, the risk is at the industry level or associated with the supplier’s geographical location, procurement has the opportunity – and the responsibility – to work side-by-side with the supplier to understand, monitor, and prepare for potential disruptions.