The last decade has yielded many events, forces, and elements in which a greater concern and scrutiny of the concept of Vendor or Supplier Risk Management has risen. At the forefront are driven for Cost Reduction, Top Line Growth, and Competitive Advantage.

Supplier Risk Management Processes are underpinned by:

  1. Identification of Potential Risks emanating from the interaction of buying organizations with their Supplier Base
  2. Quantification the Degree of Risk Impact on stakeholders
  3. Determination of Root Causes of Supplier Risk through Internal and External Collaboration
  4. Selection of cost-effective risk mitigating solutions
  5. Implementation of solutions
  6. Monitoring of solutions to ensure that solutions are institutionalized and changes stick
  7. Response Management to address slippage back to original risk and failure modes

The understanding of the Sources of Vendor or Supplier Risks is a vital component of an effective Supplier Risk Management Program. These sources must be analyzed and categorized, and mitigation strategies must be aligned to corporate strategies.

Supplier Risk Management is becoming a top Strategic Priority for CPOs, Vice Presidents, and Directors of Procurement, and is witnessing an increasing prominence as a Strategic Asset to be leveraged for Competitive Advantage.

According to a survey conducted by IBM, only about 35% of companies follow processes like the one mentioned above. Source: Risk Management a Top CPO Priority, Ilya Leybovich, 2009

Categories of Supplier Risks:

  1. Market Risks

These risks are heavily influenced by supply \ demand dynamics, where buyers compete for a limited quantity of mission-critical inputs and resources required to support their organizations’ operations. Buyer/Seller power, substitution, and technological disruption also add layers of risk impact.

  1. Political Risks

These risks are derived from various sources such as corruption, governmental instability, regional instability, terrorism, civil unrest, wars, tribal conflicts, child labor, genocide, tariffs, trade wars, and unfavorable balances of trade. These issues impact the reliability and cost of materials originating from such areas.

  1. Product Risks

Suppliers with unreliable quality levels put the products of buying organizations at risk for various issues including, safety, reliability, the fitness of use, ecological stability, increased Total Cost of Ownership, and Total Cost to Serve

  1. Brand Risks

All perceived risk impacts derived from an organization’s interaction with its Vendor / Suppliers pose the potential for irreparable brand damage. The direct and opportunity costs in this category can be significant and extremely difficult to reverse.

  1. Financial Risks

Supplier activity and performance are natural cost factors that affect overall supply chain profitability, Total Cost of Ownership, and Total Cost to Serve that affect both suppliers and buying organizations. Special care must be taken to ensure that suppliers are properly vetted through Robust Supplier Selection Processes that are driven by strategic criteria, and only financially viable suppliers are awarded contracts. Failure to implement these principles and processes usually lead to severe fiscal damage to stakeholders.

  1. Legal Risks

All the supplier risk categories mentioned in this paper are sources of potential legal risks that can be disruptive and financially perilous to Supply Chain Actors. Special attention and collaboration with legal counsel is prudent to protect supply chain actors from legal impacts that suppliers pose.

  1. Sourcing Risks

Factors such as the number of suppliers in a market, complexity, and length of supply chains, quality of forecasting methods, materials availability, all create sourcing risks. Contingencies such as Safety Stock, Excess Inventory holdings, Insurance, Early Warning Systems (EWS), and Multiple Sourcing Strategies may prove as protections from these sourcing risks. Careful studies must be undertaken to determine the ROI and Total Cost of Ownership Impacts of these contingencies

  1. Company Level Risks

Suppliers may face various challenges during their relationship with their buying organizations that may be difficult to detect. A culture of visibility, collaboration, and accountability must be nurtured as a guard from negative impacts that can arise from this risk factor. It is important to understand the fiscal health of suppliers as it is indicative of a host of other issues.

  1. Information \ Cyber Risks

Supply Chain Cyber Disruption is complexed and potentially crippling and can lead to enormous impacts on Supply Chain Actors, including brand damage, exposure of proprietary secrets, loss of intellectual property, exposure of sensitive customer information, and legal ramifications.

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David Millington

David Millington M.Sc.QSM, NPDP, CL6σBB, SPP, SPSM3®, CM® Director of Education (Next Level Purchasing Association) A Certified Strategic Planning Professional, David Millington brings over 18+ years experience in the Strategy Execution, Product / Service Development, Organizational and Supply Chain Excellence Arenas. He is a Certified Supply Chain Professional, Certified New Product Development Professional, Certified Strategic Planning Professional, and a Certified Lean Six Sigma Black Belt. David holds a master’s degree in Quality Systems Management, from The National Graduate School of Quality Management, Falmouth MA, USA. This equips him with mastery of vast bodies of knowledge and best practices. David Millington brings hands-on experience at VP, Director, and Manager Levels, guiding and facilitating the development of strategic and tactical solutions to intricate organizational, product, and service challenges.

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