Every now and again we like to examine some of the broader emerging sourcing trends, many of which we learn from our sister site, SpendMatters. Of recent interest (and perhaps a little controversy), the subject of supplier risk management has spurred a debate over whether or not supplier risk research is a waste of time. In other words, should companies conduct preemptive monitoring of suppliers on the front end, or re-deploy those resources toward developing contingency plans and alternative strategies on the back end?
My better half thinks companies ought to focus on the former. I’d argue a mix of both probably makes the most sense for most metal-buying organizations. Consider a few of the following points made by software firm Aravo, in a recent whitepaper entitled: Five Building Blocks for Successful Supplier Risk Management:
- Which of our key suppliers (and therefore customer accounts) are most at risk?
- What types of risk are we tracking for our suppliers?
- What is the probability of a financial failure on their part, and how does this affect our supply chain?
- If disruptions occur, what are the proposed contingency plans? Do we even have any?
- How quickly can these plans be put in place?
Clearly, some up front risk monitoring makes sense, particularly for companies who are sole sourcing critical made-to-order custom parts such as castings, forgings or fabrications. Many of these suppliers are small mom and pop type shops and continuous monitoring and oversight makes a whole lot of sense. But we’d argue the real risk in supply risk management relates to the development of the contingency plans. Who can re-tool on a moment’s notice? How can the buying organization ensure continuity of supply if a key supplier goes out of business?
Perhaps instead of choosing one side of the debate over the other, start with the first question Aravo asks ” Which of our key suppliers are most at risk? For key metals categories, map out on a 2×2 matrix supply risk on the X axis and degree of impact on the company (think of it in dollar terms) if that supply source went out of business (the risk doesn’t have to relate to going out of businessÃ‚Â¦.it could be some other supply disruption). Any category in your upper right hand quadrant deserves the consideration of a detailed contingency plan.
Not to lose the message on the balance of the three quadrants, having a supply risk monitoring program for the remaining categories and suppliers makes a whole lot of sense. And as many of the software providers would tell you, creating a strategy, and process combined with a technology to constantly monitor and measure supply risk can form the basis of a strong supply risk management program.