Supplier risk management

The management of supplier risk has become a major strategic challenge for businesses, regardless of their size. In a business landscape marked by complex supply chains and increasingly stringent customer requirements, businesses need to take the necessary steps to anticipate and mitigate. risks associated with suppliers. Their ability to identify, assess, and reduce supplier risks can help them maintain overall stability and performance. It should not be forgotten that a problem with a supplier can have more or less serious consequences for the company, such as supply chain interruption, production delays and customer dissatisfaction. In this article, let's discover together the importance of supplier risk management, as well as strategies and best practices for effective supplier risk management.

Supplier risk: definition

The supplier risk, also known as supply risk, refers to the dangers or uncertainties to which a company is exposed as a result of the relationship it maintains with its suppliers and its dependence on them. It is one of the various risks that it must address and is predominant among entities that need a regular supply of raw materials, components or services from third parties.

There are several types of supplier risks :

• Supply chain interruption: delivery delays, shortages, or stockouts can occur if a supplier does not deliver the products or services ordered due to production problems, financial difficulties, natural disasters, social conflicts, or other problems.
• The decline in product quality: if a supplier does not meet the quality standards requested by the company, the quality of the final product will also fall. However, faulty or unsuitable end products can damage a company's reputation and customer satisfaction.
• Financial problems of suppliers: If for any reason, a supplier is experiencing financial difficulties, this can lead to late payments, contract breaches, or even the bankruptcy of the supplier. This could have an impact on the business, especially if it is heavily dependent on him.
• Too much dependence on a single supplier: a company that depends on a single supplier for its critical needs is at major risk if the business relationship is interrupted or the supplier fails.
• Cost fluctuations: changes in the prices of raw materials or transport costs can have an impact on a company's profit margins, especially if the company has not implemented measures to supplier risk management effective or if long-term supply contracts have not been negotiated.

Why is it important to implement a supplier risk management policy?

The establishment of a policy of supplier risk management meets several objectives:

Ensuring the continuity of the supply chain

With the strategic dimension of the Purchasing function, suppliers are now considered as real partners for the company. They play a crucial role in the continuity of business operations. By making it possible to identify and mitigate supplier risks, a policy of supplier risk management helps maintain the stability of the supply chain. It guarantees the availability of raw materials, components and products to better meet customer demand.

Reducing costs

One supplier risk management proactive makes it possible to identify and assess the supplier financial risks. Thanks to it, the Purchasing team can anticipate the possibility of supplier bankruptcy and possible late payments or price changes. By assessing these risks and putting in place adequate measures, businesses can avoid additional costs due to the replacement of an urgently failing supplier or to losses resulting from poor product quality.

Improving quality and compliance

The establishment of a policy of supplier risk management also makes it possible to assess the supplier's ability to meet the quality standards requested by the company. Is he in a position to provide products or services in accordance with the requirements of the company and its customers? This reduces the risks of complaints, product returns, or disputes related to product non-compliance.

Preserving the company's reputation

Les supplier risks can have a negative impact on a company's reputation. Delayed deliveries, reduced quality, or other supplier issues can lead to customer dissatisfaction and a loss of trust. By implementing a policy of supplier risk management, the company demonstrates its commitment to maintaining the quality and reliability of its products/services and customer satisfaction. This contributes to maintaining its reputation in the market.

Anticipate future changes or risks

A process of supplier risk management includes a component of continuous monitoring of the performance and financial situation of suppliers. This makes it possible to quickly detect early signs of potential problems, such as financial difficulties, changes in management, or operational issues. By anticipating these risks, the company can take preventive measures, such as identifying backup suppliers or adjusting its production capacities, thus minimizing the negative impacts on its activities.

The different stages of supplier risk management

The process of supplier risk management includes several steps:

Identifying supplier risks

The first step is to identify the potential risks associated with each supplier. This includes financial risks such as the supplier's financial instability, late payments, or bankruptcy. Other risks may also be identified, such as operational risks. In this category, we find quality problems, delivery delays or insufficient production capacity. The objective of identifying supplier risks is to allow the company to take preventive measures to mitigate them.

Supplier risk assessment

Once the risks have been identified, they must now be evaluated in order to determine their severity and probability of occurring. This can be done through financial evaluations, such as analyzing the supplier's financial statements, solvency, and profitability. The assessment may also include field visits to assess the supplier's operational capabilities and its ability to comply with current quality standards. This assessment phase makes it possible to classify suppliers according to their level of risk and to make informed decisions about continuing or changing the relationships that the company maintains with them. Thus, a distinction can be made between low-risk suppliers, moderate-risk suppliers, and high-risk suppliers.

Supplier Risk Mitigation

Once risks have been assessed, it is essential to put measures in place to minimize risks and their potential impact on business activities. Actions to be taken may include diversifying supply sources by working with multiple suppliers. Thus, in the event of a problem with one of them, the company has other alternatives to obtain supplies.

Specific clauses may also be included in the contract to protect against certain risks, such as penalties in case of non-compliance with delivery deadlines.

Finally, it is important to communicate regularly with suppliers to establish a relationship of trust with them and to quickly detect the slightest signs of difficulty.

Ongoing monitoring

La supplier risk management does not stop at evaluating and taking initial steps to eliminate supplier risks. It is necessary to continuously monitor the performance of the supplier and adapt to changes that occur. This involves using key performance indicators (KPIs) to measure the quality, timeliness, and reliability of suppliers. In the event of a failure or a drop in performance, corrective actions must be taken quickly to minimize the impact on business activities.

Establishing a business continuity plan

La supplier risk management also requires developing a plan to ensure the continuity of business activities in the event that a risk occurs. Identify backup alternatives to reduce the impact of vendor failures.

By following these steps and taking a proactive approach, you will be in a position to more effectively manage supplier risks and to guarantee the stability and reliability of your business operations.

How to manage the risks associated with large suppliers?

Large suppliers have advantages, but they also represent significant procurement risks.

Solving issues with a major supplier can be difficult. Finding an available contact person to urgently solve your problem before those of other customers is sometimes very complicated, if not impossible. This is how supplier risk occurs.

Sooner or later, the question of the “small customer” that you may be with your supplier will arise. Unfortunately, you often discover this after you have already engaged with the supplier in question and supplier risk may happen.

But you can predict the likelihood of such problems.

For a strategic purchase or a major project, you can take certain steps before taking any risk by engaging with a large supplier and thus avoid supplier risk :

Require a single contact:

When requesting a proposal, always require suppliers to designate a contact person who will be responsible for managing situations that require a high level of interaction (in addition to everyday relationships).

You are thus minimizing supplier risk by having a single point of contact.

Ask your single contact:

The ability to make a single contact can reduce or increase the risk of procurement.

Before engaging with a supplier, you will need to assess the designated person's communication skills, knowledge of various aspects of their business, and relationships with key contacts in each area.

If the person seems to be unqualified in these various fields, supplier risk is increased.

Ask for a “climbing plan”:

As good as your one-stop shop is, some purchases are just too risky or too critical to expect a response from them.

To avoid supplier risk, ask the supplier to attach to its proposal an “escalation plan” with the names and contact details of the persons to contact in case of no response from the single contact within a fixed period of time.

This plan should therefore start with the name of your contact and end with the name of the manager with an appropriate number of intermediate levels in between.

Test the “climbing plan”:

Before engaging with this provider, test the plan by trying to reach the right people. Are they answering the phone? If not, leave a voice message telling them to call you back in a short time.

If they don't contact you again, again supplier risk is increased.