“Supplier Risk” is no longer a buzzword or an emerging trend. Nowhere is this more evident than for the food and retail industries, where what started with the horsemeat scandal in 2013 now seems to be haunting Europe as the nuts-for-spices scandal.
Yet risk is an issue that cuts across many industries, around the world. The increasing globalisation of company supply chains compounds risk—and at the value chain level. Such risks have a material impact on companies, resulting in supply chain disruptions, material losses, and reputational damage.
Figure 1 shows the most prominent supplier-related risks that companies are exposed to currently.
According to a November 2013 survey by PwC, 55 per cent of respondents believed that they had experienced at least one significant supply chain disruption over 2011–2013, and these disruptions increased costs for 42 per cent of the respondents and affected customer service for 39 per cent respondents.
Clearly, the need for proactive supplier risk management is no longer simply a nice-to-have—and that’s why 70.6 per cent of the CPOs surveyed for Procurement Leaders’ 2015 Trend Report noted that the time dedicated to risk management activities will increase in 2015.
What are Organisations Doing to Manage Risk?
A February 2015 Procurement Leaders article compares supplier risk to an iceberg. The top 10 per cent of the iceberg, which is visible, is financial risk. The remaining 90 per cent—the portion that is hidden below the surface—includes executive changes, geographical and political risks, and the risk of natural disaster, risks that progressive organisations are increasingly turning their attention toward.
A 2012–2013 Capgemini survey of CPOs lists some of the strategies employed by companies to manage supplier risk:
- Switching to multisourcing for key inputs
- Continuously monitoring supplier performance, and taking actions to mitigate emerging risks
- Putting a clear process in place to continuously assess, mitigate, and manage supply risks
- Developing a process to proactively analyze potential risks, and building supply chain contingency plans
- Using external consulting service providers to help identify and mitigate risks
- Training procurement teams in advanced supply risk management techniques
- Implementing relevant technology solutions to support and manage supply risks
Take a look at several examples of how global organisations are working to mitigate risk across different areas of the supply chain:
Companies with widespread and complex supply chains can find themselves at sea while identifying high probability risks, especially those that have the highest impact on their bottom line. As such, organisations turn to new and sophisticated tools to help identify and mitigate risk—as was the case with Ford.
In December 2013, Ford announced a new supplier risk management strategy, developed in collaboration with MIT’s Dr. David Simchi-Levi. Assessing Ford’s supplier risk was a challenging task, given that the company sources thousands of components from ~4,000 tier 1 suppliers. The risk assessment model was based on Dr. Simchi-Levi’s Risk Exposure Index approach, and concluded that a short disruption pegged at 61 per cent of the tier 1 firms would not have an impact on Ford’s profits. Yet a disruption in supplies from 2 per cent of the firms studied would have a substantial impact. Leveraging this analysis, Ford has focused its efforts on those firms that account for the highest supply chain risk.
For companies that rely significantly on a single geography, commodity, or supplier, it is essential to diversify their purchasing in order to reduce the impact of any disruptions in supply from that single source.
India-based sugar manufacturer EID Parry is expanding its business outside the state of Tamil Nadu. The company’s Executive Chairman A. Vellayan assured shareholders at a July 2014 annual general meeting that they will see long-term benefits of the company’s policy of spreading out its sugar mills across a number of Indian states.
Suppliers that engage in practices such as unsustainable sourcing of commodities, use of child labor, and unsafe manufacturing practices pose a grave threat to the reputation (and ultimately economics) of companies that source from them.
A case in point is Procter & Gamble. Following a February 2014 Greenpeace report on the deforestation practices of some of the company’s palm oil suppliers, the company released an extensive no-deforestation policy aimed at encouraging sustainable sourcing practices among suppliers.
Similarly, Kellogg’s announced its commitment to purchase only deforestation-free palm oil, with a target date of December 31, 2015. The company also introduced a new responsible sourcing policy that seeks to reduce the impact of its supply chain on climate. This includes the provision of resources and education to help suppliers increase their resilience with respect to climate change, optimise the use of fertilizer inputs, reduce GHG emissions in their agricultural practices, optimise water use, and improve soil health.
The Underlying Trend
In an environment of increasing supplier-related risks, it is crucial for companies to strengthen supplier engagement in order to mitigate threats such as supply discontinuity, over-reliance on key suppliers, and reputational damage from supplier activities. To gain competitive advantage, it is important for them to identify, assess, and efficiently monitor and manage such risks—piecemeal or as part of a broader integrated strategy. The underlying trend, though, is clear—as procurement departments mature and organisations grow, an integrated risk management strategy will be the most effective path forward.
By Ankit Abraham Sinha, Senior Analyst, & Sidharth Sreekumar, Assistant Manager – The Smart Cube, a global professional services firm specialising in custom research and analytics.