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The inventory advisor

Mar 30, 2020

Managing & identifying supplier risk.

Suppliers are a vital link in the supply chain, and finding ones that are reliable, trustworthy, and efficient should be on the top of your priority list. We all understand that there will be times when deliveries are late, or orders are short supplied, but this should be the exception and not the rule. In fairness, there are also factors out of the control of suppliers, as we have recently seen with the latest pandemic, COVID-19. By spending a bit of time assessing the risk that each supplier could potentially have on your business gives you the knowledge to make decisions or to put measures in place to manage these risks.

In preparation for your supplier risk assessments, we list below some things to consider. Having this information will give you a good sense of whom you are dealing with and the level of risk involved.

Compile a list of suppliers

Put together a list of suppliers and the level of importance the products they supply have on your business. You will have suppliers of critical significance versus suppliers providing items of less importance. To determine their importance, you will look at your monetary spend with them as well as your inventory item classifications. It’s unlikely that you will be able to conduct assessments on all of your suppliers, so this list will help you focus and get started on the critical ones first.

Create your assessment

Prepare your assessment document. Some questions/areas to consider include:

  • Where is the supplier located?

Suppliers in countries where there are frequent environmental disasters or countries that have trade embargos, civil unrest, or political and compliance issues could be a concern. If the products they supply can be sourced from other countries, it would be beneficial to investigate those rather.

  • How long have they been in business?

Companies that have been around for decades doesn’t necessarily mean are better than your new start-up, so don’t use this metric as your deciding factor. Often companies that have been around the block have become a bit ‘stale’ in their comfort zone, but they certainly have the expertise. Start-ups, on the other hand, are hungry and eager to get themselves on the map, so they usually bend over backward for their customers, but they lack experience.  

  • How many customers do they have?

Find out how many customers they have, and more importantly, you want to try and speak to a few that can give you some feedback. Suppliers will most likely only give you names of customers that are happy and have good things to say about them so dig deeper with your questions to them  

  • Compliance

Ask for relevant compliance certifications, professional licenses, data protection, and personal information policies, and any other documents that may be of importance to your industry. 

  • Subcontractors

Do they use sub-contractors? If so, request a list as you will ultimately want to conduct an assessment of these companies as well.

  • Employees

Try and get information about their staff turnover. This will give you a good sense of how they treat their employees, which will have a direct impact on the services and customer experience that they provide to your organization. Run an advanced search on LinkedIn and check how many employees are ‘past not current’ at a supplier and look at the duration of those employments – short stays may also indicate a potential issue.

  • Reputation

Run a quick search on Google and check out their online reputation. Most countries have websites where B2B or B2C customers can leave posts on service and performance, so make sure you look at these.  Naturally, there may be some customer complaints on their social pages, but see if they responded and how they responded. If the complaint was ignored, that should be a red flag for you.

Data analysis

You already have performance data on your existing suppliers. Once you have extracted this data, look at the following indicators:

  • Look at the percentage of on-time deliveries. Use the actual delivery date (or the date the stock is booked in) versus the date they promised. Perhaps build in a percentage leeway of 5-10%.
  • Calculate an average lead time for delivery and compare this to what they promised you.
  • Calculate a late delivery bias by assessing what percentage of the deliveries are after the date promised.
  • Rate these measures in some way to allow you to compare the suppliers against each other (maybe a simple 1-10 scale per measure).

Going forward, implement a procedure whereby you conduct a risk assessment on all new suppliers before you award them your business and carry out re-assessments on all suppliers annually. Certain specialty items may not be available from a wide range of suppliers, but where you can perhaps consider multiple suppliers especially for your critical items so that your risk is spread. You may also like to recognize your top-performing suppliers and start culling the poor performing ones as part of a continual improvement process. 

Remember that supplier risk ultimately affects the financial well being of the business and has a direct effect on your bottom line. The time taken in conducting these assessments is well worth the effort and will hold you in good stead with your financial execs and company stakeholders.