Five tips to manage supplier risk

Tom Grand | | 26 April 2013

Reducing exposure to suppler risk in a global sourcing environment requires a keen eye on five key factors. Here is how to cut complexity, effort and cost from the risk mitigation process.

1.    Gain visibility by mapping all tiers of your supply base

As the horse meat scandal demonstrated, visibility of the entire supply chain, through multiple tiers, is now absolutely critical to protecting a business. Having confidence in the products and services a business offers will increasingly be reliant on mapping and risk-assessing the supply base accurately and understanding the relationships that exist between different tiers of suppliers. Industries need to work collaboratively to identify where their supply chains are interdependent on the same suppliers, so that they can proactively identify and address potential risks. The automotive sector is developing a global community for mapping and risk-assessing suppliers across multiple tiers.

2.    Know your suppliers

As supply chains become more global, with components for products being sourced from multiple countries, one of the greatest challenges for buying organisations is in ensuring compliance to specific laws and regulations in each country around ethics, corporate social responsibility, health and safety and financial security. Communication is critical, ensuring various companies share – and cross reference – information about the same suppliers. But it is also essential supplier data is accurate, verified and up-to-date.

Organisations should centralise supplier information and introduce processes that create consistency of data across the entire enterprise, worldwide. A standardised approach must be taken that asks the right questions of the supplier – the correct depth of data gathered being appropriate to the risk presented by the supplier – and that the information is backed up by methods that verify the data supplied. With the highest risk suppliers, audits are essential.

3.    Ensure information offered by suppliers is verified

Research conducted by Achilles and IFF Research revealed 43 per cent of businesses are aware of a high-risk supplier failing to meet compliance requirements. In addition, 8 per cent of organisations interviewed believed more than half of their suppliers are ‘high-risk’. If companies are to mitigate the risks from suppliers failing to comply with such requirements as health and safety, insurance cover, CSR practices, financial stability, and anti-bribery policies, then those buying organisations must ensure all information received from suppliers is verified and monitored.

Information should be thoroughly checked, certificates examined and financial information verified using a reputable credit service. For high-risk suppliers a professional on-site audit is essential. Tools and processes for identifying and ranking supplier risk should be used to understand and manage the risks in a controlled way. Working in a collaborative community on supplier information offers huge cost-savings and efficiencies in managing this process.

4.    Stay up-to-date on EU legislation

Research by Achilles and Nottingham University reveals a sharp rise in supplier challenges over recent years – up to 18 per year from an average of just two prior to 2006. In 37 per cent of those cases at least one of the claims was supported by the court. Challenges can take months to resolve and cost hundreds of thousands of pounds in compensation or settlement out of court. Therefore, buyers must ensure their procedures and contracts are watertight and in line with current legislative requirements.

5.    Work collaboratively to reduce complexity

Gathering information across the globe on suppliers in a co-ordinated way, ensuring the integrity of data and verifying material submitted by suppliers is a complex, time consuming and costly process for any individual organisation. Buyers should work in collaborative communities appropriate to their industry to create visibility of common suppliers and cut costs on managing and verifying supplier data. Through outsourcing the task to a central co-ordinating resource, information is up-to-date, verified and aligned to common standards – so improving processes, sharing costs and reducing risk.