Supply Chain

How to Improve Supplier Risk Management In Your Business

by Jarrod McAdoo

The Covid-19 pandemic has exposed the fact that many supply chains remain inadequately prepared for a crisis. It’s no excuse to remain passive, though. Supply chain management and procurement sit poised on the frontlines of managing global supply risks for their brands.

A reliable supply chain can decrease purchasing and production costs for manufacturers and sellers. That’s why companies are always looking for new ways to streamline and increase efficiencies while also mitigating the risk within their supply chain.

From inventory management to customer shipping, leave nothing to chance when it comes to supply chain risks. With that in mind, let’s take a look at how supplier risk management can benefit your business and prevent the disruption of services.

Understanding Supplier Risk Management

Your business is only as strong as its weakest link when it comes to supply chain management. Sure, it’s a well-known cliche, but it doesn’t make the statement any less accurate.

Today’s supply chain managers deal with higher financial risks than ever before. Why? Because supply chains are now global as a standard operating procedure and with that comes the increased chance of disruption. 

Failure to manage supplier risk comes with significant monetary losses and damage to a company’s reputation. It can also represent a shortcut to:

  • Production delays
  • Product recalls
  • Regulatory penalties
  • Catastrophic health and safety fails
  • And much more

I think we can all agree that no company wants to take that shortcut. Nonetheless, countless businesses struggle with how to develop effective supplier risk management strategies. Especially when they get caught unprepared amid such challenges. 

That’s why you should focus on prevention instead of waiting for a supply chain crisis to strike. 

Gaining a Full Picture of Supply Chain Threats

You must understand the elements of strong supply chain risk management. After all, guaranteeing that your goods arrive on time is just one part of the overall picture. 

Business owners must also have knowledge when it comes to:

  • Managing vendor relationships
  • Appreciating the geographic challenges associated with growth
  • Building strong payment protocols

Necessary data isn’t always readily available to inform decisions, especially when it comes to factors such as supplier compliance, integrity, reliability, and production capacity.

Exacerbating this further? A typical enterprise-level company may deal with upwards of 20,000 suppliers. 

Here are steps you can take to protect your brand, drive growth, gain a competitive edge, and ensure your supply chain operates effectively.

Managing Risk at Every Step

As companies continue to expand globally, risk management in the supply chain will become even more essential. Companies branching out into new markets must:

That’s a lot for any enterprise to bite off. The resulting complexity of the supply chain often masks a wide range of regulatory, financial, and legal risks that you won’t fully appreciate until knee- or neck-deep in the new market. 

How can you gain a better understanding of the supply chain in advance? Many companies use data analytics to gain a more profound view of financial transaction information as well as other operational details. Through this method, they come away with a much better comprehension of where potential risks lie.

Because of the complexity of the current environment, your company needs supply chain data analytics. Why? To identify a variety of potential threats from waste to fraud, billing anomalies to risk patterns.

Hedge Against Issues Before They Arise

As you’re already starting to appreciate, effective supply chain risk management requires more than a reactive approach to potential risks. Instead, you must act proactively to mitigate and hedge against  issues before they arise.

Why? Because today supply chain disruptions and waste abound. 

From fraud to abuse, these issues continue to prove alarmingly pervasive. Eighty-five percent of surveyed global supply chains experienced at least one supply chain disruption in the past year.

Eighty-five percent! If that doesn’t scare you into action, I don’t know what will.

Among your best weapons for combating this type of disruption? Proactive risk management. It remains your company’s most cost-effective strategy.

Proactively Manage Potential Threats to Your Supply Chain 

Don’t believe it? Consider this. Companies actively manning their supply chain risk expend 50 percent less to manage supplier disruptions than companies who wait for trouble to come knocking.

As you explore geographic expansion into various markets, you must make strategic choices to avoid related risks before they rear their ugly heads. In other words, you need to manage risk effectively from the get-go.

With a proactive mindset, your organization will gain an immediate competitive advantage or at the very least counter the competitive advantage of a competitor who may be doing the same. You’ll also ensure the maintenance of your brand’s reputation. What’s more, you can exploit your newfound understanding of risk to drive future performance. 

What does proactive strategy involve? Preparing in advance for the most significant supply chain risks out there. That way, you can put systems in place now to pivot quickly when the unlikely and inevitable occurs. 

Know Your Potential Suppliers 

With any expansion into a new market, you’ll need to work with third-party suppliers. They often represent a lifeline as you begin to navigate a new country, its culture, and its regulations and red tape. 

As a result, you need to have a thorough knowledge of each third-party’s business practices. This process requires asking tough questions like:

  • Do existing business relationships create any conflicts of interest?
  • Does this company have a strong track record when it comes to meeting contractual obligations?
  • Does the company observe the same high standards as your company when it comes to areas like safe working conditions and/or protecting the environment?

The last thing you want to do is sully your company’s reputation by working with third-party companies that fall short when it comes to the questions above.

Manage the Risk Associated with Each Supplier

Carefully consider whether your existing supply network can meet your needs before bringing in a new supplier.

Remember that forming a strategic partnership with a select group of your best suppliers frequently comes with a variety of advantages. These include the potential for priority services and scale advantages.

In some situations, you may have to work with suppliers who aren’t your first choice. Take steps to protect your company by assigning risk categories and developing backup suppliers for primary materials. Then, segment suppliers into these risk categories.

It’ll help your company pivot faster when problems arise. These may include everything from manufacturing slowdowns to weather events or anything else that could critically impact the supply chain. 

Learn more about the supplier management solution that can put supplier information, performance, and risk right at your fingertips. 

Monitor the Goods and Services You Receive

Once you begin working with a third-party supplier, how do you ensure you get what you paid for? By carefully and consistently monitoring the goods and services you receive.

Do this with an eye for quality and quantity, ensuring they adhere to the requirements agreed upon in your contract. No matter how good your due diligence at the outset of a new professional relationship, you may find yourself working with a supplier that can’t deliver.

You don’t want to be stuck with inferior goods and services. After all, it’s your brand whose name and reputation will be sullied by less than stellar fulfillment.

Getting what you’ve asked for makes it much easier to meet the high standards you’ve set for your products and services. 

Pay for What You Get and Nothing More

Having an elaborate list of contractors with which you work ups your chances of duplicating a bill, inappropriate markups, and improper related-party billing.

You need to nip that in the bud. How? With accounts-payable processes that ensure each supplier’s invoice relates to the goods and services provided. 

While this sounds straightforward enough, billing remains one of the primary ways that companies open themselves up to fraud. Twenty-nine percent of companies have reported an incident of supply chain waste, abuse, or fraud in the past year.

How do you avoid inadvertently permitting this vulnerability? For starters, equip your accounts-payable staff with a healthy dose of skepticism when it comes to protecting the company’s cash. Empower them as stewards of your business’s money.

To do this, you’ll need to steer them away from roles as volume producers, which may push them outside of their comfort zones, initially. However, establishing a system for review and escalation that functions well will drive value through your organization.

It starts with instilling in your employees a mindset geared towards accuracy and attention to details rather than volume production. But don’t stop there. Explore how contract management can help your company manage all contract processes in one place. 

Put Mechanisms in Place to Prevent or Resolve Disputes

At every stage of the supply chain, there’s potential for disputes. How do you mitigate dispute-related risks and promote smooth operations? By actively heading off conflicts before they happen.

You should also have a framework in place for those times an amicable resolution is needed. Combining the right technologies and processes is critical for identifying sources of disagreement that threaten to disrupt your supply chain.

How do you do this? As with the previous accounts-payable scenario, you need the right employees by your side.

They should be not only capable of effective communication but also of implementing communications processes. These employees will help prevent disruption of the supply chain. 

Remember that, in most cases, a mutually beneficial solution represents your best outcome. That way, you’re in the optimal position to enhance your company’s value while mitigating risk. Learn more about navigating contractual rights and obligations when problems come up. 

Don’t Forget About the Sales Process

The complicated nature of the supply chain can lead some companies to neglect a critical step in the supply chain option: sales operations. Neglect this at your own risk. 

Your sales operations represent an essential link that loops back around to your suppliers. After all, customer demand impacts your purchasing requirements. 

Remember that as your sales channel evolves, it can bring new threats to the environment. For example, if you open up a new market in a geographic location where you’ve never sold goods or services before, this will impact your company’s procurement-supply dynamic.

How can you address this risk? By understanding how sales interactions expose your company to liability. To drive high revenue growth, give sales operations the attention they deserve. 

Risk Management in Supply Chains

When it comes to your supply chain, creating value and mitigating risk requires a strategic, organized effort between the various stakeholders in your business. These include:

  • Supply chain and procurement personnel
  • Compliance teams
  • Legal employees
  • Finance teams

Carefully selecting the third-party suppliers you choose to work with is a vital step in the process. But it’s just one of many. That’s why you need to work across your business to design a strategy for using third-party relationships to your company’s advantage.

Yes, this requires a serious investment of time and effort on the part of your company and its employees, but the results will prove well worth it. If you succeed in these areas, you’ll drive business growth while protecting your brand’s reputation.

You Don’t Need a Crystal Ball 

You don’t need a crystal ball to effectively undertake supplier risk management. And you don’t have to adopt a worse-case-scenario mindset for the rest of your working career, either.

You do, however, need to empower your employees with the resources to protect your supply chain. What’s more, you need a bulletproof supply chain risk management plan at the ready.

Learn more about how ivalua can help your company mitigate supply chain risks while adding value.

Jarrod McAdoo Blog Picture
Author

Jarrod McAdoo

Jarrod McAdoo brings over 22 years of procurement experience across multiple industries, including higher education, retail, manufacturing, and engineered products.  During this time, Jarrod held various roles in category and supplier management including the management of strategic sourcing and procurement teams as well as leading teams in implementing shared service procurement models and source to pay systems.  Jarrod holds a Masters in Business Administration from Duquesne University and a Bachelor’s degree from Carnegie Mellon University.

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