How Supply Base Segmentation can help you Manage Risk

by Vishal Patel

The New Importance of Risk Management

Managing Supply Risk has always been part of a buyer’s job, but it is becoming more and more important today. Indeed, many trends have increased the chances of Supply Risk occurring, such as Cost Reduction focus, Supplier consolidation, Reliance on the Internet, Just-in-time delivery practices, Centralization, and Outsourcing.
So with an ever-growing list of problems that will keep you up at night, how can you break this down and address these risks? You’re already familiar with supply base segmentation, which is defined by ISM as, “The strategic analysis of each supplier to determine the extent to which the supplier contributes to the core competence and competitive advantage of the buying organization.”

Make the most out of Supply Base Segmentation

Time and resources are limited, so you typically segment the supply base to pinpoint specific suppliers with whom you wish to focus time and resources. Segmentation for risk is just an extension of normal supply base segmentation, only you are looking specifically for suppliers who pose a potential risk to your firm or who are strategically important and you want to keep an eye on them. These are the suppliers of interest for risk, those on whom you want to focus for risk management. Ordinarily supplier segmentation begins by looking at those suppliers who represent the top 10-20% of spend. But don’t stop there. Just because you don’t spend a lot of money with a supplier doesn’t mean that they can’t bring down your supply chain with a risk incident. Identifying these single points of failure in terms of risk is important. Involve end users, as they can identify suppliers critical to risk management. As a result of SCRM segmentation, you can list of each supply chain risk categorized by criticality and prioritized by importance to address. Then you can identify the suppliers whom you want to watch carefully for risk.

Here are a few examples of the types of suppliers to consider during supply risk segmentation:

• Suppliers who have exhibited poor performance (even if not yet formally measured) such as late deliveries, poor customer responsiveness, and poor quality
• Suppliers located in politically or geographically unstable areas of the world or who demonstrate other potential risks
• Suppliers with whom improved communications would be mutually beneficial and provide potentially valuable information
• Suppliers who are currently working with your company collaboratively on product development or who pose a potential IP risk New suppliers in an important category who have not yet established a performance track record
• Business concentration or overdependence on either your company or another company. If the overdependence is on another customer, then the supplier may be less responsive to your firm. Overdependence on your firm can create risk should the supplier encounter financial or operational issues.

Segment by Types of Risk

If you want to learn more about Supply Base Segmentation or just other ways of Managing Risk, please Download our Free Guide on Supplier Risk