Search
Close this search box.
Horizon 2024 is here! Join hundreds of procurement visionaries in Miami on May 15-17, 2024. Register Now!

Home » Blog » Contract Management » 4 Formulas for Supplier Risk Management

4 Formulas for Supplier Risk Management

4 Formulas for Supplier Risk Management
Zycus Recognized as a Visionary in the 2024 Gartner® Magic Quadrant™
TALK TO PROCUREMENT EXPERT
Consent
This field is for validation purposes and should be left unchanged.
Table of Contents
Subscribe for the Latest Posts
This field is for validation purposes and should be left unchanged.

It is no secret that large enterprises increasingly engage with a large number of far-flung suppliers in today’s globally connected world. Companies depend on these suppliers to man manufacture or develop their products or services or rely on them to run critical business processes. A supplier failure can, therefore, directly affect an organization’s business performance and reputation. And this is the very premise for considering a robust supplier risk management strategy.

In a study conducted byFM Global among 600 large enterprises, respondents rated supply risk management as the one with the greatest potential to disrupt top revenue drivers. The study noted that it could take two or more years for organizations to recover from a supply chain failure. To cover for this, read more about supplier risk management in the discussion below. Among 600 large enterprises, respondents rated supply chain risk as to the one with the greatest potential to disrupt their top revenue drivers. The study noted that it could take two or more years for organizations to recover from a supply chain failure.

According to a report by Dun & Bradstreet called Managing Risk Throughout the Supplier Lifecycle, major supply disruptions over three years may result in 35% drop in shareholder returns, 11% rise in operating costs, and a seven percent dip in sales growth.

Following to the conversation, you wonder, how do companies stay focused on supplier risk management in the changing world? Indeed, an organization which has multiple suppliers should regularly assess and understand the risks that concern businesses. At this time, we provide you formulas to fortify your supplier risk management.

Learn More: Zycus Supplier Risk Management Software

Supplier Risk Management in Procurement

 

Risk assessment: Selecting suppliers considering risk management

First of all, it should start with ‘risk assessment.’ It is necessary to have a detailed approach to evaluating the maximum number of risks that can potentially occur over a period. Companies should maintain risk registers to identify baseline risks and their corresponding impact. The risk register should be comprehensive enough to capture potential threats that concern an organization. There is a need to create worst-case scenarios and a business-impact analysis of all the identified risks for detailed evaluation. Dashboards used for predictive risk monitoring would alert for timely action. Monitoring, however, is only half the work done. Risk probability scores, risk registers, and risk scores help raise the red-flags need to follow up by corrective and timely executive action.

Risk transfer with supplier risk scoring

Importantly, many large organizations prefer to reward their ‘high-performing’ suppliers as a part of their loyalty programs to motivate suppliers. Some others prefer distancing themselves from supplier’s risks by transferring the liability and making the supplier responsible. This is key in cases where supplier-failure can lead to catastrophic business losses.supplier The proper risk assessment criteria should be set and agreed upon by vendor or supplier and principal organization.

Besides that, manufacturing corporations that rely heavily on contract management should consider risk transfer measures besides making provisions for contingencies and scoring the suppliers based on set performance parameters. Risk transfer involves the use of insurance that partially transfers the onus of the risk back to the supplier. Transferring risk increases pressure on the supplier to maintain the quality of goods and services delivered.

Technology

Automation solutions have become increasingly crucial for assessing and mitigating risk on a large scale. Consequently, these solutions identify partners, processes, and practices that are risky and help ensure that an enterprise is immune to any unwanted supplier related issues.

Indeed, with automation, companies can assess the strategic importance of the suppliers. It can analyze product portfolios, annual supplier spends, and the financial health of each supplier. It can help identify the most vulnerable suppliers through ongoing reviews, audits, and performance management with impact analysis.

Without a doubt, automation can make potential risks visible by mining and analyzing internal and external data. It can also help formulate the next plan of action—setting KRAs, project durations, tweaking deliverables and deadlines, and appointing responsible points of contact—internal as well as external—for every supplier.

Supplier Risk Management Formula

Vendor performance management

Finally, companies should conduct regular quality checks and continuously monitor their supplier risk management. This can be done in the form of a streamlined supplier selection process covering strict selection criteria, multi-continent sourcing, and backup suppliers. Maintaining an extensive list of vendors, along with a comprehensive view of vendors and a detailed analysis of active suppliers is desirable. However, maintaining merely an extensive file can be counter-productive.

Instead, a qualified list that incorporates the CPO’s experience with individual suppliers and their performance track records are essential. Moreover, this will need to be an ongoing exercise with an emphasis on data governance. It should be noted that a regularly updated and qualified database can help spot vendors prone to higher risk and classify them based on the extent of the threat they pose. In addition to that, historical data of vendors like breach notification, business plans, and financial details should also be collected. Consequently, you can lower supplier risk by putting in controls, periodic reviews, and conducting regular quality checks.

Learn More: Vendor Management Guide

Related Reads:

Don't Forget to Share
Zycus is a leader in Cognititive Procurement. A leading SaaS platform used by many large enterprises across the globe for enabling efficiency and effectiveness of the procurement function.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top