5 Supplier Risk Assessment Pitfalls to Avoid
In mid-2007, a California-based toy maker Mattel recalled a little over 18 million toys. The company’s Chinese supplier was using lead-based paint. Incidentally, the supplier had been with the company for over a decade!
The incident illustrates how little companies know about their suppliers. It also indicates that the supplier risk assessment processes were not viewed as essential, ongoing exercises.
A lack of supply chain visibility keeps companies exposed to blind risk, leading to huge unwarranted losses and a weakening of competitive advantage. Let us look at a few common missteps global organizations take while hoping to keep their supplier risks under check.
1. Inability to visualize risks – Companies, large and small, tend to ignore the need to continuously map even their Tier-1 suppliers. The overlooked risks can be supplier bankruptcies, capacity shortage, or supply of spurious or low-quality offerings. The resultant unfortunate outcomes may include production delays or shutdowns, dip in customer satisfaction and damage to corporate goodwill. The financial implications of liabilities can shoot up to millions of dollars in a few cases.
2. Lack of risk practice – Even the companies which assess risks on a regular basis are often found to have just a ‘legal manager’ or an officer who doubles as a risk manager with myriad other responsibilities on her/his shoulder. Very few companies have a dedicated team or practice efficient at risk assessment. And those who have it seldom have strategies in place.
3. Ignoring new-age risks – The common risks that cause supply chain disruption are natural disasters, fire, grid blackouts and equipment breakdown. Political and currency instability and the changing tax regimes in different parts of the world are other factors causing uncertainty.
Of late, new forms of risk, like cyber-attacks and the unpredictable dangers associated with terrorism have given rise to trade-restrictions and stringent guidelines with respect to sourcing and shipping. The financial crisis of 2008 has given rise to working capital disruption along with dearth of credit, putting many companies (read: suppliers) in a bad liquidity situation.
4. Dilution of risk-checks that comes with a global footprint – International spread of suppliers is also making risk assessment and drawing risk metrics a tough and complicated proposition. Regulators around the world are becoming wary of suppliers and their quality, pushing enterprises to consider supplier risk seriously or face legal penalties. Lastly, it is not easy for organizations that source goods and services from multiple overseas suppliers to meticulously follow supplier risk assessment best practices. A pragmatic solution is to carry out regional-level supplier risk assessments involving the local market expertise on a regular basis.
5. Underutilization of data analytics – Increasing complexity of the world along with global spread of suppliers and a multitude of issues is expanding the number of factors to be considered while assessing supplier risk. Actively anticipating, tracking, updating and managing various kinds of risk becomes a mammoth task.
Analytics, should be viewed as a necessary tool while assessing risk in your supply chain—global or domestic. Supplier risk is a dynamic process and analytics can aide it substantially by exposing weak links in the chain, helping corporate decision makers to take right actions in advance. As they say, a stitch in time saves nine.