What’s Supplier Risk Management?

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Supplier risk management is a strategy that aims to manage supplier relationships in such a way that the potential for some type of disruption in the receipt of goods and services from a supplier or supplier will have minimal negative impact on the business of the customer. A number of approaches to the supplier risk management activity are used, including periodic and critical reviews of suppler performance, comparing that performance with the level of efficiency evidenced by competitors, and the ongoing overall value of the supplier/supplier relationship with the customer . When structured correctly, supplier risk management reduces the possibility that a single supplier’s failure to deliver goods and services on a timely basis will cause serious customer disruption, including triggering the loss of customers that are served by that customer.

With supplier risk management, several factors are taken into consideration. The supplier’s ability to provide timely delivery of products, if often the focus of attention. This can be especially important for companies that are attempting to operate with a lean inventory of raw materials. In order to ensure that a supplier can support the customer in this endeavor, the ability to deliver certain quantities of goods just before the customer needs to introduce those materials into the manufacturing process is crucial.

Supplier risk management will also address the quality of the goods and services provided. This is because eventually any reduction in that quality will have a negative effect on the customer’s reputation. If a suppler supplying raw fiber to a textile plant fills the order with highly contaminated fibers, the products produced by that plant will also be of lower quality. As a result, the factory must reject the shipped goods or use them to produce inferior products that must be marketed at a deep discount. In the meantime, additional standard-compliant raw fibers must be ordered and delivered if the plant is to avoid run-down operations that could lead to the delivery of finished products to a customer, which in turn causes inconvenience to the plant’s customer.

With supplier risk management, attention is paid to evaluating the supplier’s past performance, current market position relative to direct competitors, methods of communication provided to customers, ordering and delivery policies and procedures, and capabilities of the supplier. supplier to overcome acts of nature and other threats that may delay deliveries. Using an ongoing procurement risk management process means not only evaluating the supplier in anticipation of establishing a relationship, but also regularly evaluating the supplier’s performance to see if that performance remains at or above the required standard. If the risk assessment process indicates that a particular supplier is no longer a good fit for the customer, steps are taken to qualify the degree of risk associated with doing business with a different supplier, and then make a decision whether to move the business that other supplier.

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