Once a supplier is onboarded, real-time monitoring and sub-tier discovery begin. It is important to understand that the journey from qualification to contract is a strategic risk management effort. The tactical work starts after contracts are signed, but the strategic reviews do not end. Commodity managers are used to meeting monthly to discuss the state of commodities and review risks, and a similar initiative should be built at minimum for a company’s most strategic suppliers. The right dashboards will help this review board be quick and sustainable.
How to choose the right suppliers for risk management strategic reviews
Most companies select their suppliers solely based on spend, which means the more they spend with a supplier, the more strategic that supplier is. We have seen a good example at ZF, where one of their plants is far from an airport. One year the area had numerous public transportation strikes, and ZF organized taxis for their employees to go to work. The spend with the local taxi company was massive, and this company ended up being part of ZF’s most-strategic-supplier circle that year.
But there are additional factors besides spend to help identify which suppliers to review. Making the review about the part, not the supplier, leads us to four important factors to review from a risk perspective. A part is more critical in production depending on:
- How substitutable the part is.
- How long replacement times for the tools are.
- How many alternate suppliers for the part are available.
- How complex the entire supply chain is for the part.
Ongoing supplier risk management for maximum lifecycle value
In a recent KPMG survey, more than three out of four respondents said supplier risk management is a strategic priority for their business, and six out of 10 said their organization’s most severe reputational risks come from third parties’ failure to deliver.
In the supplier lifecycle, risk management starts at ground zero: When a company searches for a new supplier by evaluating and rating their production location for potential risks likely to occur. Going into deciding on a relationship with a supplier and initiating a contract, researching historic events gives more detailed clarity on supplier performance, and can help as an additional negotiation point in contract discussions.
During a supplier lifecycle, risk management offers multiple ways to enhance that supplier’s value to the organization. Companies can realize that value by putting supplier risk management at the heart of procurement strategy and management in several ways.
Contract compliance savings
Businesses often see contractual savings leakages of up to 15% from friction factors such as supplier non-performance, invoice and credit memo errors, and redundancies. Through a structured supplier lifecycle framework, they can further enhance value by not only focusing on “cost” but also “value beyond cost.” And post COVID-19, supply chain organizations see resilience and agility in a supplier’s supply chain as a core value driver.
Organizations with a strategic view of key relationships can better influence their suppliers beyond sourcing and contract awards to increase value in quality, service, and timeliness. All of those should be part of a holistic risk management scorecard, to benchmark external risks vs. internal performance indicators that help estimate impact. A supplier that already struggles will struggle even more, even with only small issues.
Important for purchasing is to build a strategic relationship with key suppliers. Part of this program is keeping up to date with supplier company news and showing interest in products out of contract scope. In addition, executive sponsorship for strategic suppliers is important to good relationship management. When it comes to risk management a good supplier relationship will help communication in a crisis and make you a preferred partner that gets the material all customers all longing for.
Customer of choice
Our experience shows that businesses can gain up to 3% in additional value by improving their supplier management program. A formalized supplier lifecycle framework helps businesses become a “customer of choice” of suppliers, leading to competitive pricing access (“favored nation”), top supplier talent, service, volume discounts, supplier thought leadership, and lower labor rates.
Involving suppliers in the innovation process impacts the entire company and improves revenue while reducing costs. An established supplier lifecycle program focuses resources on key strategic suppliers to brainstorm, crowdsource, and innovate new ideas.
Commodity management checklist for supplier risk management
Commodity management is meant to encompass all the strategic activities and responsibilities that go into the process of buying raw materials. It may also be referred to as category management, strategic procurement, or merchant management.
Commodity management includes responsibility for supplier sourcing, relationship management, industry and market analysis, quotations, terms and conditions, negotiation strategy, and business awards. Add in strategies regarding the movement of materials, inventory, cash cycle management, and understanding and setting trends and direction. Plus detailed understanding and strategic planning for the sub-components, sub-suppliers, and the end-to-end supply chain.
While it is always good to allow for some creativity in the development of a commodity strategy there are clearly some key elements that must be included, in great levels of detail:
- Spend levels – current and forecasted.
- Market share – the percentage of the total market that your spend represents; are you are a major or minor buyer of this particular commodity? *
- Customer requirements – current and projected.
- Suppliers – current supplier base, potential supplier base.
- Terms and conditions, and service levels – current and desired/required. *
- Competitive factors/differentiators – unique capabilities and requirements of this commodity. *
- Inventory levels – days of supply, rapid replenishment capabilities, upside/downside flexibility levels. This is critical information for understanding urgency of reaction and overall risk scores.
- Risk Factors – supply availability, technology maturity, quality, supplier financial viability, cyber risk.
- Strategic objectives – in support of unique business and customer requirements. *
- Relationship strength/strategy – level of contact and relationship strength with your suppliers and customers. *
- Environmental / ”green” strategies. *
- Diversity in sourcing. *
- Total cost of ownership (TCO).
- Negotiation strategy/process.
*Should be part of your internal risk scorecard.
The commodity strategies should also be shared outside of the supply chain organization. Your executive team should understand these strategies. Your customer teams should understand these strategies. And your peer organizations such as operations, who are often the internal customers of the supply chain, should also understand and ratify these strategies.
Learn more about the value of technology-based insights for supplier risk management