The Importance of Location-Based Supplier Risk Scores

Supplier risk assessment is not about completely removing risk from your supply chain. Firstly, that is not possible. Any company that depends on suppliers has some degree of supplier risk. Furthermore, it is not necessarily advisable, particularly for companies that focus on innovation and bringing new products to market. 

Having said that, ignoring supplier risk is not an option either. Your suppliers have the ability to derail your production schedules, destroy customer confidence, and damage your reputation.  

Therefore, you do need to have a clear understanding of risk across your supply network. You should have visibility into the types of risks each supplier potentially poses to your organization. In addition, you should know how much risk is acceptable to your department and to your company overall. 

However, quantifying risk across different suppliers, in different parts of the world, quickly becomes a daunting task. How do you compare a seat manufacturer in China, with a steering wheel maker in Canada? What metrics should you use when you source strawberries from the United States, coffee beans from Ethiopia, and dairy milk from France?  

This is where using strategic supplier risk scoring becomes invaluable.  

The strategic supplier risk score is a standardized numerical rating. It quantifies the diverse risks associated with a specific supplier facility in a specific location.  

The strategic risk score can combine both external risks and internal metrics. These are weighted to what is most important to your company. 

This standardization allows for a true comparison between suppliers, even when they face vastly different threats.  

However, this article concentrates on external risks. More precisely, here we are looking at how risks can differ depending on supplier locations. 

The Spectrum of Location-Based Risks 

Sometimes supplier risk is less dependent on who your suppliers are, but where they are. This is why strategic supplier risk scoring must include location-based risk factors. 

Location-based risks vary around the world. Tornados, for example, are more frequent and more destructive in the United States than tornados in the United Kingdom. While forced labor can happen anywhere in the world, we know that it is more likely in certain regions, such as Xinjiang Uygur Autonomous Region.  

Location-based risk factors can be grouped into several key categories, each representing a different facet of potential disruption.  

• Natural disasters  
• Political violence 
• Socio-political  
• Operational  
• Sustainability 
• Risks to individuals 
• Tax, economic and legal
• Climate risk 

As you can see, location-based risks are diverse. Plus, they can change over time. Formerly peaceful regions can experience uprisings; extreme weather events can damage operational infrastructure; regulations can change. 

Before awarding a contract to a supplier, you should know which production facility will be used to manufacture your parts. You can use location-based risk scores to understand the potential pitfalls by working with suppliers in different parts of the world. 

Furthermore, you can use location-based risk scores to determine unacceptable risk thresholds. For example, you could decide that a region prone to flooding is a tolerable risk, but a history of political instability or civil unrest is not. 

Regional and Facility-Specific Risks 

It is important to distinguish between regional or country location risks and supplier facility risks. Certain risks, like political violence, taxation rates, legislation, and so forth are beyond the control of a supplier. 

Before choosing between potential suppliers, you need to understand what risks are specific to this supplier’s exact location. Ideally, you would examine what critical issues a supplier experienced in the past. Most importantly, you need to know if the supplier has taken any steps to mitigate these risks. 

Let’s say the supplier experienced a fire in one part of their facility. You would want to clearly understand the cause. Fires have many different causes: faulty wiring, lightning strikes, negligence, arson attacks and so forth. All these present very different kinds of risks. 

There are also risks that could be specific to a region, but not the supplier’s facility. For example, if their building has been built to withstand earthquakes, or they have flood defenses.  

Understanding a potential supplier’s specific location risks is additional due diligence that will help you to confidently select the best supplier for your organization.  

Risk-Optimizing Your Supplier Network 

While the ideal time to perform a supplier risk assessment is before onboarding them, it is very valuable to understand the location risk scores of your existing suppliers.  

You can also enrich external risk data with the internal metrics that are most important to you. This could include issues such as business volume, quality performance, length of the business relationship, material criticality, and so forth. 

If you work with the same supplier across multiple regions, you should measure the risk score at each facility. In addition, you should also aggregate the supplier’s overall risk score. 

This will help you decide if the supplier– as a whole – introduces an acceptable level of risk to your organization.  

If the level of risk is too high, this gives you the chance to consider your options. It could mean diversifying your supplier network over time, shifting spend to less risky suppliers, or working with your supplier on mitigation plans. 

In addition, you should also consider your risk score by region. This will expose regional vulnerabilities, such as a concentration of critical suppliers in a single geographic region. 

This could introduce an unacceptable level of risk, including single points of failure in regions prone to natural disasters or political instability. 

From Insight to Action 

You cannot build a resilient supply chain without understanding the risks tied to location.  

However, visibility is only valuable if it leads to better decisions. 

During supplier selection, the risk score acts as an immediate, objective filter. You can establish “no-go” thresholds. These automatically screen out vendors that fall outside your company’s risk appetite, saving hours of evaluation time. 

Location-based risk scores also allow you to clearly see risk across your existing supplier network. This means you can take corrective action over time to de-risk your supply base, when and where it makes sense to do so.  

You cannot control the weather, the global economy, or geopolitical events. But you can control how you prepare for, and respond to, risk.  

If you would like to see how supplier risk scoring could work for your organization, please contact Everstream Analytics for a demo.