Supplier risk is any potentially negative impact a supplier can induce in a company operation, production, or distribution. That’s a major component of the procurement activity and must be one of the strategic focuses.
Basically, the supplier risk is the probability of deterioration of economic activity of a business due to problems related to the supplier. That may be a breakdown in production or interruption of delivery.
Risk management also deals with incoherent behavior of suppliers and service providers. So, if anything goes different from the contract or what was asserted, it is work for the risk management.
In this article, we will discuss more about risks on suppliers and how to deal with them.
Supplier Risks Categories
A lot of different problems can occur when establishing a relation of a company and a supplier. But mainly, there are four main categories that contemplate the supplier risks.
Firstly, there is the Financial Risks, that concerns the financial aspects of the supplier. That may be the possibility of maintaining operations, the profitability of the supplier or even economic dependency and bankruptcy.
Then we have the Contractual, or Legal Risks, related to the non-compliance contracts, legislation of transactions and business, legal aspects such as fraud or crimes.
Another category is Operational Risks, involving the practical aspects of the business, such as the production of the goods offered, the quality control and delivery.
Finally, there is the Reputational Risk, which is the ethical and social compromise of the company, the media presence and how it deals with the public relations.
Why you need Supplier Risk management?
First and foremost, risk management will avoid possible mistakes that can affect activity and profit of your company. So, risk management set ways of assuring that suppliers are following the right protocols and actions.
It’s also an important stage of risk management to make a Risk Appetite Statement, which is a description of the risks that are facing your organization and how much you can accept to achieve results.
That document will state what are the risks and the possible responses for them. Because the document deals with sensible situations for the company, it must be aligned with goals and decisions.
That way it can help decision-making during crisis and be a valuable tool for managers. Some steps can help you construct a good Risk Appetite Statement:
- Use a diverse team.
- Focus on strategic aspects.
- Include an overview of the operation.
- Define KPI’s for risks.
Risks Management Methodologies
There are multiple ways of defining risks for your company, so you must choose a methodology that suits your needs and is able to delivery the conditions for your operation.
Among the main methodologies are the Project Management Body of Knowledge (PMBK), that resides on a quantity and quality analysis of the risks of an organization.
PMBK focus on the probability of occurrence and the level o impact of each risk and then, ranks them on a scale from 1 to 10 to create a strategy of risk management based on what’s worst.
Then we have the Failure Mode and Effective Analysis. That follows a similar strategy of defining a 0 to 10 severity level based on occurrence. That number is the Risk Priority and the higher the riskier.
Finally, the Preliminary Risk Analysis is done beforehand and shows the whole universe of risks facing an operation, documenting, and recording for later usage.
Supplier risk is indispensable for every company that needs materials or services from suppliers. As it lowers the possibility of mistakes and problems, it can raise the efficiency of the operation the therefore the profit.
The risk analysis also gives insights about what can be better at the strategy and what is not working. The evaluation must follow goals and be frequent.