Executive Briefings

Keeping Supplier Risk at Bay Is Important

The consequences can be enormous, even catastrophic, if a supplier fails. Jim Lawton, senior vice president and general manager of D&B Supply Management Solutions, says you must have a risk-assessment plan in place at all times.

Managing supplier risk means being forward-looking to the point that you are always aware of the issues that can be problematic for your suppliers, having enough information to properly evaluate those issues, then having a plan so you can act before disruption occurs.

Know your supplier is a critical component of that strategy, Lawton says. You need to know how much you spend with a given supplier, how critical it is to your operation and how much is it worth to keep that partner.

But who does this assessment and monitoring? Historically, Lawton says, supplier risk management was the province of the finance department, but more and more it's the chief procurement officer who wears that hat now.

That makes sense as so much potential risk is not financial in nature. True, many disruptions are due to supplier bankruptcies, especially in the last year or so. But failure due to other reasons is just as "impactful," Lawton says. Disruptions due to quality or delivery issues are always possible. Likewise, violations of government regulations can shut a supplier down or cause it great financial hardship.

Managing these risks is hardly academic. Lawton says Fortune 1000 companies that have experienced disruptions due to supplier failure have seen their costs rise 11 percent on average, 7-percent lower sales on average, and a 35-percent decline in shareholder value.

There really is no typical industry that one can say is most at risk, says Lawton. "All industries, from manufacturing to retail to services, need to be careful. The specific drivers of risk vary from one industry to another, of course."

Lawton cautions that any company that has implemented Lean initiatives may find itself somewhat exposed. If, for example, it has leaned out its buffer stock, it may be a good candidate for a supplier risk management strategy.

To view this video interview in its entirety, Click Here.

Managing supplier risk means being forward-looking to the point that you are always aware of the issues that can be problematic for your suppliers, having enough information to properly evaluate those issues, then having a plan so you can act before disruption occurs.

Know your supplier is a critical component of that strategy, Lawton says. You need to know how much you spend with a given supplier, how critical it is to your operation and how much is it worth to keep that partner.

But who does this assessment and monitoring? Historically, Lawton says, supplier risk management was the province of the finance department, but more and more it's the chief procurement officer who wears that hat now.

That makes sense as so much potential risk is not financial in nature. True, many disruptions are due to supplier bankruptcies, especially in the last year or so. But failure due to other reasons is just as "impactful," Lawton says. Disruptions due to quality or delivery issues are always possible. Likewise, violations of government regulations can shut a supplier down or cause it great financial hardship.

Managing these risks is hardly academic. Lawton says Fortune 1000 companies that have experienced disruptions due to supplier failure have seen their costs rise 11 percent on average, 7-percent lower sales on average, and a 35-percent decline in shareholder value.

There really is no typical industry that one can say is most at risk, says Lawton. "All industries, from manufacturing to retail to services, need to be careful. The specific drivers of risk vary from one industry to another, of course."

Lawton cautions that any company that has implemented Lean initiatives may find itself somewhat exposed. If, for example, it has leaned out its buffer stock, it may be a good candidate for a supplier risk management strategy.

To view this video interview in its entirety, Click Here.