In an ever connected economy, suppliers are relied upon more than ever for all business functions. However, using a greater number of suppliers also introduces risk into your supply chain. This is due to one simple maxim – not all suppliers are created equal. Some suppliers and their service offerings are more crucial to your business, and all suppliers treat risk management differently. Therefore, categorizing and profiling your suppliers on risk factors is crucial for protecting your business from potential liabilities. Based on a PwC study, “81% of respondents have an inventory of suppliers; but only 51% of these organizations have evaluated the relative risks each supplier poses to the organization.” We’ve assembled a list of key reasons why the other 49% of businesses should evaluate suppliers for risk.
You’re making an investment in the supplier & relationship
Your business only has so many opportunities to work with suppliers in your network. For every supplier relationship you enter into, you are forgoing the opportunity to work with another supplier. And, with each new supplier brought into your network, you are further distributing your company’s finite resources. This could be in regard to monetary investments being made or in the amount of time your staff has to nurture these critical relationships. These relationships can either be collaborative and strong, helping advance your company; or, detrimental relationships, bringing your company down with their poor practices. Supplier risk profiling can help ensure you enter into strong relationships by making it clear which suppliers align with your company’s standards.
Risk profiling is key to protecting your financial and relational investments as serious costs can arise as a consequence of supplier failure. According to Ernst & Young, these costs can include loss of capital, alternative sourcing requirements, administrative headaches, and slowed production. Incorrect supplier selection can hurt your bottom line, as you lose immediate sales, and can result in your customers looking to your competitors for their future needs.
Another crucial reason to perform supplier risk profiling is for the protection of all stakeholders involved with your business. Your stakeholders include all members of your company, your customers, suppliers, and shareholders. One example of protection is with regard to the safety of your product or service. While your company may be taking adequate steps to ensure safety, supplier failures can happen, and have serious consequences. This can result in increased physical danger on a job site or a defective product making it to market.
Another major consequence of incorrect supplier selection is damage to your company’s reputation. If an error occurs, the reputation impact will negatively affect your company just as much, if not more, than that of your suppliers. Errors are always blamed on your company even when the issue is clearly a result of supplier failure. These errors can lead to adverse publicity, and again, damage your company’s bottom line. Maintaining your company’s reputation with stakeholders, as well as the general public, is another key reason to have a strong risk profiling process in place based on various risk factors.
Supplier risk profiling is also important in protecting your company from compliance related issues. Globally, governments have increased both regulation and enforcement of supplier violations. Practices ranging from sourcing to bribery are now monitored by government agencies and punishable with crippling fines. As government purview intensifies, companies more than ever need to appropriately manage their risks, and have a deep knowledge of their suppliers in order to minimize issues arising from their supply chain.
With suppliers owning an ever growing piece of the global supply chain, their associated risks will not diminish in the foreseeable future. While “risk is integral to the pursuit of value … prudent organizations find ways to manage all risks,” including their suppliers. Many company’s risk strategies remain reactive, studying lagging rather than leading safety indicators. Unfortunately, “the risks of not knowing the business practices and potential liabilities of your suppliers could not only lead to financial penalties and brand damage. It could put you out of business.” Conversely, proactive organizations minimize potential consequences from supplier error by constructing holistic views of their suppliers with the help of risk profiling.