I came across this at Supply Chain Management Review entitled “Reducing supply chain risk – a data driven approach” today. The article does an excellent job describing the need to assess your suppliers from various standpoints; financial data, operational data and on-the-ground intelligence. The point is made that each of these data sources have strengths and weaknesses. For overseas suppliers, this data is either unavailable, unreliable or extremely expensive to acquire. The article points out that the first step in any supply chain assessment is to determine where you are vulnerable.
Unfortunately, the article doesn’t explain how to determine which suppliers are most critical to your supply chain.
I’d like to fill that gap. You need to look at each supplier, determine which parts they supply, determine which end items those parts go into, then look at the projected revenue that you plan to receive from the sale of those end items. This is the potential loss you can expect should this supplier go out of business. Some suppliers will naturally float to the top as being critical to future revenues. Those are the suppliers that you need to focus on. You can do a similar risk assessment by component part to identify critical components that are single sourced.
Once you’ve created this list of critical suppliers, then it’s time to gather all the financial, operations performance and on-the-ground data for those suppliers. As the article points out, you need to maintain and monitor this information on a regular basis.
This is a tough time for all of us. Don’t let a failed supplier add to today’s already significant challenges.
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Tags: Supply chain, Supply chain risk management
Posted in Supply chain risk management
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I believe there is another way to look at the importance of suppliers and this is related to the strategic nature of the supplier. Let me give an example. If a supplier produces a component or ingredient that makes your product unique, this supplier is of critical importance for your business, particularly if the product is a flagship product. On the other hand, if the supplier is the source of a commodity component/ingredient with a large variety of sources, the supplier is probably way less critical. It is obviously ennoying to have to change suppliers if one goes bankrupt, but an alternative source can be found reasonably easily, while in the first scenario this may be totally impossible. If you are interested in the subject, in 2005 we wrote a book, called collaborative sourcing, focusing specifically on this subject. You can find details about the book at http://www.i6doc.com/I6Doc/WebObjects/I6Doc5.woa/wa/DocumentDA/doc;jsessionid=58D46440C6097359AC9F0D93AB514F5F.i6doc?wosid=zNUrfefeb5bbb1c1wavrag&d=1007955 if you wish to know more about it.
Christian, you raise some great points. The idea of assessing your suppliers based on their contribution to revenue is really intended to give you a list of which suppliers to look at first. It’s a way to prioritize your assessment of supplier risk. As in all things, there are exceptions and you identified one of them. In many cases, the flagship product will drive the highest revenues so a supplier of a unique component that is critical for that product will be at or near the top of the list…but not always. Having a good understanding of your products and your supply base is critical to a solid risk management approach.
Thanks for the tip on the book. I’ll look it up!
Today, more and more companies need to assess their suppliers with regard to sustainability and broader CSR goals, as well. Most of a company’s carbon footprint is embedded in its supply chain, so as you work to implement an environmental sustainability platform, it is important to evaluate your suppliers from this standpoint.