Five strategies to manage risks of supplier failure in manufacturing

The manufacturing industry today is defined by constant evolution. All manufacturers from the automotive, industrial, hi-tech and medical device sectors are moving towards lean production, just-in-time manufacturing, reduced product lifecycles, outsourcing, green operations, and supplier consolidation for improved performance and greater business benefits. However, these shifts have brought forth new kinds

It is now understood that supplier failures can have a far-reaching impact on the business and brand value. As supply chains continue to become more interconnected, their vulnerability to failure and disruptions also increase. From labor disputes, to unforeseen accidents and natural calamities, the production line is under constant threat, making the traditional approach towards identifying supply chain risk ineffective.

To deal with fierce competition, lean supply chains, unpredictable demands, and global operations, manufacturers should focus on improving the visibility and transparency within their supply chain. They should adopt a renewed approach to supplier risk management, where supplier relationships are based on collaboration, are more transparent, evolve over time, and where risk is proactively identified and managed at every step.

While it is impossible to eliminate all supply chain risks, a risk-intelligent approach can help organisations proactively mitigate avoidable risks, and improve the response strategies for risks that are unavoidable.

1. Know the supply chain

As supply chains continue to become more and more complex, it is imperative for manufacturers to gain an end-to-end view of their supply chain. While most companies know who their immediate suppliers are, they seem to neglect their upstream supplier relationships. It is important that manufacturers build a comprehensive inventory of all their supply chain relationships.

While analysing risks in the supply chain, these are some of the key questions that need to be asked:

1. Who is in your supply chain? Who are the suppliers that you most depend on for your key components?
2. How many tiers of supplier do you leverage?
3. Do you use sub-contractors?
4.  How do you assess and control the risks associated with sub-contracting?
5. Do your suppliers assess their risks?
6. Do they have effective plans in place for managing supply chain disruptions?
7. Do you have appropriate agreements with your suppliers?

Asking the right questions will help identify potential failures and other weaknesses in the supply chain. Manufacturers should also extensively leverage intelligence from third-party content providers and social media to enrich their supplier information.  

Accurate information about suppliers can help manufacturers to segment suppliers based on various criteria and design their assessments based on supplier segmentation.

This will help manufacturers come up with an efficient supplier risk management strategy to minimise disruptions, and protect monetary and reputational losses.

1. Identify supplier risks

Manufacturers must aim at having a comprehensive risk management programme in place to help them identify all risks associated with their supplier relationships. The foundation to a successful risk management programme is the proactive identification of supply chain risks such as process risks, geopolitical risks, undesirable events, black swan events, contract risks, non-compliance risks, reputational risks, financial risks, and information system failures.

This risk identification process should be further strengthened by an analysis of the specific drivers that increase supplier risk. Manufacturers need to consider varied risks of failure - from risks of port strikes, to supplier shut down, delays, physical damage of products, natural calamities, and shortage of raw materials. The risk identification process must go beyond just the basic financial and compliance assessments.

Regular analysis of all available supplier information can help manufacturers identify key risks and the specific drivers that magnify the possibility of occurrence of these risks. The risk identification process needs to be flexible so that it works with or without the direct co-operation of suppliers.

1. Assess & reassess supplier risks

While supply chains have evolved over the past few years, supplier risk assessments are still limited to just financial performance, which is not enough to identify risks of failure ahead of time and gain greater visibility into risk areas.

Supplier risk assessments should take into consideration all types of risks associated with a supplier relationship. A simple approach to risk assessments is to determine the impact, likelihood, and consequence of every risk identified. Based on these parameters, manufacturers should create different strategies to handle different types of risks.

Manufacturers should conduct regular risk assessments to identify and assess the risks associated with the supply chain. The key is to remember that not all suppliers carry the same amount of risk and hence, same assessments, and survey questions and questionnaires will not address all types of risks and suppliers. Manufacturers should have specific assessments designed for each supplier or supplier segment, by considering the various types of risks associated. An important point here is that supplier risks should be assessed from multiple perspectives. The assessments should be holistic and comprise of procurement, logistics, quality, compliance, legal, product development, and financial perspectives.

Based on the assessment results, manufacturers should segment their suppliers based on their risk ranking, and adopt appropriate mitigation and monitoring strategies.

Manufacturers should not ignore the low probability risks that have a high impact. Special attention should be given to assess and reassess such risks because these can have calamitous consequences if manufacturers are not prepared. Manufacturers should assess these risks adequately.

Also, risk assessment should not be a one-time activity. Supplier risks change all the time, and need to be assessed regularly. Based on assessment results, type of products or services delivered, location, types of associated risks, manufacturers should reassess their suppliers at predefined frequencies.

In addition to risk assessments for potential and current suppliers, manufacturers should leverage content from external sources such as Dow Jones, D&B, Lexis Nexis and Regulatory DataCorp (RDC) which curate information such as adverse media reports, sanction lists, Politically Exposed Persons (PEP), and other third-party data.

1. Manage & mitigate supplier risks

Based on the type of suppliers, their criticality, and the types of associated risks and assessment results, manufacturers should create appropriate strategies for management and mitigation.

The first step is to determine the strategy based on whether a risk needs to be mitigated, reduced, accepted, or transferred. This should be followed by design and implementation of appropriate controls to mitigate and reduce risks. Testing, refining, and retesting of controls will ensure that the risks are managed.  An important aspect is establishing open communication with suppliers to ensure successful risk mitigation.

Manufacturers should establish continuous monitoring processes and performance metrics to ensure that supply chain risks are identified and mitigated in a timely manner.

Eliminating all potential risks is impossible, and so, manufacturers must have a well-defined response strategy and crisis management plan in case of failures. Manufacturers must also evaluate how resilient they would be in case of any failure or disruption. In nutshell, there has to be a ‘Plan B’.

1. Leverage technology

Given the increasing size of supply chains, supplier risk management programmes can be very resource-intensive, tedious, and costly. Technology can play a critical role in automating and strengthening supplier risk assessments, monitoring, and management.

Technology can help streamline supplier information management, risk identification, assessment, and mitigation. Integrated technology solutions provide a centralised platform to manage multiple suppliers, and provide greater visibility into supply chain risks. Technology solutions can also map supplier information for better traceability. They can also maintain contracts, agreements, documents, SLAs, and other important information in a centralised repository for ease of access.

Technology can help identify high-risk suppliers, assess their risk impact and likelihood, identify risk ratings, track risk profile and monitor controls to keep risks in check. Sophisticated solutions also provide advanced survey and assessment capabilities for due-diligence, continuous monitoring, and control effectiveness evaluations.

Advanced technology solutions also help consolidate and roll-up supplier risk intelligence to support decision-making. Advanced analytics and visual presentation of key data in formats as dashboards, risk heat maps, and reports can easily provide users with the complete supply chain risk information.

These solutions can also integrate with reliable industry sources and social media to aggregate, validate, and enrich supplier data thus providing a 360 degree view of supplier risks.

Conclusion

In today’s constantly evolving business environment, supply chains around the globe are getting more and more complex, increasing the volume of new risks that manufacturers are being faced with. It is now imperative to move towards a risk-intelligent approach to enable proactive management and mitigation of supplier risks. The key strategies necessary to successfully to do so include having in-depth knowledge of your entire supplier base, proactively identifying, assessing, and reassessing all supplier risks, formulating effective and appropriate methods to manage and mitigate these risks, and using the help of technology to do so in a streamlined and automated way. 

Rituparna Bhattacharjee is a Senior Associate at MetricStream

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