To Optimize Supplier Management, Balance the Three R’s

A recent article over on Supply & Demand Chain Executive gave us seven steps to balance supplier risk versus reward, the two classic R’s of supplier management. And while it was a great article with seven pieces of great advice (if properly followed and implemented), it may not be enough to truly succeed going forward. There is so much risk at so many levels in today’s global supply chains, that it’s unlikely that the buyer can do enough to balance the end-to-end risk versus the reward without the supplier’s help — help that can be hard to come by if there’s nothing in it for the supplier. In other words, something is still missing.

But before we try to put our finger on the missing piece, let’s review the seven steps offered up by Byron Tatsumi of KPMG in the S&DC Executive article.

  • Define and Prioritize Supplier Tiers
    The most critical suppliers (to operations or revenue) should get the most attention.
  • Utilize Risk Assessment Processes for New Requests
    Regardless of whether the request is against a new or existing supplier. A supplier great at manufacturing electronic components might not be so good at machine parts and vice versa.
  • Implement Ongoing Supplier Due Diligence
    A supplier that is not considered a risk today could be a significant risk in a year and vice versa.
  • Utilize Balanced Category Scorecards
    And look at metrics and performance across the board — cost control, quality control, inventory control, etc.
  • Adopt Robust Performance Reporting and Issue Resolution
    That goes beyond a dangerous dashboard to highlight good, bad, and, most importantly, missing data to help you identify potential issues before they materialize.
  • Maintain Category Market Research Profiles
    Markets are volatile and dynamic. Tomorrow’s costs, and primary cost drivers, can be very different from today’s. Don’t source using last year’s data.
  • Implement a Supplier Six Sigma Program
    With the goal of continuous improvement in mind.

These are all great steps, and they will all help to get better performance from a supplier which will reduce a buyer’s risk and increase a buyer’s reward, but not all risks are supplier risks. Some of your most critical risks could be upstream risks in your supplier’s supplier’s supplier. While balanced scorecards and a good Six Sigma program might be sufficient to convince a first-tier supplier to implement some basic supplier management programs on their end, chances are that, without the right incentive, they won’t be enough to convince the first-tier supplier to work with its critical second tier suppliers to implement corresponding programs. It doesn’t matter if the first tier electronic components manufacturer has the best supply management program in the world if its second tier sub-component manufacturer doesn’t have any programs in place to insure continuity of supply of raw materials and basic inputs from third-tier suppliers.

Without some incentives, it’s unlikely that a first-tier supplier operating on a razor thin profit margin is going to take the time and energy required to transfer the modern supply management processes, that the buyer spent significant time and money on, to second tier suppliers. For that, there’s going to need to be some remuneration involved — the third R. If the supplier is rewarded for decreasing risks, lowering response times, and increasing quality, then it is going to have some incentive to helping its suppliers decrease risk, lower response times, and increase quality. If, instead of focussing only on penalty clauses, the buyer instead includes some reward clauses for improving performance, it’s likely that overall risk will decrease while buyer rewards (fewer stock-outs, fewer returns, etc.) increase as well.

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