Category Archives: Supplier Management

Five Types of Supply Risk, and How to Mitigate Them

Today I’d like to welcome Jim Lawton, VP and General Manager of Open Ratings, a D&B company with a range of supply risk management solutions for automotive, aerospace and industrial manufacturers.

Risk is a painful reality in manufacturing today. Strategic initiatives like low-cost-country sourcing and supplier rationalization programs only increase manufacturers’ exposure and vulnerability to the risk of supply chain disruptions.

Working with Open Ratings’ Fortune 500 manufacturing customers, I’ve come to realize that even the most sophisticated companies need a reminder for the different types of risk, and how to mitigate each. As I see it, the best way to avoid the inevitable is to understand the many sources of potential risk – which can be defined in five broad categories – and put strategies in place to mitigate each one:

  1. Strategy Risk = Choosing the right supply management strategy.Know that what’s right for one business might not be right for yours. For example, a small family-run business may opt to source locally because they don’t have the resources needed to keep an eye on global suppliers.

    Mitigation and Management Approach: Define the right up-front strategy, and identify and qualify the right suppliers, using reliable market intelligence to drive decisions.

  2. Market Risk = Brand, compliance, financial and market exposure.When outsourcing part production or even entire product lines, you’re putting your company at the mercy of your suppliers. If they deliver a sub-par product, or fail to deliver completely, your customer will be looking to you – not them – for an explanation.

    Mitigation and Management Approach: Pinpoint the product line’s quality standards tolerance, and determine the possible impact of a compromise. Monitor those lines closely to detect early-warnings before issues wreak havoc with your firm’s brand, ability to meet compliance regulations and the bottom line.

  3. Implementation Risk = Supplier implementation lead-times and production/performance ramp.Know who you’re working with and what their capacity issues are before signing on with them. Working with a supplier for whom your business only represents a fraction of their revenue means you may not get the level of attention that you want.

    Mitigation and Management Approach: Ramp new suppliers quickly to gain early visibility into any risk factors that might hinder production, lead-times, initial performance, etc.

  4. Performance Risk = Ongoing supplier quality and financial issues.Now that you’ve selected a supplier, there’s still a lot of work to be done. Businesses are acquired, go out of business or shift strategy every day, so constant vigilance is needed.

    Mitigation and Management Approach: Continuously monitor all of your suppliers to avoid disruptions caused by bankruptcies, performance issues, ownership changes, labor strikes, geopolitical changes, etc. You may need to tap technology to effectively achieve this level of monitoring.

  5. Demand Risk = Demand and inventory fluctuations and challenges.While some suppliers jump at the chance to take on new opportunities, enthusiasm doesn’t necessarily mean they’re in the best position to excel.

    Mitigation and Management Approach: Watch your suppliers carefully for signs that they are overwhelmed with new business. Don’t let their desire to grow their business affect your commitments.

Risk will always be inherent in the supply chain. By implementing a comprehensive, proactive approach and working with your suppliers to define a strategy based on shared business goals, you will reduce your exposure to risk – and the catastrophic impact it can have.

Not only will you gain new ability to mitigate issues before they wreak havoc on the supply chain, your brand, and the bottom line – a supply risk management framework also supports more informed supplier development, and total-cost decision making to further reduce inventory levels; improve supplier quality; and remove additional cost and waste out of your supply chain.

The best-laid strategies require your team to shift their mind-set, to divide their attention equally between cost-reduction efforts and risk mitigation considerations, but the rewards are well worth the effort.

OpenRatings … Not Just for Performance Anymore

Recently, I had the opportunity to sit down with Jim Lawton and talk about not what Open Ratings was, or is, but what it will be now that it has been acquired by D&B and has access to not only the cash reserves one needs to create the next big thing but also the data it needs to take its analytics capabilities to the next level.

As discussed many times by Jason Busch over on Spend Matters (including in “Open Ratings Alert: A New Business Model”* and “Sourcing Innovation Next Generation On Demand”*), and also by Jim Lawton in his guest post (“Don’t Let the Supply Risk Grinch Steal Christmas”*), Open Ratings had the unique capability, built on some great predictive analytics work by some brilliant MIT graduates (whom I hope to be talking to in the future), to analyze a supplier’s financial and performance data relative to other companies in your space and tell you how likely they are to perform for you with respect to a contract to provide a certain category of product or service.

Considering most companies don’t have the data or the models to even attempt this, this is a great offering. However, with access limited only to a subset of D&B data and customer data from the Open Ratings Network, the results were often coarse grained compared to the fine-grained event and product specific events a buyer would really like to have. Considering your only other hope for a coarse-grained result was Austin Tetra (acquired by Equifax) (whom I will also address this week), this was rather fantastic when the capability first came out – but one could see the next step and it only made sense to push for it – which they did, and now that they are part of D&B, I dare say that they can give you a performance-based picture of a potential supplier that, in some ways, is more detailed than any other picture any other provider can give you.

However, performance is not the only issue you need to be concerned about. In today’s ultra-fast marketplace with ultra-lean supply chains, Risk is King. It’s not how good the supplier will perform, but how regularly they will perform. The last thing you want is for a great performing supplier to go bankrupt without warning nine months into a new contract. The real question is, with their new access to D&B’s huge data store, updated daily, will they be able to tell you not only how well a supplier can be expected to perform, but how risky the relationship could be be. After all, the real key to managing risk in your supply chain, is, of course, to not introduce it in the first place!

So, on this note, I’m going to end this post and ask you to stay tuned for tomorrow’s post where Open Rating’s Jim Lawton guest authors a post on the five major types of risk and what you can do to hedge against them. Keep the RSS feed alive!

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Vendormate: Great Fit, Less Fraud

Those of you following Spend Matters in recent months will remember a post on Vendormate (acquired by GHX, acquired by Thoma Bravo) on “Tackling the Compliance Side of Supplier Risk Management”*, a vendor registration, credentialing, and compliance monitoring solution provider with a large footprint in the healthcare sector.

Not long ago, I too spent some time talking with Andy Monin in an effort to understand the extent of their offering and how they differ from services provided by providers such as Austin Tetra (acquired by Equifax), Open Ratings (acquired by Dun & Bradstreet), Browz (merged with Avetta), and Connect4Growth. It was an illuminating discussion and I believe that they are truly fulfilling a need in the healthcare sector in particular and that the financial sector needs to take a long hard look at their offering.

Jason Busch highlighted some of the benefits of the Vendormate solution, including the capture of supplier information through an online registration portal, the capability to capture supplier credentials and certificates, the built in rating and scoring system that uses 126 data points, user defined thresholds and risk tolerance, and 3rd party data to assign each vendor a risk score, and the ability to manage compliance risk through exception and be alerted when a supplier may have fallen out of compliance.

What Jason did not highlight were the following facts:

  1. most mid-size and larger organizations have no clue how many vendors they are doing business with, even within a single commodity category (a point that the spend visibility vendors spend a lot of time trying to drive home)
  2. many companies go through peaks and troughs with respect to vendor cold-calls; after a major advertisement or in a public standing offer renewal period, a company will be bombarded with more calls than it can handle, while the rest of the year calls will be few and far between; furthermore, it can be difficult to differentiate between vendors that can provide positive productivity and savings opportunities and those that will do nothing more than waste your time and money – a systematic approach, such as that provided by Vendormate, for receiving, screening, and processing these vendors helps you differentiate the gold from the coal and insures that your business operations are never disrupted as a result of vendor cold calls
  3. regulatory compliance, terrorist screening, and fraud are huge problems that need to be addressed not only in your company, but in your supply base
  4. many companies have no means, or no time, to insure that vendors are aware of, sign off on, and agree to policies and procedures
  5. since Vendormate implements a paid subscription service, vendors have an incentive to keep the information current

Vendormate’s solution addresses these problems as follows:

  1. by providing a common registration system, and refusing to deal with any supplier not in the system and approved, you can know precisely how many vendors you are dealing with and precisely how many provide you with a certain category of goods; this can greatly improve the accuracy of your spend visibility and analysis efforts
  2. by providing a self-serve supplier portal, especially one that comes bundled with a registration fee (to offset processing costs and credential review), a buyer can streamline vendor registration, review, approval, and selection
  3. by integrating with third parties that provide terrorist watch lists and companies that have been identified as committing fraudulent activities in the past, companies can insure they remain in compliance with their vendors and mitigate some key risks
  4. by providing you with a centralized process, it can insure that a supplier accesses a policy, and signs off on acceptance before completing registration; this is key to mitigating risk and future litigation

All-in-all, it’s a great way to kick-start your vendor management and compliance initiatives, especially in the verticals they have considerable strength and experience in. In addition, I highly recommend you check out Vendormate’s blog, it is shaping up to be a good resource on vendor management.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

On the Fourth Day of X-Mas (Collaboration)

On the fourth day of X-Mas
my blogger gave to me
four little words,
tri-focal lens,
two boxing gloves,
and a lesson in strategy.

One of my favorite presentation titles at eyefortransport’s recent Supply Chain Directions Summit in the San Francisco Bay Area was Coca Cola’s presentation “Winning Together“.

Coca Cola is now making a big push to improve its supply chain through collaboration and information sharing. According to Coca Cola, success depends on:

  • relationships,
  • communications,
  • commitments, and
  • visibility.

Ok, so these words are not so little, but they are fundamentally important. They define a blueprint for successful collaboration between you and your supply chain partners. As outlined in the presentation, the keys to sourcing success are not canned processes or over attention to metrics, but working as a team internally and externally with dedicated partners and by focusing on communication to customers when a shipment is in danger of being late, not on-time percentages, as this allows both parties to work together to resolve a potential problem before it occurs. Strong relationships are the key to success and sustainability – take the time to get it right!

The presenter also made the point that very little information is truly confidential, and that the best way to resolve issues and collaboratively improve supply chain performance is to put everything on the table. Share all relevant information with your partners, and give them anything else they ask for if it will help them help you. This isn’t saying that you should publish all your corporate information on your web site, you can always enter into two-way information protection agreements, but that you should not hold back in sharing with a partner trying to make your operations better.

Note that eyefortransport’s sister organization, eyeforprocurement has a number of upcoming events next year custom designed for today’s procurement professionals, including the Supplier Management Forum next April in Miami. Registrations received before year’s end save $400 off of the regular registration rate and those who quote “sourcing innovation” in the discount code field save an additional $100.

On the Second Day of X-Mas (Market Intelligence)

On the second day of X-Mas
my blogger gave to me
two boxing gloves
and a lesson in strategy.

In the Autumn issue of CPO Agenda, you will find the article “Raw nerve” by Richard May which indicates that sometimes a tough response is required when suppliers demand raw material price increases. Sometimes there are reasonable justifications for the request, but sometimes the justifications are not warranted. If you remember my post on The Internet & the Purchasing Knowledge Revolution, or Charles’ recent insights on Supply Excellence [WayBackMachine] on “Caveat Emptor: Economic Indices Could Be Misleading You” and “Supply Market Assessment 101” you might recall that a single commodity index alone does not justify a price increase.

You need to know where the supplier is buying from, the relevant cost indices of the raw materials in those regions, the relevant exchange rate between your supplier’s supplier and your supplier, it’s expected stability, the relevant exchange rate between your supplier and you, and it’s expected stability. An increase in the steel index in the U.S. is irrelevant if your supplier buys its steel in China. Also, the cost increase in a commodity can often be offset by a recent currency devaluation. Therefore, the first defense you have against a commodity increase is a deep understanding of your should-cost structure, including that of your supplier. It’s your first boxing glove.

Your second boxing glove is a good strategic sourcing process that you can use to find an alternative source of supply, enabled by a cross-functional team that will allow you to quickly and efficiently work through the process. If there are genuine reasons for a cost increase, but your supplier refuses to collaborate to keep costs down for both parties, sometimes you need to find an alternate source of supply.