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  • CFO.com | US

Five Ways to Manage Supplier Risks

Supplier risks are becoming more challenging because of the inherent difficulty in achieving supply-chain visibility.

As companies develop business relationships around the world into more complex supply chains, protecting these essential links from disruption is becoming harder to manage.

Opinion_Bug7Thus growing number of organizations are developing enterprise risk management (ERM) frameworks and other holistic risk management approaches to response to an increasingly uncertain global business environment. Developing ERM programs make it easier for companies to focus on the root causes rather than on the symptoms of disruption in their business operations and thus prevent such disruptions over the long term. Via such approaches, companies can actively anticipate, track, and manage the various types of risks in their supply chain.

Given the complexity of managing third-party risks across different business units, many companies are turning to predictive analytics to gain a better and more comprehensive view of long, complex supply chain and distribution networks.  There are many challenges in doing business with suppliers in unfamiliar markets, each with its own unique array of threats. Problem areas can include language barriers, unstable local politics, geographical issues and vastly different legal systems.

Supplier risks are also becoming more challenging because of the inherent difficulty in achieving supply-chain visibility in a setting where suppliers are arranged in multiple tiers. Indeed, many companies don’t have the ability or the will to map even their first-tier suppliers. That can leave them blind to risks buried deep in their supply chains and extremely vulnerable to a failure of a tier-two or tier-three supplier. Consider, for example, the lessons Mattel learned beginning in August 2007 when it recalled 967,000 toys because a supplier in China that the company had worked with for 15 years had been using lead-based paint. At the time, Mattel required the factories it contracted with to use paint and other materials provided by certified suppliers.

Mattel executives said then that they did not know if the contract manufacturer substituted paint from a non-certified supplier or if a certified supplier caused the problem. One of the company’s solutions for better quality management was to reduce the amount of toys it made through contract factories. About 50 percent of Mattel’s revenue came from toys made in 11 factories it owned and operated. The other half came from toys that it outsourced to up to 50 manufacturers in China. Those toys tended to be short-term products that featured characters from movies and television shows rather than Barbie dolls and other long-term Mattel brands.

In light of this recall, other organizations like Nickelodeon and Sesame Street decided to introduce a third-party monitor to assess all the companies that made toys under their brands, including Mattel. In the summer of 2007, the Toy Industry Association worked with the Consumer Product Safety Commission to introduce new regulations to require more stringent safety checks.

4 thoughts on “Five Ways to Manage Supplier Risks

  1. All this is very good advice. All company stakeholders, meaning customers, employees, capital providers and regulators, have an interest in supply chain integrity. Irresponsible behavior creates enterprise-level risks including the overarching one — loss of reputation. In addition to the operational considerations discussed above, reputational value preservation should be part of an integrated ERM solution.

  2. Good article, however as the quality of data improves, the move to advanced analytics becomes critical – especially to go beyond ‘expected loss’ (impact x probability over the distribution) to ‘unexpected loss’, by incorporating frequency distributions. An understanding of potential unexpected loss reprioritises risk mitigation strategies.

  3. This is great advice for any company looking to improve their supply chain management . New Supply chain strategies will improve efficiency and increase productivity. I work for McGladrey and there’s a very informative whitepaper on our website that readers of this article will be interested in. @ Count, manage and move: Warehouse inventory control strategies. http://bit.ly/1kgYXWo

  4. “Problem areas can include language barriers, unstable local politics, geographical issues and vastly different legal systems.” – Yes, and these are just few of risks’ roots!

    Considering my own experience in procurement and supply chain management, the minimum set of measures for lowering risks is:

    1) demonopolization (working with an optimal quantity of suppliers ranged at least into 2 categories – main and reserve);
    2) quality control of suppliers and contractors (not limited by just controlling the quality of the goods/services, but also including deep investigation of suppliers’ corporate standards, management system, attitude to customers, resources sufficiency, etc.);
    3) overall business processes optimization in terms of reliability (including intercommunication between the departments), especially concerning logistics;
    4) suppliers development and integration.


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