Alicia Scavona05.17.10
Risk Reduction Through the Best Supplier Relationships
Alicia Scavona, Tefen USA
Try to envision the following scenario. The product line that contributes a significant source of revenue to your organization has suddenly shut down because a critical component supplier just went out of business due to rising costs and restricted access to capital.
How did this happen without your foreknowledge? Why is your organization now facing a supply interruption? The issue can be traced to an inadequate Supplier Relationship Management (SRM) program. A key factor of such a program is to build and maintain solid relationships with your suppliers, particularly your strategic partners, in order to understand their issues and challenges. These relationships are critical and impact new product introduction, component/finished good quality, inventory costs, manufacturing schedules and financial stability.
Defining the Relationship
Just like a spouse, a supplier impacts lifestyle and a bank account. The foundation of SRM is to understand how the supplier can or will impact your organization. By implementing a prioritization process that correlates the supplier’s impact to your organization through a risk-based approach, a company can decide where to dedicate their time and effort.
To sustain a robust SRM, supply chain organizations should segment their supply base categorically based upon a set of attributes and parameters. Two key attributes are technology and commitment. Technology relates to the sophistication of the product being supplied along with the financial expansion and development. Commitment is the alliance between the supplier and customer, comprised of trust, dedication, performance, and information flow.How many segments should an organization have? There is no simple rule. It is dependent on the complexity and size of the business, and typically can range from three to five.
The top tier is Strategic, where both parties are mutually growing together by improving current products and developing new ones. Typically, significant investments have been made and each party regularly shares a broad range of information between organizations. Additionally, there are service-level expectations of a Strategic partner that are regularly met, if not exceeded, and the success of each organization is intertwined.
The Business as Usual tier is expected to satisfy the agreed upon service levels. Their products or services are commodity-driven and less-exclusive. This segment typically meets expectations with little effort.
The final segment, Inactive, should not be overlooked. It identifies the suppliers that should not be used in the future because they were unable to meet the mandatory technology needs, commitment level or performance requirements. Senior management should be involved in the reinstatement of any supplier in this segment.
Two more segments, Partnership and Phase-out, can be considered. Partnership defines a relationship where both organizations might be forced to be interdependent on one another because of a sole source/single source or propriety process relationship; but the information flow or potential growth is limited. The Phase-out segment is reserved for any supplier that is targeted for deactivation. The reasons can vary but usually include market/technology shift, performance, end of life cycle, etc.
Remember, a segmentation should be defined with a“360-degree” approach, where customers put themselves in their suppliers’ shoes. Perhaps the customer has a key stake in the business, but the supplier does not return the sentiment. Prior to deciphering each supplier’s segment, you must remember that the segment will drive the service-level expectations and the information communicated.
Measuring Risk in the Relationship
To understand the level of risk a supplier presents requires continual performance monitoring. Supply chain organizations should continue measuring traditional attributes such as quality, delivery and financials. However, to fully define the level of risk suppliers present to the organization, more information is required. In some organizations, this additional data already exists within a variety of departments and is reviewed based on the department’s objectives and goals. Although this is a start, it is critical to integrate all the imperative data into one tool which will provide a logical summation of data points. Periodic reviews of this information support a predictive environment for preventing failures in the supply base.
To develop a consolidated tool to provide visibility, consider having two tools; one to measure the relative risk of a supplier and the other to measure the relative risk of components they supply. Separation is required because a supplier can be ranked as high risk, while components they provide are low risk, or vice versa. Based on your organization’s requirements, a set of attribute statements or questions needs to be defined around the areas of business, performance, quality/capability, technology, etc. Universal parameters are created for all suppliers/components and divided into varying degrees of risk to stratify results. To maintain data accuracy and integrity, the people responsible for the attributes that are being evaluated should populate the tool. Also, the process needs to be well defined so there is consistency across the organization.
A visual dashboard can be created from the data sets and used to manage performance or identify where actions need to be taken to mitigate risk.
Future correlations can be done to understand a supplier’s portfolio (i.e., comparing the risk of the supplier to the risk of components they supply). This information should be communicated with the supplier on a recurring basis to ensure awareness exists and preventive measures can be taken. Like all performance monitoring processes, the risk-evaluation process should be looked at regularly to ensure that the attributes and parameters reflect the organizational strategy and needs.
Structured Conversations
To further reduce risk within the supply base, meaningful discussions should be held with suppliers. Through identifying the supplier’s segment, frequency, people and a focus on productive and meaningful discussion can be framed. As an example, a supplier’s segment informs the business on how to structure the conversations, who should be involved and how many times assessments should occur within a given period of time. The greater the commitment between the two parties, the more frequent the conversations should occur. Parties should discuss current events, industry trends, specific performance concerns, value driven opportunities, etc.
Conversations with strategic suppliers should be conducted face to face and within a learning environment such as at the supplier’s headquarters, exploring the supplier’s (or customer’s) manufacturing and distribution site, or visiting the next level upstream or downstream in the supply chain. The greater the collaboration, the more hands-on exploration should be done to further understand each other’s operations.
Through these discussions, organizations can gain an understanding of their suppliers’ state of business. In doing so, they may identify a new indication of risk or potential interruption in supply, which opens up an opportunity to take the necessary action to reduce the risk.
In order to drive a consistent message across the supply base, supplier segmentation templates are developed to standardize the information being exchanged. For some top-level suppliers, the financial health and new product development is shared in depth, while with lower-level suppliers, a brief overview of recent company business is highlighted. As the SPM process is established, the metrics should be shared with the suppliers and trends discussed. During these reviews, action plans for areas of improvement are outlined with action items, owners, and review dates.
It’s important to remember, however, that the session should be a two-way conversation and viewed as a full circle, where the supplier presents its comparative information around business health, strategy, metrics, barriers, etc. This allows both parties an opportunity to be open and honest regarding the highs and lows of the relationship. By allowing the supplier to open up, the customer is able to further mitigate risk by adding another element of education. This is a crucial component that many organizations forget to do. They forget to ask, “And, how are you?”
By developing a risk-based SRM program, supply interruptions can be foreseen and averted. The program’s success relies upon open and honest communication between the suppliers and the organizations they serve.