As the world morphs more and more into a global marketplace, supply chains keep becoming more complex. Organisations are increasingly enlisting third-party suppliers to benefit from cost reductions and specialized products.
There is expected to be constriction on retail and general merchandising and transportation costs are anticipated to rise. This will cause some capacity constraints. The supply chain issues that occurred in the pandemic are going to be amplified, commentators say.
Research says this will impact on price and availability, leading to inflation. Product ranges will be smaller. It is possible that there will be a return to COVID-style rationing. Ingredients such as wheat could become harder to procure, sending prices up and depleting ranges.
As a result, sourcing strategies are getting more extensive and intricate. Despite the numerous benefits organisations can reap from such plans, intensive supply chain come with an exponentially increasing number of risks.
The performance, operations, and organisation of suppliers can impact client companies in a number of ways. Possessing an understanding of the types and nature of risks involved is necessary for procurement teams if they aim to build strategies to mitigate them.
PASA spoke with supply chain expert Kafil Saleem from Kissflow, which offers a flexible purchasing software that streamlines end-to-end procure-to-pay. In the article Mohammed explores supplier risks that procurement teams need to mindful of.
1. Reputational Risk
Kafil says reputational damages are unpredictable and are extremely challenging to recover from, and a lack of maintenance of standards on the supplier’s part can greatly contribute to them. He says Rrsks can be further divided into two main groups:
A. Supplier Performance
“Supplier performance risks are related to the risks associated with a supplier’s direct output,” he said. “This can include substandard product quality, shipment delays, supply interruption, etc. Such actions directly impact the bottom line as they are translated into your organization’s low-quality output and inefficient services.”
B. Supplier Practices
Kafil says these risks involve the social, ethical, and environmental risks that supplier practices may pose. “In the quest for low costs, if your organisation ties itself to suppliers which are found to be indulged in practices like child labour, making workers work in dangerous working conditions, causing excessive environmental damage, etc., the ensuing reputational damage can be irreparable.”
He said reputational risks not only ruin an organisation’s chances of expanding its customer base but can also take away loyal customers. “Inconsistent product and service quality can deter first-time customers from purchasing again, and scandals resulting from sourcing without proper research can take away your market share while discouraging potential customers,” he said. Best practices of supplier risk management may include intensive research about suppliers and shortlisting a few reputed ones to ensure the mitigation of reputational risks.
2. Resilience Risk
If your company is dependent on only one supplier for key input, any interruption in the supply chain can affect your company’s resilience, Kafil says. “Though these can result from a number of factors like natural disasters, geopolitical atmosphere, or systemic failure, financial collapses in the case of sudden bankruptcy can cause them as well,” he said.
Such risks could cause interruptions in customer services and thus can cause a loss of potential sales.
“Moreover, if such an interruption makes your organization haphazardly draw contracts with new suppliers, it can end up in a more vulnerable position,” he said.
“So, vendor risk management strategies that foresee and prepare for such situations are critical to a company’s resilience.”
He suggested procurement teams should ensure they stay on top of their market and economic research and have backup plans ready to protect the company from the brunt of such situations. “They further need to ensure that they possess knowledge of their suppliers’ financial health, especially if the products or services of those suppliers are vital to your organization’s output,” he said.
3. Information Security and Privacy
Today, organisations are more interconnected than ever. But with that, it exposes organizations to considerable cybersecurity risks at every touchpoint with manufacturers.
“Enlisting a supplier includes involving them in the company’s network to facilitate data sharing and communication; here, a cyber supply chain risk originates,” Kafil says.
“The supply chain can be hacked at any point and hackers can then tunnel their way into your organisation,” he said. “This risk is transferred to the customers as well. This was clearly demonstrated in the SolarWinds Hack in 2020.
Kafil says organizations can face immense costs as a result and their reputation can be damaged permanently. “This can be particularly damaging if your organisation has high-profile clients,” he says.
“The personal details of citizens can be exposed as well, further landing the company in an uncomfortable position.”
Procurement professionals should consider an efficient supplier risk management process is critical to ensuring protection against such a strong threat. “Past supplier performances and customer reviews should be analysed carefully by procurement officials before onboarding suppliers. Rigid approval workflows are further necessary to reduce rogue purchases that can put the organization at risk,” Kafil said.
4. Regulatory Risk
Regulatory risks constitute non-compliance with trade laws, social, environmental, and governance factors, commercial undertakings, etc., associated with sourcing, outsourcing, or offshoring arrangements. Such non-compliance can not only result in losses, but the company and its officers can also face civil and criminal liabilities, especially in the case of not following local laws.
Kafil said it is of utmost importance to ensure that your suppliers can uphold the compliance obligations of your company.
“This again highlights the need for procurement departments to maintain a proactive approach in supplier management system to stay on top of information regarding supplier practices and economic conditions,” he said.
5. Commercial risk
Commercial risks arise from poorly managed sourcing arrangements. These include budget overruns, inaccurate billing, etc., and can result in considerable financial losses and missed growth opportunities. Commercial risks can arise from both internal and external factors. The former include estimation of costs, the wording of contracts, etc., while the latter includes supplier failures, delays, etc.
Kafil said reliable, transparent, and consistent supplier management software processes are necessary to avoid such risks. Streamlined internal procurement operations play a vital role in mitigating such losses by providing enhanced visibility into the process.
“Clear visibility of procurement processes and supplier practices is necessary for this day and age where risks grow alongside the market,” he said.
“Though an organisation cannot completely prevent risks among suppliers, it can certainly take steps to mitigate them and protect itself from their impact.”
Enquiring and keeping a record of your suppliers’ sourcing arrangements and ensuring that your supply chain does not go against regulatory and legal requirements is prudent for efficient risk management. The procurement team’s strategies clearly need to include the identification of risks associated with every potential contractor, assessment of risks through categorizing, predicting effects and planning mitigation, and monitoring the risks through contracts and agreements.
Kafil is a certified procurement consultant who has been coaching companies to establish resilient digital procurement operating models.