Managing Supplier Risks Based on Internal and External Data
This article is the third in our series on how modern data analytics solutions can provide procurement professionals with insights into their operations. Let’s discuss about Managing Supplier Risks.
It should be clear that monitoring supplier performance plays an important role in good risk management. However, risk management is a much broader topic, involving even more data to integrate and link from external, as well as internal sources.
Modern data integration and analytics technologies offer business reporting opportunities for supplier risk management that significantly reduce efforts to collect and analyze dispersed data. Mapping and monitoring risks in Procurement requires additive associating of information about our commercial relations with suppliers, suppliers themselves, and their performance. All this data is of different nature, coming from many internal and external independent sources.
Let us investigate this topic from the viewpoint of the key places where supplier risks are identified and the information that should be presented in business reports to facilitate identification.
Dependency measured in both directions:
- Our company’s dependency on a supplier – requires presenting combined information on the share of spend directed to each supplier in total spend of a given category (source: ERP), as well as information regarding the possibilities and barriers for changing suppliers (sources: ERP, where interchangeability of materials or services can be identified as well as separate files with descriptive information).
- Supplier’s dependency on us – is identified primarily as the share of turnover with our company in the supplier’s total sales. So, it is a mix of internal information on spend (ERP) and external supplier sales data (source: business information providers or suppliers themselves).
The supplier’s financial condition
Regardless the dependency, there is a need to verify how suppliers are doing financially. This requires presenting external data provided by business information providers or information provided by the suppliers themselves, which may be stored in separate files. This time, apart from sales, other key financial indicators should be presented. Many business information providers offer their own financial risk indicators which can be incorporated into the analytics.
The supplier’s production capabilities and ability to maintain quality
Here, we need to combine information on supplier performance assessments (KPIs sustained in ERP or at separate analytical reports as described in the previous chapter) with information provided by the quality management system (supplier assessments, execution of improvement initiatives), usually stored in separate files. All this information comes from within our organization.
Managing Supplier Risks: The supplier’s ability to act correctly in today’s business ecosystem
At this point, information on environmental compliance, ethical trading, diversity, and economic inclusion should be harnessed and integrated into the analytical reports. Here we are dealing with many various external sources, i.e., monitoring organizations, certifying bodies, and suppliers themselves.
Mere integration and coherent presentation of all the above-mentioned information in an easy and digestive way saves an enormous amount of time for procurement professionals. It also allows them to manage the supplier risks comprehensively, at the strategic level, and ensure a high degree of proactivity. Adding smart alerts makes this task even easier. Additionally, building an analytical base for risk management brings another important benefit, which is having one place with up-to-date managerial information, that can be shared by the Purchasing and Quality departments. This greatly facilitates mutual understanding and cooperation between the teams.
Stay tuned for our next article on how modern procurement analytics solutions help improve procurement efficiency.
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