Supply Chain Management Tips

Feb 19, 2015

Procurement’s Role in Supplier Management

All business-supplier partnerships present risk. However, the level of that risk varies based on the services or goods being supplied. Some contractors and suppliers may be critical to your operations, while others play a smaller role and present less of a threat to business continuity. The need for supplier management does not diminish however. The increased correlation between supply chains and performance indicators uncovered in the MIT-PwC survey doesn’t show signs of going away. Of the survey participants, 95% agreed or strongly agreed with the statement “dependencies between supply chain entities have increased.” (1). Understanding where potential weaknesses or vulnerabilities lie, and being equipped to manage each of them, presents tangible benefits.

By minimizing financial risk, you increase business confidence

Heavy up-front investment in any project comes with risk, restricting cash flow and a company’s ability to pursue other potential sources of revenue. Generally, that risk is counteracted by a strong return on investment. But a project - and the project’s funding - can be compromised if even one crucial supplier fails to deliver on a predetermined contract. Companies should be proactive and assess the financial stability of their partners in advance. Implementing a supplier management program can minimize financial risk and can increase business confidence with each new project.

By identifying where you need to diversify suppliers, you mitigate skills/ expertise risk

Relying on any one supplier for a business-critical product or service makes a company extremely vulnerable to forces outside its control. The MIT-PwC study found “supply chain operations were most sensitive to skill set and expertise (31%)” (1). It’s the corporate equivalent of putting every egg in one basket. If a supplier is no longer able to deliver on the contract, the business on the receiving end may be incapable of producing its own goods or services. Conversely, if the firm is able to source a specialized product or service from a number of places, it increases its flexibility and responsiveness to unforeseen events, be they financial upsets, global economic shifts, or natural disasters.

By strengthening links in the supply chain, you reduce delays and save time

In a supply chain, one weak link can disrupt the flow of goods and services, which can ultimately create a “domino effect” for all suppliers and end users that follow in the chain. When a business is assured of its suppliers’ financial stability, it won’t have to dedicate time to managing or replacing one critical but unreliable supplier. As such, the business can effectively manage all of the suppliers and projects downstream.  The lesson, a properly implemented supplier management solution saves both time and money in the long run.

Source: MIT Forum “Supply Chain and Risk Management” MIT Forum for Supply Chain Innovation. 2013.