A 2016 study conducted by North Carolina State University found that major organizations are exposed to greater levels of risk today; especially in regards to exposure to Governmental Regulatory Changes and Scrutiny, Economic Conditions, Cyber-threats, and Privacy/Identity Management of Information Security. As other studies have also demonstrated, procurement and supply chain organizations play an ever-increasing role in managing enterprise-wide risk. This is because the typical company now has externally-provided supplier products and services occupying between 35% (service sector) and 70% (manufacturing sector) of their company-wide operating expenses.
So how can leading procurement groups act pro-actively to gain more value while mitigating risk in their supplier community portfolios? This article will describe two categories of techniques that can be cost-effectively deployed to create more-comprehensive Enterprise Risk Management (ERM)...
Category 1 - Pro-Active Supplier Performance Management:
Every procurement organization can facilitate its active management of key suppliers (and associated risks) with a focused identification of key provider relationships. You see, risk exists when an organization is not pro-actively managing supplier relationships and/or lacks visibility into factors which can lead to supply chain failure. Segmentation of our supplier portfolio can allow procurement groups and their internal departmental customers to better focus their supplier managers upon value-added activities, which will produce significant cost reductions and improved quality from key suppliers, thus reducing risk in the supply chain.
A pro-active approach to supplier performance management includes several steps:
First, we can separate our suppliers into ABC categories for more-sophisticated management. By applying the Pareto Principle to their supplier portfolios, leading procurement organizations are managing supply chain risk and performance for different groupings of providers... The "A" suppliers are the 20% of key suppliers which represent 70% of expenditures. "B" suppliers are those 30% of relationships which account for 25% of spend. "C" suppliers are 50% of our portfolio that represents just 5% of overall value.
Our supplier management efforts should first focus upon the "A" providers by utilizing more-active techniques such as Score-carding and Business Feedback Review Meetings. Proactive relationship management will gain valuable benefits in these key relationships by utilizing these methods.
"B" and "C" level provider relationships should be managed via more-automated tracking and reporting. Key scorecard metrics like "on-time delivery", "invoice accuracy", "quality", etc. can usually be extracted from a typical ERP system and be electronically reported back in simple scorecard format to these suppliers.
, key information about the organization's supplier community should be regularly-collected and reviewed by procurement leadership in dashboard report formats that allow general trend observation and tracking of performance improvements. Core data can be input from scorecarding technology tools and also from a supplier stability tracking website (the latter discussed in Technique #2 below).
, ever notice that the expression 'Supplier Relationship Management' (SRM) has the word 'Relationship' right in the middle? If we wish to develop key suppliers, Procurement needs to take a more visible role in relating to the supplier firm's management team so as to collaboratively develop the relationship in ways that optimize value received. More-sophisticated supplier relationships should incorporate senior levels of management on both the buyer and supplier sides to ensure proper prioritization of performance and risk security.
Technique #2 - Passive Supplier Risk Management
Let's face it, most procurement groups just don't have unlimited staffing to apply to supplier risk management. In the past this has resulted in key tasks often being under-managed in building advance warning 'safety nets' that should surround our key supplier relationships.
- Good procurement contracts should require the supplier (and any allowed subcontractors) to limit the buying organization's financial exposure AND to carry policies of insurance which protect the supplier and us from risk. Too many procurement groups fail to include insurance requirements in their supplier contracts. But for those who do, too often they only get proof of insurance at the initial contract award. The problem is that suppliers' policies of insurance often fail to meet the buying organization's own requirements (90% of required insurance certifications provided by suppliers fail to meet the buying organization's contracted requirements). Also the insurance policies will expire or change several times during a contract term. Failure to manage insurance policy expirations leave many organizations very exposed to risk.
- We might have the best written contract in the world with a key supplier, but if they enter financial insolvency or operational catastrophe...all bets are off. As has been mentioned in Strategic Procurement Solutions' prior journals, good procurement contracts should be written so as to provide us with visibility into all key suppliers' financial stability. But if no one regularly-retrieves and analyzes that information, management may be caught by surprise when a key supplier or supply chain element fails. This is especially true when a macroeconomic downturn occurs (the US alone has experienced 14 recessions since the Great Depression around 1930, and many other times of less-sustained economic pullbacks). As has been attributed to Winston Churchill, "Those who fail to learn from history are doomed to repeat it."
- Recent regulatory changes in the US and Europe now require much more active verification and management of supplier business licensing credentials and taxpayer identities. For example, many US procurement leaders are not aware that their organization is now required to maintain a copy of a supplier's W9 Taxpayer Identification Form in the 'current' IRS format documenting a verified Taxpayer Identification Number (TIN). This is quite different than the past, when a W9 form could be collected just once from a new supplier at initial onboarding/setup. Under today's revised recordkeeping rules, organization's need to solicit and maintain a library of current supplier W9 forms, subject to potential audit by the Internal Revenue Service.
Through research recently performed for one of our key clients, Strategic Procurement Solutions became aware of an innovative provider which will gather and manage any supplier organization's supplier stability information for FREE. This leading firm was also identified by Jason Busch and Pierre Mitchell of SpendMatters (I've co-presented recently at two ISM conferences with Pierre...) as one of the Top 50 Procurement Firms to Watch. Without any cost to a procurement group, this firm performs the following tasks for ALL portfolio suppliers and hosts the results in a sophisticated cloud-based reporting site. Information collected and managed by this provider for their customers includes:
Global Customer Support Team
- Multi-lingual staff assist a company's suppliers with registration and ongoing compliance management;
Insurance Certificate Management - Continuous collection and management of contracted suppliers' insurance certificates and endorsements in all regions where the company has operations;
Government Watch List Screening - Assists with international watch list compliance for all suppliers, including the US Patriot Act;
Customizable Document Management - Any standardized document can be collected and verified (including business licenses, certifications like W9 forms, ISO certifications, etc.);
Financial Stability - Can provide reports on changes in all supplier's creditworthiness and/or collect financial data provided by key suppliers;
Results Graded & Reported in Cloud Tool - Per a procurement group's unique screening criteria, results can be graded and verified.
By moving these tasks to this innovative provider without any cost, leading procurement groups are then able to better-focus their staff members upon pro-active supplier management activities. Email us at Supplier Management Provider Info if you'd like information on that firm. Note - this provider is not part of Strategic Procurement Solutions...this information is just a complimentary benefit for the readers of this journal!
Many other techniques apply to Enterprise Risk Management (ERM) and the supply chain. These are taught in our firm's onsite Supplier Performance Management™ (2 day) training workshop or an online Managing Supplier Performance™ (6 week) e-learning training forum. Information can be requested at