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What Is Supplier Risk Management?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 September 2016
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Supplier risk management is a strategy that is aimed at managing supplier relationships so that the potential for some type of disruption in the receipt of goods and services from a supplier or vendor will have a minimum amount of negative impact on the business operation of the client. A number of approaches to the task of supplier risk management are employed, including periodic reviews and critiques of suppler performance, comparison of that performance with the level of efficiency evidenced by competitors, and the overall continued value of the vendor/supplier relationship to the client. When structured properly, supplier risk management lowers the chance that the failure of any one vendor to deliver goods and services in a timely manner will cause severe hardship to the client, including triggering the loss of customers that are serviced by that client.

With supplier risk management, several factors are taken into consideration. The ability of the supplier to provide timely delivery of products if often a major focus. This can be especially important to businesses that are attempting to operate with a lean inventory of raw materials. In order to make sure that a supplier can support the client in this endeavor, the ability to deliver specified quantities of goods just prior to when the client needs to introduce those materials into the production process is crucial.

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Supplier risk management will also be concerned with the quality of the goods and services delivered. This is because ultimately any reduction in that quality will have an adverse effect on the reputation of the client. Should a suppler that provides raw fiber to a textile plant fill the order with fiber that is highly contaminated, the goods produced by that plant will also be of lower quality. As a result, the plant must either reject the shipped goods, or use them to produce lower-quality products that must be marketed at a deep discount. In the interim, additional raw fiber that is up to standards must be ordered and delivered if the plant is to avoid curtailing operations that could lead to delivering finished goods to a customer, which in turn causes inconvenience for the plant’s customer.

With supplier risk management, care is taken to evaluate the past performance of the supplier, current position within the market in comparison to direct competitors, modes of communication that are provided to customers, ordering and delivery policies and procedures, and the ability of the supplier to overcome acts of nature and other threats that could delay deliveries. Using an continuous process of supply risk management means not only assessing the supplier in anticipation of establishing a relationship, but also routinely evaluating supplier performance to see if that performance remains at or above the required standard. Should the risk evaluation process indicate that a given supplier is no longer the best fit for the client, steps are taken to qualify the degree of risk associated with doing business with a different supplier, and then making a decision on whether to move the business to that other supplier.

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