Supplier Risk : Why Should You Care?
In today’s digital world, supplier risk management is undergoing a massive change. There are now so many more factors to consider when managing a supplier, but luckily technology and automation have eased this transition by cutting down the complexity, effort, and cost.
Organizations spend millions of dollars on ensuring customer success and satisfaction, as they help drive revenue, but what if I told you managing suppliers effectively can help bring millions of dollars to the bank too? Would you sit up and listen? I would if I were you.
As I mentioned earlier, today’s supply base is more digital, connected, and global than ever. This means supplier risk has never been greater, from volatile commodity price movements, bankruptcy filings, human trafficking incidents to consolidation and outsourcing – risk exposure is now LIVE, and anything can happen at any time of day.
Supply Chains that historically functioned without a glitch now face a growing list of challenges both from international and domestic events. Today, an organization’s success is completely dependent on its suppliers.
A recent report by the University of Tennessee & Global Supply Chain Institute showcased that even though the risk is real; executives have done little about it:
- 90 percent of firms do not quantify risk when outsourcing production
- 66 percent had risk managers in their firms, either in legal or compliance, but virtually all of those internal functions ignored supply chain risk
An older study by Hendricks and Singhal emphasizes the negative consequences of supply chain disruptions that can still be seen today (Production and Operations Management, Vol. 14, No. 1, Spring 2005). The study analyzed more than 800 supply chain disruptions that took place between 1989 and 2000. Firms that experienced major supply chain disruptions saw the following consequences:
- Sales were down 93 percent, and shareholder returns were 33-40 percent lower over a three-year period
- Share price volatility was 13.5 percent higher
- Operating income declined by 107 percent, and Return On Assets (ROA) declined by 114 percent.
Despite the right intentions, companies are unable to drive comprehensive supplier risk programs as a part of their supply chain strategy. The two key drivers are:
- A lack of understanding of various factors that should be monitored to measure supplier risk comprehensively
- Disparate information sources, fragmented processes and spreadsheet based non-scalable risk models
These challenges can be difficult, but there are solutions available. SAP Ariba has worked with its customers to help identify, assess and quantify risk comprehensively and in real time through Ariba Supplier Risk Insights.
With this new innovation, we bring a systematic three-step approach to supplier risk management:
- Supplier Performance & Rating: We bring the inherent risk of doing business in that category or country, together with the relationship factors with your suppliers like preferred, global vs. local, etc., and also incorporate ongoing performance metrics and internal or external supplier ratings to assess health of the supplier engagement
- Incidents: We then look at external incidents that are happening right now – a labor violation, a natural disaster, fraud incident reported etc. In fact, we look at more than 130 different types of external risks-labor violation, fraud, cyber crime, and downsizing.
- Analyze & Report: Finally, we combine external sources with internal context (Supplier and Engagement from SAP and Ariba) and apply deep learning and analytical models to proactively surface risk exposure, scores, and alerts, to help identify, assess and adjudicate/mitigate risk in your supply base.
Let me give you some context: effective supplier risk management can help a billion-dollar organization add close to $9 to $12 million to its bottom-line.
If managing supplier risk is causing you distress and sleepless nights, join us at SAP Ariba LIVE at the end of this month.
There is a huge amount of insight, networking, and information sharing available at Ariba Live in Singapore. This is where customers, suppliers, and organizations are invited to share their experience, learn of new developments, and see the power of intuitive and collaborative solutions. We’ll help you understand how you can measure and manage supplier risk in a systematic and ongoing manner.
See you at Ariba Live!