How to vet suppliers
Thanks to globalised, multi-tier supply chains operating in economically challenging times, the risk of supplier failure in terms of turnover, supply disruption, customer relations and brand perception has increasingly become an area of concern for supply chain managers.
This concern often goes beyond those who hold responsibility in internal sourcing and supply chain disciplines, and is shared by the finance, operations, engineering and quality assurance teams.
The increasingly complex structure of today’s supply chains often extending to tier three or tier four suppliers provides access to a cheaper, or a particularly sought after product or service to the end consumer.
However, it also serves to amplify the potential for disruption. These sub-tier suppliers need to be identified and the nature and importance of their role in contract delivery understood at the pre-contract stage. These suppliers are often omitted from an assessment until an issue arises.
In addition to sub-tier suppliers it’s also important that the supplier vetting process targets where it is going to make the most impact. Those suppliers representing higher levels of business criticality, reputational impact, complexity or limited supply are where the focus should be, especially where this combines with high value goods or services.
Supplier health checks can proactively help organisations take steps to identify and avoid or reduce the chances of supplier failure. These checks should include:
Financial health Assessing the viability of a supplier in terms of its financial stability is crucial. A strong balance sheet and good cash flow position means that the supplier is better able to withstand variability in revenue streams that may occur.
It is also a good indication of a supplier’s ability in the longer term to execute against investments required to grow its business. Company credit reports effectively provide an evaluation of a supplier’s accounts and more (CCJs, late payment history, industry benchmarks and ratio analysis etc).
Company structure If a supplier forms part of a group of companies, it is important to establish the nature of any sister companies to ensure that they are not at odds with any aspect of the organisation’s reputation, or to identify where financial issues in one company could impact the contracting company.
Furthermore, it is important to understand the nature of any relationship with a parent company to ascertain if the supplier has control over the direction of its own business plan, objectives and investment, as well as the policies and processes to deliver it.
Location Understanding where contracted goods and/or services will actually be supplied from and identifying any risks or impacts that may be associated with a specific location is essential. The difficulty with this particular aspect of a health check is that impacts can come in the form of an unexpected disruption such as natural disasters or even terrorist attacks.
Value The value of a contract to a supplier could be an indication of the supplier’s attitude and approach to the relationship over time. A customer preference exercise can be carried out to ascertain the relative value of the business against the attractiveness of the account.
It is possible to work out just how valuable an account is to a supplier by looking at its approach in terms of service and response levels, drive for best price and maximum profit and keenness to lock in. Face-to-face dialogue will also help both customer and supplier jointly develop and increase dependency through extracting mutual value.
Capacity Assessing a supplier’s ability to deliver is also best carried out through direct contact. An information request or site visit should provide you with the information you need to assess a supplier’s resources in terms of staff, technology, equipment and storage to ensure it has enough capacity to handle your requirements and understand how quickly it would be able to respond to these and to other market and supply fluctuations.
Compliance Supplier compliance is about assessing any pre-requisites for contracting with an organisation such as sustainability, environmental commitments, ethical values and CSR. Supplier compliance information should be ascertained at the tender process.
Communication Many highly collaborative supplier relationships share health check information as part of the agreed way of working together. Ongoing partner relationships must focus on fostering growth in trust and shared information through regular and structured communication.
When carried out in a rigorous and consistent manner, the information obtained as part of a supplier health check process in terms of a complete view of the assessed organisation’s current and future validity as a supplier can then be input into the supplier’s risk profile.
This can then be incorporated into an organisation’s overall risk management process and identification of any issues or opportunities which need to be addressed or simply communicated will provide the insights and information necessary to help maintain a strong and healthy supply chain.
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