The Growth Potential in Managing Supplier Risk

This is an excerpt of the original article. It was written for the September-October 2010 edition of Supply Chain Management Review. The full article is available to current subscribers.

September-October 2010

You’re the Top!” In addition to being a great Cole Porter song, it’s a sentiment all of us would like to hear both in our personal and professional lives. Let’s take the professional perspective here. Looking at things from a supply chain perspective in particular, just how do you get to be considered “the top”? You’re the Top!” In addition to being a great Cole Porter song, it’s a sentiment all of us would like to hear both in our personal and professional lives. Let’s take the professional perspective here. Looking at things from a supply chain perspective in particular, just how do you get to be considered “the top”?

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The global economic downturn changed some fundamentals in nearly every industry, geography and area of business—from finance to operations, from compliance to procurement. The global recession may be dissipating, but its effects and lessons learned will have a significant impact on our approach to risk as we dust ourselves off and begin working in a recovering economic environment. As procurement professionals, perhaps the biggest change we see pre- to post-recession is the increased importance and focus on risk. Furthermore, we’ve witnessed an evolution in viewing this area more holistically from risk management through risk mitigation.

The downturn moved risk from a good practice to a must do, best practice. For us at DHL, like many other companies, the eye-opener came when a number of suppliers started showing very weak financials with some Dun & Bradstreet scores indicating a high probability of near term business failure. As a consequence,  supply chain risk management was abuzz again in C-Level suites and corporate boardrooms.

The Aberdeen Group, an independent research firm, conducted a study on supplier risks before the downturn. The report, “Supplier Risk Increasing While the Market Stands Still,” provided a glimpse into a more laissez faire attitude about supplier risk, with 49 percent of companies surveyed reporting that they did not have a developed supplier performance and risk management program in place. Even then, many of these same companies, 62 percent of them, reported that they expected supplier risks to increase significantly over the next three years due to factors such as the globalization and disbursement of their supply base. Enter the global recession and, combined with existing trends, supplier risk management has skyrocketed in importance.

Even as we enter an economic recovery, most companies competing in the global economy will face increased pressures and risks to their operations. As companies emerge from the downturn there will be a continued effort towards leaning the supply chain and outsourcing areas when there is a compelling value proposition. This brings about reliance on suppliers who can proactively manage risk more dependably and on lower risk suppliers in areas such as logistics. There will also be increased responsibility on purchasing professionals to proactively manage and mitigate risks by choosing optimal suppliers, monitoring them, and ultimately balance risk and return.

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