5 ways to mitigate the risk of supplier failure
Major disruptions from COVID-19 continue across the globe and are forecast to continue into 2021 and any supply risks that are not managed will create vulnerability of supply. It’s important to assess those risks, shore up any weakness and create robust supplier relationships.
Organisations that are prepared for uncertain times will substantially reduce their supply risk.
Major disruptions such as pandemics or earthquakes impact the delivery of essential services and goods. Across the globe COVID-19 has considerably increased the risk of business failure and this risk is forecast to continue into 2021/22. After only six months into the global pandemic Air New Zealand reported an $87 million loss; their first loss in eighteen years. For Air New Zealand the government stepped in and offered a $900 million loan, but the option of debt financing is not always available to every businesses.
Financial difficulties for suppliers can come at any time and sometimes out of nowhere. It is important to consider the positive contribution the supplier is making to your organisation and whether that outweighs the risks that will need to be managed.
When a strategic or significant supplier fails, the cost and time implications of finding and on-boarding a new supplier can be extensive, particularly if there are specialised infrastructure requirements (moulds, patterns, specifications and technical expertise, large or small volume requirements). The failure of a supplier can have a disastrous impact on a business, and can potentially threaten its own survival.
This article includes five important factors to support a robust Supplier Relationship Management programme with your strategic and significant suppliers.
  1. Apply a classification system to your SRM
  • Not all suppliers are equal. At the highest level classify suppliers according to their strategic criticality (Kraljic Matrix).

  • Add other classifications depending on preferred management and criticality. This could include sustainability, broader outcomes, modern slavery etc.
    • Example: a local supplier has a cash flow problem. Considering the broader outcome that the supplier is a significant employer in your region, your approach might be to support the supplier. This could include changing your payment terms (e.g. down to 7 days or even immediate payment to assist with supplier’s cashflow).

  • Businesses that have Contract Lifecycle Management (CLM) technology can automate process workflows based on these classifications.
2. Incorporate risk management standard protocols – and at a minimum for all strategic and significant suppliers:
  • Develop a culture and protocol for open and honest communication.

  • Ensure that your SRM programme includes an instantly accessible (if needed) business continuity plan, alternative supplier and disaster recovery plan.

  • Conduct regular financial due diligence health checks – e.g. review annual / interim reports / credit ratings.”

  • Hold regular reviews – this is best done face to face (or via video conference if restricted from meeting in person):
    • The timing and content of meetings should be dictated by criticality factors
    • The agenda could include: a performance update, a current business update from both sides (e.g. any senior personnel changes, planned investment, health and safety incidents, labour disputes, new customers and churn etc.), and innovation.

  • Conduct a regular audit
    • Regular supplier questionnaires / assessments
    • On-site visits to assess the supplier. There may be signs to indicate the supplier is in difficulty – e.g. empty warehouses, poor standards, low staff morale etc.
3. Be aware of signs of a potential problem
Some indicators of a supplier’s failing financial health are listed below. The presence of one of these indicators doesn’t necessarily mean there’s an issue, but it’s worth investigating further:
  • Resignations of staff (more than one)

  • Signs of internal conflict

  • Lack of communication, not responding to emails or phone calls

  • Requests for price increases

  • Investment plans or changes – for example a planned renewal of equipment doesn’t go ahead or gets delayed

  • Performance issues and specifically delays in On Time Delivery

  • Raw material supply issue or contractor issue. This should be investigated (it could be because the supplier is not paying their suppliers / sub-contractors)
  • Losing customers or market share

  • Empty or untidy warehouses

If a supplier hasn’t yet failed but is showing some difficulty it may be unwise to assume that there will be another capable and available supplier to step in quickly to take their place. Consider whether the positive contribution the supplier is making to your organisation outweighs the risks that will need to be managed or mitigated.
4. Help suppliers by reviewing your own business processes
Procurement and supply management strategies and / or processes may negatively impact the supplier:
  • Forecasting and / or demand management. Poor process can have a financial impact on the supplier – e.g. based on your forecasting they could purchase too much raw material.

    • Marketing campaigns and new products. Sharing information will help the supplier with their planning – e.g. new product strategies, marketing campaigns, changes to your operating model, lead times required to meet deadlines.
    5. What to do if the supplier is in trouble
    • Identify the classification status and any actions specific to that classification (see point 1 above).

    • Immediate: For significant / strategically important suppliers, escalate and engage with senior executives from both sides, be open, honest in dealings with each other. Review business continuity plans and/or disaster recovery plans.

    • Short term: If the approach is to support the supplier then seek an understanding of exactly what the specific issues are and work with the supplier to resolve.

    • Short term: Shore up the immediate risk to supply, this could involve using alternative suppliers.

    • Medium to long term: Look for creative solutions – e.g. dual source, local supply options, investment in the supplier etc.
    The future is not always within our control, but with early identification and mitigation of risks, at least we can be reassured that if the unthinkable does happen we have a plan for it. 

    Read the first part of our Supplier Relationship Management series here: Realising the benefits of Supplier Relationship Management

    About the Author:

    Sue Dixon MCIPS Chartered

    Senior Procurement Solutions Consultant

    Sue has over 20 years’ leadership experience in procurement and contract management across a broad range of categories and regards herself fortunate to have worked at several of New Zealand’s leading organisations. Sue is an advocate of professional procurement and is enthusiastic about working with clients to help them gain the business advantages of Zeren’s technology solutions.

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