Originally Published in Supply Chain Management Review | February 27, 2014 | By Paul Mandell
Today’s corporate procurement function faces a wide array of serious challenges. Among the most vexing are those that relate to supplier risk—an area made particularly complex by an increasing reliance on suppliers in foreign lands. This risk was highlighted vividly by Toyota’s recent recall of thousands of cars following the company’s switch to a new fabric supplier, whose product did not meet safety standards. Unfortunately, Toyota is not alone in facing supplier risk.
At a recent event for senior procurement executives of Fortune 1000 companies hosted by Consero in January, tackling supplier risk was a primary topic of discussion. During an interactive panel session on the issue led by Steve Hrubala, the global head of procurement and strategic sourcing at the Carlyle Group, and Elisabeth Schlag Lawrence, the director of global indirect procurement at Godiva, the participants shared a series of best practices for minimizing global supplier risk—four of which are described below.
1. Make Routine Site Visits: One intuitive but invaluable method of managing procurement risk when sourcing overseas is the practice of scheduling routine site visits. Leveraging this strategy, corporate representatives visit supplier facilities on a regular basis and both meet with vendors and observe the work. Site visits allow procurement officers to ensure that workplace practices and product quality are consistent with their expectations, as well as to increase the likelihood of early discovery of major problems—from supply chain hiccups to unsafe working conditions.
2. Invest in Local Advisors: The panel also discussed the importance of having trusted local advisors in the countries in which a company’s suppliers are operating. Among the risks of which senior procurement executives must be aware when dealing with overseas suppliers are those relating to changes in the political or economic climate of the region. Imminent employee strikes or increasing odds of government nationalization of your supplier are important pieces of knowledge that are better acquired earlier rather than later. Investing in consultants or other advisors on the ground in the countries where your risk is greatest, who understand the dynamics relevant to your business and can flag problems early, is critical to maintaining a smooth foreign procurement experience.
3. Reward Supplier Performance: A third strategy for minimizing foreign supplier risk is the proactive use of incentives and rewards for suppliers to develop and implement policies specifically focused on minimizing risk. Many businesses create such programs after a catastrophe has taken place—either as a condition for new vendors to win the business or simply to avoid a costly repeat of the issue with the same supplier. Getting out in front of potential disasters with a program that benefits suppliers for avoiding or mitigating risk is one of the best investments a procurement department can make in protecting the procurement function and the company.
4. Build Internal Support: A final way to manage procurement risk can be done entirely in house. This method involves securing the support of the company’s leadership for investment in reducing global supplier risk. Getting buy-in from the top corporate brass, as well as from senior executive peers in other departments, can be critical to securing the resources necessary for a robust and effective risk-management program. Gaining such support can be easier said than done—particularly within companies focused on short-term profits and during a time of tightening budgets. But with clear and regular communication about the value of investing in risk management in terms that demonstrate a positive impact on the bottom line, senior procurement executives can optimize their efforts to protect the company against supplier-related disasters worldwide.
Risk management is among the most critical duties of procurement, yet often among the most overlooked. It is impossible to avoid supplier risk altogether, whether a company does business with suppliers in 50 countries or one. However, by making use of the strategies above and keeping risk management top of mind, corporate procurement leaders can play as important a role as anyone in the pursuit of overall corporate success.