Procurement teams are acutely aware of procurement risk, and more broadly, of how their sourcing and spending decisions impact operational resilience. For instance, those who work in financial services recognize the necessity of meeting regulatory and compliance requirements. Within consumer goods organizations, procurement professionals have to ensure that products are consistently available, and that their brand image is well-represented. In industrial manufacturing, they know all too well what happens within the supply chain when a supplier’s reliability or quality degrades. In many ways, supplier evaluation and selection is the most important task for a procurement team, given the potential for positive or negative business impact.
As a result, procurement and sourcing professionals have gone to great lengths to ensure that they evaluate suppliers according to the total value they bring to the table. But what is supplier value and how is it measured? Do those considerations only apply to the primary supplier, or to the extended supplier network?
What determines supplier value to a procurement team?
Measuring supplier value is part science and part art. Depending on the category of spend, the criticality of what is being sourced, and your overall objectives, value determinations can vary greatly. And so can the supplier evaluation process.
For commonplace goods and supplies (say, wire hangers or office supplies), a supplier’s value may be primarily measured by unit price and speed to fulfill. But for more complex or hard-to-source goods or services, things like warranties, add-on services, and customization can increase value. The more critical the supply is to the business, the higher the value of supplier reliability, quality, positive relationships, and stakeholder preferences.
Similarly, methods of evaluating the value attributes can vary as the complexity and criticality of the purchase (which is to say, the procurement risk) increases. A simple Request for Information (RFI) to tick off pre-requisites may suffice before holding a reverse auction for basic goods. More extensive RFI and profile questions, with weighting and scoring of responses within a Request for Proposal (RFP)/Request for Quote (RFQ), may take procurement deeper into a value assessment. In some cases, external data augmenting extensive RFIs and constraint-based scenario analysis may provide a more detailed evaluation of supplier value. Site visits, prototypes, references, in-depth research, and background checks may also come into play.
But these are somewhat narrowly focused evaluations of what value the supplier can bring to the table and where they can add value in the course of supplying a specified good or service. What about the negative aspects of value, the risks the supplier may bring along as well?
The increasing relevance of supplier risk
It’s now all too clear that businesses are increasingly interconnected and dependent upon extended and often specialized supply chains. There are innumerable examples of supplier failures, supply disruptions, and other business challenges stemming from extended supply chains. It’s not just manufacturers suffering from disruptions within the critical supply chains that serve as the lifeblood of their operations. Businesses across all industries and of all sizes have been cast in these stories.
In a world where procurement risk is so great, an inadequate supplier evaluation can be catastrophic. When a key supplier fails to deliver, your entire business could come to a screeching halt. If a sub-tier supplier is using forced labor, or is damaging the environment, your brand reputation could take a major hit. A data breach at an outsourced service provider could expose you to embarrassment, fines, and even lawsuits.
Unfortunately, these aren’t hypotheticals or even rare occurrences anymore, as shown by the results of a recent Interos survey. A full 94% of 900 organizational supply chain decision makers reported they had suffered a supply chain disruption over the last two years, amounting to an average of $184 million in lost revenue. On top of that impact, 83% also suffered reputational damage because of issues that arose in their extended supply chains.
The list of supply chain threats is long. Supplier financial instability. Global health pandemics and rising case counts. Natural and man-made disasters. ESG and reputational impacts. Cyber attacks, ransomware, and data breaches. Shifting geopolitical and trade policy winds. Regulatory changes, sanctions, and restricted lists. All of these are having an increasingly visible impact on local and global, physical and digital, primary suppliers and extended supply networks.
Evolving strategies to handle procurement risk
Executive teams and their boards are now meeting monthly, on average, to discuss supply chain risk and disruptions, per the responses received in our global survey. And the discussions are leading procurement towards a broader assessment of supplier risk and operational resilience, and at deeper levels within the supply network. Procurement teams that haven’t taken the initiative to apply new approaches to supply risk are being asked to get onboard quickly.
There is ample evidence of procurement’s expanding view of supplier risk. Initiatives to include more multi-source options, alternates, and backups in case of a disruption. Diversifying geographical concentration to ward off procurement risk caused by weather events, infrastructure constraints, labor issues, or political strife. Deeper financial analysis, ESG alignment, and contractual obligations have been used to protect the business from surprises. Contingency planning and scenario analysis can provide much needed agility and reduce negative impacts to the business.
As supply networks grow and become more complicated, so too do the risks that are hidden by overly-casual supplier evaluations. Supplier self-reported survey responses, point-in-time assessments, and a shallow review of primary suppliers just don’t cut it anymore. Claiming a lack of visibility into sub-tier supplier risks and an inability to anticipate problems across the supply network is a poor excuse, and one CEOs will not tolerate any longer.
Incorporating risk and resilience into the supplier evaluation
An overnight shift to reign in extended supply networks isn’t in the cards. Businesses and their supply chains have evolved over decades to focus on core competencies, strengths, and specializations. Today’s (often global) extended supply networks have created nested dependencies across multiple tiers of suppliers. As such, a shortage, quality issue, or even a reputational hazard in a lower-tier supply node has the potential to cause a debilitating ripple effect.
Multi-sourcing strategies, safety stocks, and other contingency plans are in place to ward off the immediate impacts of a failure somewhere within the supply network. But there is only so much “what if?” analysis that can be done when there are procurement risks hidden within your supply chain.
Uncovering the hidden risks, and identifying and assessing their potential impact to the business, can help procurement organizations proactively build resilience into their supply networks. A thorough supplier evaluation that affords deeper visibility into your supplier’s suppliers, down to the original sources, can help identify sole-source situations in lower tiers, unseen geographic concentrations, and financial problems that could undercut a healthy primary supplier’s ability to support your business.
“When you can see everything, you can do anything” is Interos’ motto, because visibility into hidden risks is a key factor in building resilience into your business. A deeper view of multi-tier relationships and dependencies, and a broad view of multiple risk factors, can show you more about the value, or the procurement risk, a supplier brings to the table.
The value lies in that supplier’s resilience—a state that includes not only their own resilience, but resilience at their sub-tier suppliers as well. And with that information at hand, procurement teams can evaluate suppliers more holistically, with a keen eye towards the potential risks of one supplier over the other, to make better decisions.
Get more actionable insights for procurement teams
Watch this in-depth and revealing discussion on how procurement and sourcing professionals can:
- Gain insight into how existing supplier evaluation approaches are falling short
- Leverage technology to minimize procurement risk and build resilience
- Improve what they bring to the table as organizations look for ways to see and avoid risks
For more information on Interos, visit interos.ai.