When it comes to mitigating supplier risk, even the largest corporations are sometimes flying blind.
“You never know what you don’t know,” as Paul Blake, senior manager of technology product marketing at procurement software firm GEP, put it.
Sure, a corporation with complex international supply chains can never exactly forecast the socioeconomic or environmental factors that could impact business. But sophisticated data management does offer some predictability to vendor risk mitigation and supply chain management.
Blake told PYMNTS that, for larger organizations that deal with multiple vendors across multiple geographies, supply chain risk is on the tip of everyone’s tongue.
“Supplier risk and supply chain risk are very important factors in the procurement world; it’s a very topical subject right now,” he said. Many of GEP’s clients have supply chains connected to developing markets that are enduring their own growing pains and economic and social overhauls. In these scenarios, understanding what type of information a corporation needs to mitigate risk is crucial.
That’s quite a tall order, however. What may initially come to mind when considering vendor risk is the threat that, once a procuring organization has paid for an order, various factors prevent the supplier from ever actually delivering and following through with that transaction. Blake explained this as a “risk in purchasing.” That’s towards the end of the procure-to-pay process, and it’s hardly the full picture.
Larger firms often have to work with vendors not only as suppliers but also as business partners, he noted. This means that one of the most lofty threats to a supply chain is the breakdown of that buyer-supplier relationship.
“The most important thing at the start of the process is identifying suppliers you’re going to work with for, probably, an extended period of time,” Blake explained. “They need to be able to maintain their side of the relationship in a manner that ensures that the terms you’ve agreed upon with them can be met.”
“That becomes quite complex,” he continued. “It’s not just about them being able to supply you with the goods.”
Contractual obligations, like meeting a certain level of service and pricing negotiations, are what make the difference between a vendor simply delivering goods or becoming a business partner, he added.
Data analytics are a critical part in the process of identifying which suppliers to work with, how many to work with and how to ensure that these vendors can follow through in a long-term business relationship. Earlier this month, GEP revealed a partnership with Global Risk Management Solutions (GRMS) as part of its efforts to streamline the vendor risk mitigation process for clients.
Their collaboration sees GRMS’ data analytics capabilities integrated into GEP’s SMART procurement software, arming procurement officials with the information needed to generate a vendor risk profile.
When supplier risk assessments are done manually, Blake explained, the threat of a business relationship breakdown can be high, causing lost resources for a buyer.
“It’s not just about placing a purchase order and paying an invoice,” Blake said. “It’s about putting your faith in the relationship with the supplier to deliver the strategic aims you set out to achieve when you set up the negotiation in the first place.”
Risk analysis offers a business the ability to go after the right suppliers that are more likely to continue alongside corporate clients and meet contractual obligations, like pricing agreements. Otherwise, Blake explained, a supplier may go out of business due to financial instability, for instance.
“It’s all contingent upon whether the supplier plays their role,” he stated, “and if they’re not able to do so through financial instability, then you’ve actually lost all of the advantage that you’ve negotiated in the first place.”
The array of risks involved in international supply chains for a global organization are copious, from suppliers going defunct to hitting child labor law violations. Then, of course, there are the unknowns: political and environmental events, for instance, that no one saw coming.
Arming a procurer with data about the supply chain and its individual vendors, though, can offer a much clearer path for the enterprise to step onto when beginning the procurement journey.
As Blake explained, though, the challenge is real.
“Knowing what you don’t know — the level of risk and categories of risk you should be investigating — is certainly an exercise in even the brightest brains of the procurement world,” he stated.