Risk management and Review of Supplier Selection

Overview

In this report, risk management in relation to the supplier of the organization will be carried out. Furthermore, risk identification, risk register and risk response will be discussed. At last, not least, sustainable supplier selection in order to address the sustainability required will be discussed. The recommendations for risk management and sustainable supplier selections are provided.

Introduction

According to Berry (2014), risk management is an important business practice and it is valuable to minimize the disruptions to business operation. Risk management enables the organization to highlight the potential risk associated and their impact on the organization. The risk present the opportunities (upside risk) as well as threats (downside risk) for the business.

As suppliers are, consider strategic partner, therefore, effective risk management is required in order to keep the disruptions at minimum in supply chain. The risk management is continuous process, which can be deployed before the suppliers are selected and after the relationship is developed (Brose and Millett, 2015).

Frenkel et al (2015) explained that risk Management is a process of analyzing, evaluating and control the unexpected risk.  For example, a company carries out risk analysis of supplier in terms of cost and quality offer before supplier is selected. However, once the supplier is selected the risk management processes should continue to minimum the problem in terms of delivery or possible shortages.

Effective risk management ensures that uncertainties associated with business operation with appropriate estimation and set contingency plans. Risk management will enable the organization to develop strategies to manage the uncertain events. The risk associated with the suppliers could range from cost, quality and deliver of the materials (Piga, 2014).

Supplier Management

Supplier plays an important role in success of company, as half of revenues earned by companies are spent on purchase goods and services.  The role of procurement has become prominent in terms of value of transactions performed by the department. The challenges involve in the supplier selection is identification, evaluation and management of the suppliers (Duckert, 2015).

supplier selection criteria and risk management
supplier selection criteria

Henriques and Richardson (2013) analyzed that the most important factors while selecting a supplier involve cost and value, quality of the material as well as agility. Having strong relationship with the suppliers is important in order to reduce cost, deliver quality product, flexibility as well as minimizing the disruption in the supply chain.

Monczka et al (2015) added that in today’s competitive business environment, it is important that firm must produce quality products at the right price. The production processes success is based on the two components, which are suppliers and workforce. Therefore, careful supplier selection as well as risk analysis is required for effective management of supply chain.

Risk Management

According to Henriques and Richardson (2013), risk is defined as an event, which may deliver an unfavorable outcome. The downside risk pose serious threat for the business like failure to achieve its goals, increase costs, recue revenues or even legal liabilities for the business. There are different types of risk associated, which may be strategic, operational, legal or financial. Risk management involves identification, quantification and developing a risk response.

There are different types of risk associated with supplier management like supplier failure to deliver the materials, price of the materials, supplier financial position or the quality of the material supplied. Risk planning involves assessment of the risk organization is exposed in relation to business environment (Hopkin, 2015).

risk management process

Supplier Risk Management

According to Yacura (2013), Supplier risk management involves management of the events, which could hamper the sourcing plan of an organization and disrupted the operation of the organization. In order word, risk involves the unfavorable event and negative outcomes associated with these events. Effective supplier risk management involves identification of the events, which could create problem for the supplier. The supplier failure could result in financial and operational problem for company.

Wu and Vincent (2009) added that the risks are managed based on their probability and impact on the organization. The range of risks associated with supplier management is material specification, selection of supplier, performance of the supplier, legal, fraud and operational risk.  The tradeoff between cost and quality of is important consideration for supplier risk management.

Supplier Risk Identification

Risk identification aims at estimating the organization exposure to the uncertainty. It involves the structural approach in order to highlight the events that could potentially hamper the organization position to achieve its objective. Risk identification involves the anticipated probability and livelihood of the risk event (Brose and Millett, 2014).

risk matrix - likelihood and impact

Supplier risk Register

Hopkin (2012) stated that risk register is useful in tool in order to record the risk associated with business operations. The register is important document, which record the identified risk.  The common element of risk register involves description of the risk, type of risk, probability of risk and impact of the risk. Risk register contains all the risk highlights and contain information about the impact of the risk.

For example, financial credit worthiness of the supplier is important element. If supplier goes bankrupt, it danger the supplies for the business and business might have to arrange alternatives. However, the probability of the supplier bankruptcy is low but has high impact.

key risks in supplier selection

Quantitative Risk Analysis

According to Frenkel et al (2005), quantitative risk analysis involves the prioritizing of the risk, which has been identified, and highlight in the risk register. The risks are prioritized in terms of their probability of occurrence and their impact on the organization. The qualitative risk analysis are carried out through assigning the values to each risk in the risk register and level of risk involved with each risk. If the risk has high impact on the business, it should have high priority attached to risk (Duckert, 2015).

quantitative risk assessment

Quantitative risk map

Risk Response

Kerzner (2014) explained that risk mitigation and response involve developing strategies to create options and actions for the risk indemnified and quantified. There are four types of strategies which business could use in order to response to the risk business are facing. The first strategies are avoiding the risk. Avoidance means business leave the risk. The reason behind adopting this approach is that the cost associated with risk might be too high and it outweighs the benefits derived by the business.

For example, supplier deliveries are received in the evening rather in the day. If company changes the timing it may cost company additional cost and have to fulfill other legal requirements. Therefore, it is better to receive delivers in the evening rather facing additional cost and legal consequences (Hopkin, 2015).

Wu and Vincent (2016)  added that the next risk response strategy is ‘transfer the risk. The risk can be transfer through taking the insurance. For example, if the goods are in transit, company, and some damages occur to the material or Goods Company can claim that value from the insurance company. The next viable strategy would mitigation of the risk. The mitigation of the risk involves reducing the risk through adopting proactive approach.

However, company should take a proactive approach to manage the in term of time and cost involved. The last approach to tackle the risk is acceptance’ of the risk. The acceptance of risk is last resort and either risk mitigation is not possible or the cost benefit analysis is not possible (Piga, 2014).

risk response matrix

Risk Mitigation and Contingency plan

The risks can be mitigated and contingency plans are shown in the table

Sr. NoRisk DescriptionRisk ResponseContingency plan
1Supplier failure to meet deadlineRisk Mitigation

There should be financial fines linked to late delivers. If supplier does not deliver on time company should seek charges for damages

Company should have enough backup material to meet the production requirement. Alternative supplier could be backup option available for the company
2Quality of materialRisk mitigation

Supplier should be bound to deliver the product and if product fails to meet quality standard it should be return immediately and notify the supplier.

There should continuous quality testing and quality assurance program in place to ensure quality from the processes. Alternative supplier should be in placed
3Financial position of the supplierRisk Avoidance

The credit worthiness should be checked before signing on with the supplier. The credit report as well as checking reference with banks and supplier can provide useful insight on supplier financial position.

Alternative source of supplier should be arranged
4Supplier Product RiskRisk mitigation

The SLA should ensure the product/material meet the required standard of quality. Supplier should be bound to deliver the defined specification or face legal charges

The product should be sourced from supplier database who can provide in timely manner
5Price of MaterialRisk Transfer

If price of the material increased by the supplier then it should asked to keep price at lower rate or increase the price of product sold

The detail market research and supplier of products should be kept in database
6Capacity RiskRisk acceptance

If supplier fails to provide the additional demand, then company should seek alternative supplier.

 

Company should order materials with other and have backup inventory.
7Undesirable EventsRisk Acceptance

The natural disaster are unexpected events and company cannot do anything to stop such event

Supplier database should diverse in different location rather concentrating on one location

Recommendations for Risk Management

In order to effective, manage the risk associated with Supplier; company should proactively manage the supplier database. Understating the cost and value associated with supplier and the potential consequences if supplier is unable to deliver the material on time. The financial consequences associated with late delivery should be managed through ‘Contract agreement’ and enclosing the terms and conditions related to late deliveries. Company should develop the culture of quality in its processes as well as supplier.

The quality of material is important factor and company should start quality assurance program in order to manage the quality of the material. Quality audit and continuous supplier audit could help to resolve the quality risk (Yacura, 2016).

The financial position of the supplier is important factor. If company fails to identify the financial creditworthiness of the supplier, then supplier may unable to deliver the product to may result in financial loss for the company. For example, company might have invested in new product design and research in collaboration with supplier and company may lose the investment as well as result failure of supplies. Therefore, company should conduct proper financial check. The checks can be performed through credit reports and checking reference with bankers and suppliers (Henriques and Richardson, 2015).

sustainable supplier selection

Brose and Millett (2016) discussed that the price variability has serious consequences for the business. Company should sign agreement with suppliers for price stability period. Furthermore, it needs to ensure through research, checking that price increase is genuine, and economic conditions associated with the product.  The prices of the materials have important consideration on product pricing and should be effectively managed to reduce price risk.  The capacity risk can be managed through seeking sources.

Sustainability in Procurement

Sustainability is defined as meeting the need of present generation in manner that future generations can fulfill their needs. The sustainability involves caring about natural systems as well as care about society.  Sustainability is concerned with business as well as linked for the future success of the business. Sustainability is about achieving the environmental effectiveness of the business.  Sustainability program involves the care for the environment, community and natural resources. The supplier sustainability involve basement of the risk involve in the supplier operations and procurement of the materials (Brose and Millett, 2015).

Sustainable Procurement

Company purchasing decision needs to be environmentally and economically effective as well as it needs to have positive impact on the society.  Sustainable procurement involves purchasing the products and services that not benefit the company but also benefit the larger society. The sustainable procurement involves practices, which increase the resource efficiency, economic benefits as social responsibility (Monczka et al., 2016).

Selection of sustainable supplier

The selection of supplier should involve procuring material, which does not affect the natural resources. If the material supplied by the supplier affect the environment or it involve practices, which are danger to the environment, and materials cannot be recycle. Company should focus on procuring material and improve the life of the people. Sustainability involves good working conditions, environmentally friendly practices as well as ethical behavior towards number of stakeholders.

The sustainability ability program would involve working with suppliers in order to improve the quality of product along with improvement in quality of life of people. The sustainability programs involve adopting number of practices that could avoid use of material in manufacturing. The identification of supplier involve adopt practices that are danger to environment or materials, which are increase performance of the company (Monczka et al., 2016).

The three pillar of the sustainability involve economic, environment and social.  The interaction of three factors involves purchasing materials from the suppliers, which are profit for both company, as well as supplier. The social equity in the process will improve the life of employee as well as economic benefit for range of stakeholders (Henriques and Richardson, 2016).

Recommendation for sustainable procurement

Company should implement supplier sustainability declaration and Audit Program in order to determine that the practices followed by the suppliers. To implement the sustainability program company should commitment to identify the related material, which are potential dangers to the society. The step involve in developing sustainability is assessing the risk profile of the suppliers.

Supplier Risk Profile

Supplier risk profile is a criterion in order to determine the production processes, sources of materials, and the commercial relationship of the supplier. The identification of the risk related to supplier processes which are either low or high risk. The activities would involve highlighting the sources of materials, recycle facilities, the sustainability of the materials. The substance used in the processes as if mercury, metals or acid could highlight the risk associated with the suppliers. Selecting the criteria based on the value offered by the supplier could help to differentiate the suppliers in different categories. Company should impose the supplier declaration and list the material, which are considered as injurious to the environment.

sample supplier risk profile

Company Sustainability program

Company should implement the training and work in collaboration with supplier in order increase the sustainability in the supply chain. Company should disallow the products, which are consider dangerous to the environment and should encourage the supplier. The company should conduct the supplier audit program. Company should introduce code of conduct as well as select the supplier who is committed to sustainability.

The supplier development plan could be launched through training, benchmarking industry best practices and take corrective actions to implement the program. Company should monitor the supplier who follow the sustainable programs through contribution to the society, environmental friendly practices and honor the local people (Berry, 2015).

Responsible Sourcing polices

Company should embodied code of conduct in terms of integrity, fairness and openness in the processes. Furthermore, company should select the supplier. The fundamental for responsible sourcing is to develop standards and principles, which embed the responsible practices throughout the operations. The basic fundamental point which company could establish is; business operations will be conducted with integrity and fairness, employee should be offered, environmental friendly material and practices will be conducted and health and safety practices will be managed (Piga, 2014).

Conclusion

The risk involve with the supplier are range from cost, quality and flexibility. If company selects the supplier without proper risk assessment, it endangers distortion to its operation as well as financial loss. The supplier is selected the risk management processes should continue to minimum the problem in terms of delivery or possible shortages. Risk management will enable the organization to develop strategies to manage the uncertain events.

Therefore, careful supplier selection as well as risk analysis is required for effective management of supply chain. Effective risk assessment in relation to the supplier will help the company to manage and control the unfavorable events. Understating the cost and value associated with supplier and the potential consequences if supplier is unable to deliver the material on time. Risk management will help the company to increase performance of its operations as well as profitability.

Sustainable procurement practices involve procuring materials in such manner that it will maximize the benefits for the company as well as wider society. The interaction of three factors involves purchasing materials from the suppliers, which are profit for both company, as well as supplier.

Company needs to achieve triple bottom line in its operations in terms of economic, social and environment success. Supplier risk profile is a criterion in order to determine the production processes, sources of materials, and the commercial relationship of the supplier Company should disallow the products, which are consider dangerous to the environment and should encourage the supplier.

 

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