Traditional methods of risk management have focussed on prioritising attention on ‘strategic suppliers’; those that supply high volumes, or those on which the firm is commercially or technologically dependent. But these traditional methods may fail to address other critical vulnerabilities to which firms are exposed, including the risks associated with ‘small’ suppliers.
This requires a focus on various aspects of supply chain related risk including: reputational risks arising from the social, environmental and ethical consequences of supplier activity; operational risks concerning questions of product safety, delivery reliability and cost shocks; strategic risks including the collapse of a supplier, or supplier acquisition by a competitor; and unforeseen changes in product and process technology. There are three major problems in addressing these risks.
First, firms may be complacent and choose to ignore risks until a crisis comes along. This arises because a firm’s vulnerability to supply chain risk is often difficult to calibrate or visualise, and because firms may have a limited understanding of the supply chain which lies behind what they buy.
Second, firms may adopt a fragmented approach to supplier relationships which means that relevant supplier information is not appropriately managed or coordinated, and different parts of a firm may deal with procurement, logistics, and supply chain audit. Despite a long history of rhetorical commitment to the idea of ‘strategic’ supplier management, many firms struggle to maintain a high-level focus on procurement issues.
Third, many firms have not developed mechanisms that provide them with sufficient data to effectively manage their supply base including small suppliers, and the result is an information gap. This may reinforce a view of procurement as a passive, tactical and bureaucratic activity.
Recent examples from a range of sectors have illustrated the particular significance of small suppliers as potential sources of risk. There are many aspects to this, here it is worth noting just two: the reputational consequences of illegitimate subcontracting, and the implications of the forthcoming UK Bribery Act. To mitigate these risks, firms may significantly benefit from increased visibility of their supply chain and enhanced traceability across the supply chain of the items that they procure.
We would welcome your views and comments on whether some small suppliers can represent a significant risk element in your business…
Dr Steve New, University Lecturer in Operations Management, Saïd Business School, University of Oxford
Category : General Procurement
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Steve,
The obvious choice for enterprise level businesses is large/medium sized suppliers which would mean that small suppliers are pushed further upstream in the supply chain. Large companies do promote growth by supporting small suppliers (increasing diversity), in which case they are only augmenting their supply stream and the small suppliers do not pose a big risk.
In any event, a small supplier supplying to a large company or to a supplier of a large company is only going to be “one among the many small suppliers” who supply a product to a larger firm which would mean that redundancy is built into the system. A small supplier will not be able to fulfill the volume desired by the large company.
It has been proven that firms which incorporate social, ethical and environmental factors into their coporate values have reduced risk associated with them. A key reason being they work within regulations of the government which translates to fewer problems from the government and fewer chances of shutting shop. Also, firms that have CSR ingrained in them provide better a work place environment attracting and retaining top talent. I am sure most firms check the CSR effort of small supplier before they take the plunge.
Thus, I do not believe small suppliers pose any greater risk than what is normally associated with suppliers.
Best,
Bala
Bala makes some interesting comments on Steve’s blog. I have some further thoughts on this.
The risks associated with small suppliers are only one of many potential risks across the supply chain, and of course large suppliers may well present different or in some cases greater risks. The extent of small supplier risk and the nature of these risks is clearly in part an empirical question. I want to pick up on two questions raised by small supplier risk.
First, the extent to which small supplier risk is reduced where firms and their principal contractors incorporate CSR principles into their operations. Firms may take various views about the scope of their responsibilities. CSR principles may only have a significant impact on small suppliers if firms take on responsibilities for subcontractors down the supply chain. In addition there may be a gap between what the firms would like to do and the actual responsibilities they take on.
Second, the implementation of CSR principles, risk management and other aspects of supply chain management beyond the level of principal contractors requires good supply chain information. This information may be difficult to obtain and may result in problems such as incomplete supply chain maps, unreliable data, or insufficient detail about subcontractors’ operations. These gaps in information may apply in particular to small suppliers further down the supply chain.
The problem with many organisations is that they just do not have the motivation to map their supply chain for CSR down to a low enough level unless they are in the mass consumer market where reputation is currency.
The reason I often hear is that it costs too much to initiate an intiative and to manage that intiative to its conclusion.
This is obviously a very short-termist view but if an organisation cannot see a short term return on it that can be translated into significant pounds, any attempt made is half hearted or mere lip service…until an actual incident occurs.
What I have found is that there are many other reasons for mapping a supply chain which makes it attractive for an organisation – natural disasters is a good example of something that can rupture a flow of supply of essential products unless you know where the pinch points are. CSR can then piggy-back on that risk mitigation exercise.
Next comes the issue of “where do we start – we have so much procurement”. There’s a solution to that too but that’s another story.
I agree with Steve’s comments and I’d like to suggest that organisations first need to understand where the risks lie in their supply-chain. It’s a common mistake to believe that the most critical suppliers are well managed, but this is not always the case.
There is a common issue around the management of smaller (SME) suppliers across sectors, particularly in light of the current economic conditions, where these suppliers are the most vulnerable to adverse trading conditions.
How should organisations best address these issues?
First and foremost, any solution must provide visibility across the entire supply chain of potential risks. Secondly the solution should put in place appropriate measures to pro-actively manage these risks. Typically this would involve collecting more detailed information on a systematic basis for higher risk suppliers and auditing the most critical suppliers; it MUST also ensure a base level of information is collected and maintained for the smaller suppliers, often perceived as less critical.