Risk management in supplier management: here’s how to go about it.

When managing a company’s suppliers, there are always risks that can lead to widespread supply shortages or payment risks. Therefore, you should give risk management an important role in your business. Learn how to keep your supplier risks manageable.

What is supplier management anyway?

The definition of supplier management includes the design, management and development of a long-term buyer-supplier relationship in the procurement of companies.

The most important goals and tasks of this division are:

  • Reduce Procurement costs
  • Establish as much as possible efficient procurement
  • Ensuring Supply of goods
  • Optimization of the On-time delivery
  • Improvement of the Supply Management

The management of suppliers can be divided into the operational and the strategic area. The operational field deals with the continuous evaluation and promotion of suppliers. Their performance, such as quality, on-time delivery and a number of other factors, is constantly being evaluated and targeted measures to promote them are developed on this basis. The strategic area, on the other hand, defines measures to be able to select suitable suppliers. The procurement goals are always at the center of these activities.

Risk management – an important part of supplier management

Risk management at suppliers is essential, as delays in delivery threaten high follow-up costs due to production downtime or delivery problems. If, for example, a supplier of components goes bankrupt and for this reason can no longer supply you with important parts, your own company is also quickly faced with major problems. This simple example shows that you should keep a constant eye on your suppliers and reliably assess risks. Since the range of risk factors is wide, software solutions such as SAP Ariba efficiently help you capture all possible factors and correctly assess their significance.

By establishing a risk management system, you make an important contribution to setting up your company on a solid footing.

How can risks be classified?

For professional risk management, it is crucial to be able to classify risks in a targeted manner. Only then is it possible to identify high risks at an early stage. Various factors are very well suited to this:

  • Regulatory and legal requirements
  • Environment and social issues
  • Finances
  • Operational factors

With Legal and regulatory requirements attention is paid to whether the supplier complies with applicable laws and whether anti-competitive behavior has been observed before. IT security and cases of bribery and corruption also play a role here.

Compliance with human rights, unethical behavior and consideration of environmental requirements are included in the evaluation of the category"Environment and social" a. With the Finances the most important key figures are considered. An imminent insolvency, downgrading of credit rating or threatening takeovers are comprehensively assessed. About the operational factors include problems with products, production stoppages or natural disasters that could result in a production stoppage.

From all these factors, risk reports on the companies can be compiled and thus the risk of a supply failure can be derived. Manual processing of data in this context is virtually impossible. Modern supplier management software simplifies overview and conclusions.

Supplier Management Checklist

Read our checklist to find out how Supplier risks can be identified quickly and your individual Supply chain hedge – 5 steps to integrated supplier management.

Supplier Management Software

Tools for sustainable supplier management

For sustainable supplier management, it is advisable to use appropriate software. Because only through these tools is a targeted processing of the large data base possible. A good example is the SAP Ariba system. The source-to-pay platform derives a clear dashboard from the available data to classify the risk, showing you a risk summary at a glance.

Dashboard supplier management

In the form of a pie chart, you can immediately see how many of your suppliers are assigned to an increased risk. You receive a breakdown of the area in which the risk is classified as high (regulatory/legal, environmental and social, financial, operational) and also receive a quick overview of current reports.

Furthermore, the geographical location of the suppliers is evaluated. A country map gives you a quick overview of where your suppliers are located and how the geographic risk is assessed. The dashboard is an important introduction to the daily work of risk management.

Structure and further development

An important aspect of risk management is also the establishment and further development of supplier. An active or passive approach can be used for further development.

In which passive method the supplied company defines the goals and makes them available to the supplier. In this case, however, the optimization of performance is the sole responsibility of the supplier. This implements necessary measures independently, so that the customer only plays a subordinate role in further development. Although this saves the customer considerable effort, it is difficult to assess risk and intervene in further development with the passive approach.

In the active development measures are defined between the customer and supplier in joint coordination. These are aimed at improving the supplier’s performance and reducing its risk. Especially with highly strategic components, this type of collaboration is highly recommended because both sides have a better understanding of the risk and a better opportunity to intervene.

SAP Ariba offers the possibility to send questionnaires to the supplier on various topics. Based on the answers, the risk can be evaluated and possible negative aspects can be reported directly to higher management. The answers to these assessments go through several approval stages. The goal of all these surveys is to continuously improve the customer-supplier relationship, as well as to realistically assess risk. Therefore, these surveys should take place at regular intervals, so that the data basis for assessing the risk is always kept up to date.

Conclusion

Keep an eye on the risk with your suppliers

Continuous risk management is a decisive factor for sustainable supplier management. Modern software, such as SAP Ariba, helps you keep risk manageable at all times. Take advantage of the potential offered by such systems and reduce the risk of supply bottlenecks.

Tip: In this web session replay, you’ll learn how SAP Ariba can help you manage your suppliers and partners on a day-to-day basis and identify risks. Keep an eye on your risks! The 360° view of the supplier.

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