Identifying risks in the most detailed way possible
The first step for identifying the risks a company’s supply chain is exposed to is to gain an overview by analyzing its product groups and suppliers. For example, product groups where there is a high proportion of raw materials or an anticipated shortage of a particular raw material can present a potential risk that needs to be monitored by procurement.
The responsibles for procurement have to be able to distinguish between five different risk types: supply risks, risks of supplier failure, quality risks, price risks and compliance/sustainability risks. Supply risks occur when deliveries are disrupted or delayed; for example, when primary products are not available from upstream suppliers or there are interruptions in the logistics chain. Risks of supplier failure include supplier insolvency and suppliers being threatened by legal or political consequences in the country where they are based. Quality risks relate to consistent product or service quality, while price risks can be caused by shortened payment terms, exchange rate fluctuations or soaring raw material pricing. Compliance and sustainability risks occur when a supplier breaks the law, flouts environmental requirements or fails to observe social standards. Supply chain laws such as the German Supply Chain Act, which will soon be enforced, will increase these risks for companies, and the need to reduce CO2 emissions in the supply chain – referred to as Scope 3 emissions – thus increasing sustainability risks for many companies.
The greatest challenge lies in creating transparency, which ultimately determines the success of risk management. Therefore, strategic considerations are the focus at the beginning. Procurement must evaluate where and how it can obtain the necessary data. And once transparency has been created, a continuous process must be established to maintain this state in the long term.
Close exchange with suppliers is indispensable during this step. Only through regular discussions, self-disclosure and on-site audits with suppliers can buyers gain a true impression of the supplier’s individual situation. Companies also need to analyze information such as business figures, certificates of compliance with environmental standards, press releases or news reports. In individual cases, it may also be necessary to look at selected production plants of the supplier during an on-site audit. Determining which procedure is appropriate also depends on the relationship with the supplier.
1. Supply risks
2. Risks of supplier failure
3. Quality risks
4. Price risks
5. Compliance / sustainability risks