Some supply risks can be caused by the customer firm itself and thus provide a real chance of avoidance in the first place.
What? You thought supply risks were all caused by forces beyond the customer firm’s control. Think again. While catastrophic supplier failure and supply continuity disruptions have been noted as supply managers’ biggest worries, how many other reasons are sitting right on a company’s doorstep? Here are a few examples.
- Poor or ineffective supplier management practices
Reducing supply risk begins and ends with good business practices in supply management. Easier said than done, of course.
- Poor communications with suppliers
Examples include: giving suppliers inaccurate information such as sending incorrect orders or the wrong revisions of drawings. Another example is failing to convey performance expectations to suppliers.
- Outsourcing large portion of goods and services
While outsourcing can save money, it is also fraught with risks and requires good strategies and solid rationales, legal inputs, effective supply management policies and practices including a good understanding of supplier capabilities and performance
- Too much inventory
When companies keep too much inventory, they are more likely to incur the costs of excess and obsolete inventory or lower service levels due to having the wrong inventory.
- Too little inventory
As firms try to reduce inventory, they sometimes fail to do so in a systematic and optimized manner or in a way that meets essential customer requirements. And many firms do not even have a supply risk management strategy in place.
Another pitfall in understanding and managing supply risk is the assumption that supply risk is the sole responsibility of the procurement department (as mentioned in a previous post). Supply risk is a cross-functional challenge and requires the work and support of many functions such as: finance, legal, quality, operations, materials, and engineering. For example, decisions and pressures to outsource a large portion of goods and services often come from executive management, not just from procurement. If procurement tries to take sole responsibility for managing supply risk, it may be a losing – and risky – battle.
Many supply risks are self-induced. However, they cannot be controlled, mitigated or reduced by one function alone.