Supply Risk Defined in Supplier Relationship Management
Supplier relationship management is the discipline of strategically planning for, and managing, all interactions with third-party organizations that supply goods and/or services in order to maximize the value of those interactions.
In practice, supplier relationship management entails developing closer, more collaborative relationships with key suppliers in order to uncover and realize the new value and reduce supply risk; but what exactly is “supply risk”?
George Zsidisin, assistant professor of supply chain management at Michigan State University, defined supply risk as “the potential occurrence of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.”
Working with fewer suppliers increases supplier dependency
However, in addition to missed customer expectations and safety concerns, there are other more sinister outcomes of supply risk. These include:
• Losing bargaining power
• Paying more than market price
• Underestimating production time
• Over-specifying a good or service
• Having to select less innovative suppliers
Clearly, understanding and avoiding supply risk is a necessary part of every global strategic management strategy, but where are the sources of supply risk?
The most obvious one is supplier consolidation, where working with fewer suppliers increases supplier dependency, but three further areas in which supplier relationship managers should be wary are:
1. Outsourcing: When a greater percentage of what a company sells is being created by another company, the loss of direct control over production and costs creates more opportunities for supply risk.
2. Low-Cost Country Sourcing: Purchasing goods or services from “low-cost” countries such as Mexico or China or regions in Eastern Europe can introduce supply risks from quality issues to on-time performance.
3. Lean Production: The implementation of lean techniques can be marred by the lowering of buffer stock and poor collaboration with suppliers. This can result in missed customer delivery schedules and lost revenue.