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    Getting Your Supplier Risk Priorities Right

    October 2022

    Getting Your Supplier Risk Priorities Right

    Your supply chain has many risks. How do you prioritize them, and how can you tell if your risk mitigation strategy is working?

    Supply chains live or die by suppliers’ performance, so this is usually the very first risk to focus on. The holy grail is to predict supplier problems before they happen. In my experience, deteriorating financial health is the number-one predictor of poor supplier performance. Financial issues affect morale and general resource availability, and they will manifest themselves in operational problems. At Moody’s Analytics, we focus on financial risk as the main leading indicator. It is your best predictor of supplier performance.

    Supply chain is, of course, rich in other risks. Some are new: inflation, labor shortages, and logistical failures. Others have always been a challenge, such as the quality of supplier vetting, while others have become more difficult to manage in recent times: compliance, geopolitics, and ESG.

    As supply chain professionals face high expectations on managing these many risks, the key is to have a way of prioritizing them. There are a number of good ways to do so. One way is to put bottlenecks at the top of your risks to focus on. Look at your company’s critical path (suppliers that have a material effect on your sales and operations) and identify areas where you have little room to maneuver if something goes wrong. Suppliers in these areas are your high-priority concerns.

    How do you know your risk management program is working?

    First, you can anticipate problems. You definitely cannot foresee all crises, but suppliers’ deteriorating financial health will alert you to coming performance problems.

    Second, you can get a quick handle on a crisis. Some risks will materialize, no matter what. But if your program is well thought-out and you have accurately prioritized your risks, you at least have a response plan and know how to assess and react to any significant crisis.

    Third, you have an efficient allocation of resources. You can’t attend to all the risks, and definitely can’t mitigate them all. So make sure that you are focused on the most crucial ones – this is where you apply your resources.

    If you want to engage in supply chain risk discussions, please follow me on LinkedIn.

    Find out more about how we can help you to manage supply chain risks.