Three important parts of Supplier Risk Management

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supplier risk management - ToolsHero

Kelly Barner of Designnews.com, posted an article about three important parts of supplier risk management.

Introduction risk management

She states that Design engineers continually find themselves collaborating with sourcing or procurement colleagues as part of the product design process. She also states that the integration of procurement into product development is the result of organizations’ will to drive out waste and raise profitability. As a result the continuous cost assessments and participation in engineering change endeavours will undoubtedly affect design engineering departments’ work in component, material specifying and test their project management abilities.

Kelly Barner explains that sourcing and procurement engineers combine their engineering expertise with skills in creating competitive advantages through cost-reduction and establishing strategic sourcing alliances with vendors and supply chains. She says that along with performing design-to-cost, or value engineering analyses, their jobs include the assessment of the strength of the organization’s supply chain. “Vendor health has become a key component of organizational risk management.”

Three sub components of risk management

While risk management sounds like one activity, in order to be conducted effectively, Kelly Barner states that it must be broken down into three sub-components: risk assessment, risk monitoring, and response planning. These are the three highlights on the three sub-components.

Risk assessment

A risk assessment is used to determine the type and severity of risk associated with a supplier, an industry, or a location. It’s like a snapshot in time and is ultimately used as a baseline for ongoing monitoring. This allows an organization to determine what level of risk will be tolerated in each component, material, and service category. Lower risk often means higher costs. As a result, risk tolerance levels in each project have a direct impact on margins.

Risk monitoring

Timeliness and accuracy of information (materials, locations, organizations, other countries, etc.) are key when risk monitoring is an active effort. She states that each internal stakeholder will see the risk that affects their spend as critical, but the company must be prepared to determine the response relative to the anticipated impact on revenue, operations, regulations, and reputation. Sustaining a long-term effort as risk management is as challenging as identifying areas of concern in the first place. Sometimes risk monitoring is incorporated into annual or quarterly supplier review meetings.

Risk response planning

Barner states that when an identified risk is significant, the procurement department must put plans in place to mitigate as much of the impact as possible. She also states that risk mitigation plans can be anticipatory as much as they are reactionary. The importance of the supplier qualification process is important because of the presence of risk factors. The Procurement department will ensure that all plans are pre-screened to make sure alternate sources of supply are not rendered ineffectual by the same disruptions that eliminated the primary sources.

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