This is part 1 of a guide for procurement teams on reducing sourcing-related risks.
There are number of risks related to
- finding suppliers
- buying from those suppliers
- ordering parts that customer’s are expecting.
I group them all into sourcing risk, but in reality they include:
- supplier risk
- default risk
- trust issues
- quality risk
- event risk
- political risk
- exchange risk
- timing risk
- communication issues
- logistics risk
I am sure there are others as well.
Because of all the risks inherent in sourcing and procurement, it is essential to have strategies in place to manage and mitigate them. When we ignore risk, we don’t know the size or frequency of the possible risks. However, by researching each risk, and developing a strategy to handle each estimated uncertainty, the potential for anything devastating can be greatly reduced.
Developing A Strategy
A well developed sourcing and procurement department should have a general strategy laid out for how the various tasks and jobs should be done. As part of that strategy, it is essential to address risk mitigation tactics and sub strategies.
A strategy may be as simple as to ignore the risk because its cost is small and occurrence infrequent. However, even stating this is essential as it shows that you have still looked into and understand at some level the potential issues that may arise.
A general strategy for addressing risk boils down to the following steps:
- Research potential risks
- Understand their cause
- Estimate potential size
- Estimate potential frequency
- Document causing factors
- Identify mitigating factors
- Develop a risk mitigation strategy
- Integrate into sourcing and procurement functions
By walking through these steps for each aspect of risk, you can reduce and avoid millions of dollars in issues.
Having the framework is not enough though, knowing when and where to apply it is crucial!
Aspects of Risk
What are aspects of risk? Any factor that can add or reduce the riskiness of a decision is an aspect of risk. Consider some of the following as aspects
Every new supplier brings with it risk. Can they supply? Do they have good controls? How will they handle the shipment of incorrect parts?
We can mitigate this risk through strategy and audits, but the fact remains there is risk. There are reasons we won’t just move an entire line of parts to a new supplier overnight. We want to be sure they can deliver the right product at the right time with the right quality.
Beyond the supplier, we need to consider geographical issues. The best supplier will not be able to deliver if there is a geographic block.
Understanding this possible risk aspect and accounting for it can be the difference between an extra 20,000 in USD in rerouting or worse, customer lines down.
Cultural differences in business are a common source of frustration for buyers who deal internationally. There are common norms in one culture of how a situation should be handled. However, when buying from another country, these are often not met, causing frustration for the buyer and confusion for the supplier.
When requirements get technical, language can miss key phrases. I have had multiple problems arise from having a technical conversation about what was and was not acceptable in English with someone who did not speak it well, or in Spanish, which I don’t speak well.
Having strategies on how to deal with quotes, quality, and orders that surpass language barriers is key for a global supply chain to thrive.
No matter how you produce a part, there are always trade off decisions to make.
- Where do you want the ejection pins located?
- Are wire marks ok for that plated method?
- The head tolerance can’t be held with cold heading?
Understanding the various methods and potential issues your parts will arrive with can completely change your go to market time and avoid major launch problems.
As the quantity of your order increases you start to risk capacity issues. Over and over I have seen buyers and customers surprised as they ramp up from 1000 to 10,000 units a month and then all of a sudden find themselves out of parts and 3-6 months from being able to have more.
Foreseeing risks using the framework above can save you from hundred of potential issues including capacity constraints.
Overall logistics is often “slapped” onto the end of new product development or a new procurement plan; however this is often where timelines fall apart. There are many considerations such as weather, size of shipment, mold issues, congestion, or any number of issues.
Planning for logistics success is key in any procurement plan.. it is the step that closes all of the planning and completes the procurement process.
Understanding risks and developing strategies to deal with them is essential in any procurement plan - yet it often goes overlooked or underestimated. By working through this framework, general strategies can be developed and baked right into the sourcing and quoting efforts. Then, through quality improvements they can be refined with tactical strategies to help specific aspects of risk.