Managing supplier risk: Part 1

Each time a small business extends credit to a customer, it's also taking on a level of risk as there is a chance that your customers may not pay you once you've handed over the goods. But have you ever thought about the risk associated with taking on a new supplier? Much like your customers, suppliers also pose a level of risk, particularly if they have had a bad reputation or aren't financially sound.

Here are four questions you should ask yourself before signing a supply contract, to minimise and manage supplier risk.

What quality standards does my supplier adhere to?

Quality supplies influence your ability to provide quality products to your customers. Before you sign the contract, ensure you inspect supply samples and pay a visit to the premises where they're manufactured or processed to get a better idea of their quality standards. If you're still unsure, check if they adhere to ISO International Standards  as this will give you the confidence that the products are safe, reliable and of high quality.

What is my supplier's financial history like?

Chain linkChecking your supplier's background is crucial in minimising risk - you wouldn't want to find out on the day you have a huge customer order that your supplier has gone bankrupt, would you? You should always conduct a credit check and obtain at least three references from your supplier to ensure that they are who they say they are.

What do I know about my supplier's directors?

Don't stop at just checking your supplier's financial history - more often than not, their directors can also be a key indicator of financial stability, which is revealed through a credit check. Signs to watch out for include: previous director bankruptcies, banned or disqualified directors or directors who have been on the board of previously failed companies.

Will my supplier be affected by external conditions?

The Japanese tsunami of 2011 showed as the devastating effect a natural disaster could have on the global supply chain, with companies ranging from shipbuilders to technology manufacturers and car makers forced to suspend production. Deloitte Consulting analysts Kelly Marchese, Siva Paramasivam and Michael Held, recommend that firms focus on the four pillars of a resilient supply chain  to mitigate the risk of natural - or economic - disasters.

These pillars are:

  • Visibility - Tracking and monitoring supply chain events and patterns as they happen and before they happen.
  • Flexibility - Adapting to issues without raising operational costs
  • Collaboration - Building trustworthy relationships with suppliers and working with them to avoid disruptions.
  • Control - Establishing supply procedures and processes and ensuring they are followed each step of the supply chain.

"Managing risk has traditionally been an important part of supply chain management; however, the increasing complexity and connectedness of today's global business environment is taking supply chain risk and ramifications to a whole new level," conclude Marchese, Paramasivam and Held.

For small business owners, it's all the more crucial to take preventative measures to ensure that suppliers are holding up their end of the bargain and that you're getting the products you're paying for.

Part 2 will be published in this section tomorrow and will include four more things you should look out for when taking on a supplier.

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