There has been much focus in the years since the Great Recession in 2008 in identifying supplier risk from analysis of various financial metrics, whether as readily available for public companies or as requested from suppliers that are private companies.
Supply Chain Digest Says... |
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| Supply chain leaders will assign weights of importance to selected indicators to aggregate them into composite indices measuring holistic supplier risk, Bledowski says. |
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Given the need for larger companies to monitor the health of hundreds if not thousands of suppliers, gravitating to the path of least resistance is natural. But "neglecting non-tangible assets, such as quality, innovation, or customer service risks, will lead to missing relevant early warning signals" of looming problems at suppliers.
So says Kris Bledowski, a senior economist at MAPI, the Manufacturing Alliance, in a recent article on MAPI's web site.
There are several reasons to incorporate non-financial metrics in supplier risk analysis, Bledowski says. Those include that fact that non-financial analyses of suppliers allow for better assessment of strategic fit and corporate goals, something that financial metrics do not supply. For example, some companies use interviews to compile a profile of a supplier that can be further quantified.
Second, Bledowski says financials may omit or underestimate some parts of assets that are intangible. Examples include intellectual capital and customer loyalty, "soft assets" that can be an important determinant in the quality of supplier relationship. This includes estimating the ability of a supplier to work collaboratively and build cultural affinity.
Another area to focus on is innovation. Bledowski says a supplier's index quotient can approximated by such measures as R&D spending, staffing levels, or patent counts.
Perhaps even more difficult, Bledowski says a supplier's management quality can also be assessed through interactions with a supplier's senior management and mid-level engineering teams. The best way may be to rank the management skills of suppliers against each other using some type of index.
Similarly, a supplier's employee risk, such as the propensity to strike, can also be estimated, Bledowski says. He also recommends looking at categories such as quality performance and brand equity.
While acknowledging that building such non-financial measures is difficult – no doubt about that – Bledowski says "statisticians and economists can help devise non-monetary indices."
What's more, he says "The most important aspect is that these component measures be easy to aggregate and track over time," though he does not explain how this can be achieved, and later says the "sheer difficulty in quantifying them" is the greatest challenge.
Another challenge is the lack of metrics standardization, which is not the case for financial metrics.
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One way to rectify this problem" Bledowski says, is to start small.
"Performance yardsticks can be expressed in general subjective terms (say, very good, good, so-so, bad, etc.)," Bledowski writes, adding that "This allows aggregation with other similar measures that can be weighed into indices that are more general."
Netting it out, Bledowwski provides the following example of a supplier scorecard that incorporates both financial and non-financial metrics:
Source: MAPI
Summing it up, "A basic review of non-financial metrics yielded a rather far-reaching list grouped around several categories of relationship management," Bledowski says. "Supply chain leaders will assign weights of importance to selected indicators to aggregate them into composite indices measuring holistic supplier risk. These indices will also comprise financial metrics."
Is it possible to gather these non-financial metrics such as Bledowski proposes? Let us know your thoughts at the Feedback section below.
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