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From SCDigest's On-Target e-Magazine

Feb. 15 , 2012

Supply Chain News: Is it Time to Make Supplier Risk Management Programs more Real-Time?

International Monetary Fund Builds Database and Analytic Tools to Identify Potential Worrisome Patterns Sooner

SDigest Editorial Staff

Supply chain risk management generally and supplier risk management particularly have been one of the most dominant supply chain trends over the past 3-5 years. Concern about supply chain risk management has grown even more in the past 12 months as a result of the significant hits delivered to hundreds of supply chains from the earthquake/tsunami in Japan in March of 2011, and then mass flooding in Thailand in the second half of the year.

SCDigest Says:

Leong says that on top of the database, the IMF has applied a series of heuristic tools (logical rules) that find patterns among the data and look for specific types of incidents that experience has taught the organization might lead to problems at a supplier.

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But do companies need to move from the traditional, somewhat backward looking approach to supplier risk profiles to one that is more real time?
That's what Jin Leong, chief procurement officer for the International Monetary Fund in Washington, DC, says he believes.

Writing in a recent edition of ISM's Inside Supply Management magazine, Leong says that "Traditional risk management approaches take a static, often outdated, snapshot of risk. Steps like prequalification, risk classification and periodic maintenance reviews rely predominantly on backward-looking indicators and do not necessarily capture future risks."

Instead, Leong says, "what businesses today need is a risk management program that anticipates risk and potential supply disruptions in advance, so that mitigating actions can be taken before the disruption occurs."

We doubt there would be much disagreement with that. The question, of course, is how do you get there?

Leong says that last year, he and a colleague at the IMF (Caro Cook) developed an approach to risk management that would do just that. They say what makes the approach different is that it enables companies to augment traditional risk indicators like Dun & Bradstreet ratings and historical financials with real-time supplier observations. They say that while often single observations for a given supplier do not indicate risk or financial distress, when those factoids are viewed holistically over a period of time and in combination with other indicators, they allow supply management professionals to get a better sense of a supplier's internal situation.

Building the Database

The heart of the program was the construction of a "supplier observation database." This database is primarily populated with information from the organization's supply managers, who are encouraged to enter into the database any real-time observations about suppliers with whom they work. Sources for these observations can include news releases, industry reports, changes in performance or service levels, financial releases, news about competitors, public announcements, leadership changes, and changes in risk ratings, to cite the most common.

As noted above, unless it is a major incident such as a bankruptcy, a given negative observation usually won't mean that much. But when viewed over some longer horizon, like the past quarter or six months, a collection of such observations can provide advanced insight that a given supplier may be having issues that could lead to problems or a true disruption to a company's supply chain.

Leong notes that both positive and negative observations are meant to be entered. They can be characterized by whether they objective (say quarterly earnings report) or subjective (the supplier's CFO had a tough time explaining the company's financial situation.). The sources can be noted as private or public information (see graphic below).

Source: Jin Leong, IMF from Inside Supply Management

The IMF also feeds data from information it receives from the profiles all suppliers are required to submit into the database.

(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

Leveraging Heuristics

So how is all that observation data utilized? Leong says that on top of the database, the IMF has applied a series of heuristic tools (logical rules) that find patterns among the data and look for specific types of incidents that experience has taught the organization might lead to problems at a supplier.

Leong cites a illustrative example as follows: "If over a six-month period, a supplier (1) is acquired by another company with a different strategic focus, (2) has ceased to assign its senior personnel to manage the ongoing account relationship and (3) service quality is adequate and just meeting requirements, one could conclude that the supplier may be gearing up for a different strategic direction and may be less focused on its existing contracts."

In such a situation, while the IMF likely would continue doing business with the supplier for now, it would prepare mitigation strategies on the potential real issues that could develop in quality, delivery, etc.

The tools are constantly looking at the data, and issuing alerts when a given supplier has a series of observations that match a pattern that might raise concern. In this way, the view of supply risk is more like real time.

"Traditional supplier qualification programs rely on a one-time qualification step followed by regular evaluations to maintain qualification status," Leong says. "These regular evaluations cover price, performance and quality but do not address inherent risk. This poses a problem because a supplier's risk profile may have changed since the evaluation was performed. The supplier maintains a qualified status, but there is no up-to-date, real-time risk assessment."

Leong also says that current vendors must resubmit a fresh risk profile any time they want to compete for new business at the IMF. Interestingly though, the original profile, which had over 90 questions, has been streamlined now to just 25 key areas, after suppliers complained the initial document was too burdensome.

Leong concludes by noting that this new IMF approach and tool it has been able to increase its knowledge of potential emerging supply base issues "through frequent observations across a broad, diverse set of inputs," adding that "This increased level of awareness, coupled with a corresponding increase in preparedness to respond to challenges through rigorous business continuity planning, will significantly minimize the effects on operations of a major supplier disruption."

The challenge, of course, is finding someone to build the database and the heurist tools. IBM itself built a similar if not even more ambitious tool for itself over the past few years, for example, a program we suspect may someday show up as a commercial package. (See IBM Details its Total Risk Assessment Tool for Supply Management at CSCMP).

What do you think of the IMF's approach? Have you built a similar tool? Let us know your thoughts at the Feedback area below.

Recent Feedback

Excellent observation and it will be a significant input to future gaming and analysis events when considering the viability and effectiveness of a business continuity/contingency plan.

John Kunert
Senior Planner and Analyst
CIRCUMSPEX
Feb, 16 2012

The article is really good and provides important focus on areas which we as purchasers often overlook when managing supply risk. It is really a good read and I recommend fellow purchasers give more thoughts to the issues advanced by Leong.

Henry Kirui
Purchasing Manager
EEP Quality Group Inc.
Feb, 22 2012

Is it possible to share the Risk Assessment & Supplier Qualification Questionnaire? We are in the process of kicking off a Procurement Roadmap and I would like to include supplier risk as a major component of our plan going forward. Thanks!

Kelly Martin
Senior Manager Corporate Procurement
L.L.Bean
Nov, 19 2012