Sourcing & Procurement - Strategy, Finance & Organization
How to proactively manage supply base risk in economic downturns
Despite it being on purchasing organizations agenda, many firms lack the ability to proactively manage their supply base to mitigate disruption risks.
Overview
Supplier financial risk has long been on the agenda for purchasing organizations, but many firms lack the ability to proactively manage their supply base to mitigate disruption risks. Shutdowns or disruptions in manufacturing operations can result in significant cost increases, both in terms of direct operative costs and alternative costs.
In today’s globally connected supply chains, this can have disastrous effects on businesses, thus raising the importance of accurately being able to predict cash flow stability of suppliers. Dynamically assessing company financial risk requires a different set of metrics and the ability to project how different business realities may change a supplier’s financial picture. Ultimately it is imperative to understand a supplier’s ability to survive.
This paper outlines a methodology for how to create a supply risk organization that can dynamically predict a supplier’s cash flow stability and ultimately a supplier’s ability to survive economic downturns. The paper also provides a roadmap for proactively compressing the supply base as needed to create both direct and indirect efficiency increases and avoid unnecessary costs.
Supplier risk management is just one lever in Applied Value’s Lean Growth ethos. In our Value Paper “How to ensure Lean Growth when responding to an economic crisis”, we outline how to adapt the business setup for a post-crisis environment, which requires leaner and more agile organizations.