Purchasing and Procurement Department: Knowing Your Suppliers and Managing Risks

Risk management within Purchasing and Procurement is a process that requires constant monitoring in order to avoid “threats” coming from the supply chain.

Why do we talk about risks and risk management as an important activity for the Purchasing Department?

Because today, as we know, we are increasingly immersed in a geopolitical context that involves and influences every aspect of our lives.

Just think of the last few years: the Covid pandemic and, more recently, armed conflicts (Russia and Ukraine above all) have created growing instability at various levels of our society.

Observing such a context from an industrial point of view, it is clear how fundamental it becomes to address the concept of risk and how its management and subsequent monitoring are essential to correctly conduct one’s production activities.

In this article, we will delve into the types of risk to pay the most attention to and some guidelines for correctly scaling the monitoring of your suppliers.

Risk in the Supply Chain

The Supply Chain is not exempt from the issue of risks. In fact, it is probably one of the most impacted fronts. As mentioned before, it is one of the activities to which the Purchasing Department must pay maximum attention. Suffice it to say that, observing the overall income statement of Italian manufacturing companies (ATECO C), almost 76% of the latter (Source: ISTAT, 2019 data) consists of the item relating to purchases of goods and services.

Thinking of some of the most “famous” risks that inevitably impact suppliers, we can certainly mention:

• Country risk. If a supplier is located in a country or geographical area characterized by tensions (e.g., wars) that could affect their continuity of supply;
• Financial risk. If a supplier has reduced financial stability, up to a potential risk of bankruptcy.

These types of risk are characterized by high magnitude (negative impact, should the risk materialize), but fortunately a low frequency (probability of the risk materializing).

Furthermore, there are dedicated portals to monitor risks: for example, the SACE portal regarding “country risk.”

One type of Supply Chain risk worth focusing on, because it has a higher frequency and potentially impacts all suppliers, is related to operational risks.

It is on these risks, therefore, that the Purchasing and Procurement Department must focus their attention.

Operational Risk: What It Is and How to Intercept It

The importance of operational risks becomes even more evident when thinking in terms of TCO (Total Cost of Ownership). What might be an advantageous supply in the short term from an economic point of view could, in reality, become very disadvantageous in the medium-to-long term, as delays and non-conformities could potentially arise, bringing ‘hidden’ costs to the surface.

We can distinguish operational risks into two macro-families:

• risks related to production capacity. Here, the supplier is unable to keep up with the customer’s demand, leading to delays and backlogs;
• risks related to performance, which can be further distinguished into
  • risks related to logistics. The supplier delivers late;
  • risks related to quality. The supplier delivers non-conforming material.

To intercept and manage these types of risks along your Supply Chain, the best way is to get to know your suppliers by organizing visits.

Visiting suppliers is inevitably an activity that requires time, resulting in management costs for the Purchasing and Procurement Department. First, it is therefore important to define a priority to identify which suppliers to visit.

Priority Criteria to Optimize Purchasing Department Time and Costs

A primary driver, valid for both risks related to production capacity and those related to performance, is represented by the Pareto ABC Analysis on supplier purchase turnover. The suppliers to focus on most will be those in Class A—that is, the 20% in numerical terms that represent 80% of the purchase turnover.

If the data available in the company allows it, however, one can also move towards more targeted drivers, depending on whether the focus is on capacity or performance risks.

In the case of capacity risks, if forecast data is available, it will be possible to compare the production volumes “guaranteed” in the past (from historical data analysis) by each supplier with the forecast volumes requested from the supplier in the future.

In this way, it will be possible to identify suppliers for whom a future production volume is required that is higher than what they have demonstrated they can guarantee in the past.

In the case of performance risks, the best tool to implement in the company to intercept the most critical suppliers is Vendor Rating, which will monitor supplier performance along the Quality, Cost, and Delivery axes.

In this way, the most at-risk supplier panel in the supply chain is identified. These are suppliers that, therefore, deserve to be visited.

Always with a view to optimizing time and, therefore, costs, let’s see how the visit can be optimized through preliminary preparation.

Supplier Visits by the Purchasing Department: Preliminary Preparation

In order to optimize the supplier visit and manage to condense it into a maximum of one day, it becomes fundamental to arrive prepared for the visit itself through preliminary activity.

A suggested approach to follow is:

• internal preliminary data collection;
• self-assessment survey;
• supplier visit;
• final report.

The key point is the preparation of a pre-set survey that the supplier must fill out independently and that must be reviewed before the visit.

In this way, the visit will be focused on the live verification of the most critical/doubtful points emerged from the self-assessment carried out by the supplier.

Obviously, the questions to be included in the survey must be customized, depending on whether you want to verify aspects of the supplier related to their production capacity or their performance (logistics and quality).

Makeitalia: Support for the Purchasing and Procurement Department in Risk Management

In the field of purchasing, procurement, and risk management, we also support companies in implementing strategies and tools aimed at managing the supplier evaluation process efficiently.

If you need further information for any business needs, please contact us without obligation through the dedicated page on our website, available at the following link Contacts.

We will be happy to listen to your needs and have a chat with you to evaluate a collaboration together.