A 5-Step Process For Vetting And Managing Potential Supplier Risk

The financial viability of your business could be jeopardised by any of your suppliers. For that reason, it’s important to consider the long term impact of any contracts you’re considering entering into.

While suppliers will generally look at long term contracts for business critical supplies, you shouldn’t assume they will be operational for the duration of the contract terms you agree to.

If you do, you’re putting your business at major risk.

5 Questions to Answer to Assess the Risk Potential Suppliers Pose

1.      What impact does the contract have for business continuity?

The more serious the suppliers are for your business continuity, the more effort, resources, planning and collaboration will be needed to ensure potential partners are suitable to be supplying your business.

They need to be able to accommodate you for the duration of the contract, but you need to be sure you know the risk you’re entering into the instant you sign a contract.

Identify the risk first. A scorecard system will be the easiest with three scoring high risk, and one indicating low risk.

In practice, a managed print service for a local optician would score low because it’s not high on their list of priorities for supplies. A print shop though couldn’t survive without the printers therefore that would score a three on the risk score and signify a high risk, needing a thorough process in place to identify the most stable business partner for the long-term.

2.      How easy can you get an alternative supplier in place?

The ease of switching is another noteworthy consideration for assessing risk. If your partner falls apart on you and can’t deliver on the goods or services they’re contractually obliged to deliver, can you get an alternative in place rapidly?

If not, it may be a better idea to diversify your supplies between suppliers so that your business isn’t entirely reliant on one supplier. There’s a backup in place should one fall through.

For the initial contract agreement, you’ll know the time frame it has taken to get things rolling. Three months isn’t unusual for a tendering process to take, and they can run longer. The longer it will take you to get a new supplier in place for business continuity, the higher the risk will be.

3.      How competitive is the sector you are contracting out to?

When you’re dealing with smaller sized firms, you need to consider whether they’re going to last. It’s not something you’ll feel comfortable about discussing with potential partners during negotiations, but you can’t avoid it. In competitive industries, where the competition is fierce, such as the security sector where price undercutting is typical – you need to assess whether your partner will be around for the duration of your contract, or if they’re planning to exit and sell their business on.

Some sectors are highly competitive, others not so much. This should form part of your research process when evaluating potential suppliers so you know when you go into discussions, the level of competition they are up against for survival. And don’t be afraid to ask them about survival plans if there are some really competitive bids coming at you during the tendering process.

4.      Will your contract leave your supplier too reliant on Your TCV?

TCV = Total Contract Value. Diversification is a necessity in business therefore, if you discover your contract is going to be the one keeping your partner operational then the relationship may not be mutually beneficial.

Mutually Beneficial Supplier Relationship is only one of the eight principles of a quality management system in respect of ISO 9001.

Early stage start-up businesses are often overly keen to get out of negotiations and get the contract agreed that they neglect to take time out for considering long-term risks that will be associated with your contract fulfilment.

Ensure your partners are not going to be dependent on your contract for services or goods for them to remain operational.

As a rule, the higher your TCV is, the larger a supplier you will need. The reason being, the larger your contract value, the more cost there will be for service or product delivery. Should any of your suppliers be too reliant on your contract, investors (like the bank) will be reluctant to provide financial support (if they ever need it) due to the lack of revenue diversification.

5.      Intellectual Property Protection – Who owns what and who’s managing it?

IP protection is an important part of on-boarding new suppliers. In certain situations, they may be getting more information from your company that could prove dangerous later if your IP isn’t managed effectively.

Take contract manufacturing, as this report highlights. If you don’t own, as in really own your intellectual property, come the end of your contract, your supplier could be in a position to enter your market and become your competitor using the technology or information your company owns. There is a risk you breed your own competitor and those are the worst threat you can have because they’ll be a direct copy of your product or service.

Always protect your intellectual property.

For early stage start-ups that have neglected this part and need to know more, or if you’re late on learning about IP protection, see the Government overview of what it is and your protection options here.

Image courtesy of nfib.com.