Procurement Should Evaluate Supply Chain Risk

Randy Littleson of Kinaxis made these comments in a post  titled “Strong sales? Think you can weather the storm? Maybe not!” over at IW forums:

. . . my friend’s company is in some serious trouble. Why? A manufacturer that supplies injection molded plastic parts also supplies parts to the auto industry (do you see where this is going?). These injection molded parts are a critical component for many of their key products…the parts were sole sourced….(do you get the feeling of doom?)

Imagine this predicament --- a key supplier has a major customer (Customer A) that suddenly falls on hard times. Customer A is 35% of your key supplier’s annual sales. Even though this supplier is performing at a high level for your company, they can’t avoid the impact of a sudden drop in cash flow.

The point here is that a thorough risk assessment not only evaluates financial risk - - - but also business risk. In this case the supply chain risk assessment evaluates the percentage of sales made up by the supplier’s key customers. A low number of suppliers with a high percentage of sales would have a higher degree of risk.

If you are highly reliant on a single source supplier – that drives a major portion of your company’s revenue, digging deeper into supply chain risk is critical. This will help create a proactive versus reactive procurement risk management strategy.