June 17, 2020
The spread of the COVID-19 virus is having significant impact on businesses worldwide. Organizations everywhere are executing business processes to minimize the impact of this health emergency on their operations and customers. What steps can procurement professionals take to better prepare for future wide scale business disruptions? A sound supplier risk management program is a proven method.
Determine which suppliers should be assessed
Companies often have large and complex supply chains, so focusing on those suppliers with the highest impact and/or likelihood of problems is a great starting point. Specifically, consider these groups:
- Suppliers directly affecting revenue or customer satisfaction – often categorized as “critical” suppliers, this group is key to your continued business success
- Suppliers in weak financial condition – the current decline in business activity could be fatal to businesses with high debt loads, low margins, or other financial challenges
- Suppliers that could impact either your reputation or employee well-being through health and safety issues – these could include suppliers that could spread infection through your products or those who might work within your sites
Conduct risk assessments
Conduct risk assessments on the suppliers identified above looking at the following types of risks:
- Business Continuity (BC) Risk – Does each supplier have a business continuity plan on file? Does the BC plan include a section on pandemic staffing of business operations? Has the BC plan been activated? Do critical suppliers have Disaster Recovery (DR) plans on file? Has the DR plan been tested recently and can it be activated now if necessary? Here’s one example to review from Coupa’s CEO: https://www.linkedin.com/feed/update/urn:li:activity:6650897337910730753/
- Financial Health Risk – Do you have financial strength ratings on all your suppliers? Which suppliers have financial protections in place, like business interruption insurance?
- Environmental Health and Safety (EH&S) Risk – Which suppliers have direct personal interaction with your customers? Which suppliers have direct personal interaction with your employees? Could a supplier affect a person’s health via physical goods they supply?
Once the risks are understood, mitigation is the key word. Time to roll-up the sleeves and begin collaborative action with the supplier base to reduce the impact of supply chain disruptions on your business. Make sure critical suppliers have proper plans in place, in operation, or in development to assure continuity of supply in the future. For suppliers in financial distress, be prepared to assist them by changes in payment terms, direct investment, or other means – especially if those suppliers are also critical to your success. For suppliers with EH&S risk, make sure they are taking appropriate health precautions to protect your customers and/or employees. Track and document all of the actions. Lastly, consider making changes to your supplier due diligence process to make the response to the next crisis easier to handle.
Unanticipated supply chain disruptions like COVID-19 are the types of challenges that procurement teams will need to address. With a better understanding of the risks present in your supply base, and with some advance mitigation planning, responding to future disruptions will become easier over time. Knowledge is power – and even though we cannot predict events like COVID-19, we can use knowledge to reduce the overall impact of disruptive events on our businesses.
By: John Gosztyla, Risk Client Solutions Architect