Balance Supplier Risk Versus Reward

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November 17, 2010 —



  • Defining and prioritizing supplier tiers;
  • Utilizing risk assessment processes for new product/service requests;
  • Incorporating initial and ongoing supplier due diligence;
  • Utilizing balanced category scorecards;
  • Adopting robust supplier performance reporting and issue resolution;
  • Developing and regularly updating category market research profiles;
  • Implementing a supplier Six Sigma program.



Define and Prioritize Supplier Tiers



Example Supplier Category Tier

Example Definition

1

A significant-spend supplier whose products/service are critical to a company's revenues and require:

         — Complex contracts that drive continuous improvement

         — Proactive supplier relationship management

         — Detailed monthly supplier performance reporting

         — Proactive forecasting

2

A moderately high-spend supplier whose products/service are important to a company's revenue and require:

         — Complex contracts

         — Proactive supplier relationship management

         — Detailed quarterly supplier performance reporting

3

A supplier whose products/service are not critical to a company's revenue but require:

         — Complex or basic standard contracts

         — Annual performance reporting

4

A supplier whose products/service are not critical to a company's revenue and who:

         — Falls within a non-procurement-managed category

         — May utilize standard purchase order terms and conditions





Risk Assessment Processes for New Product and Service Requests



Figure 1

Figure 1. Risk Assessment Steps
Balancing Supplier Risk Versus Reward - Risk Assessment Steps

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Initial and Ongoing Supplier Due Diligence







  • Supplier financials
  • Insurance certificate
  • Business continuity plan
  • Audit report
  • Subcontractors to be utilized (if applicable)
  • Vendor management policy and program of subcontractors (if applicable)
  • Past and current references
  • Country risk assessment (if supplier is supporting you outside the US)
  • Management turnover
  • Product or plant closures
  • Requests for payment term adjustments
  • Deep discounting, etc.



  • Physical security policy
  • Asset management policy
  • Background screening process
  • Access controls
  • Information security policy
  • Information security breach history
  • Incident management program
  • Business continuity test results

Balanced Category Scorecards



Figure 2

Figure 2. Category Scorecard Example
Balancing Supplier Risk Versus Reward - Category Scorecard Example

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Robust Supplier Performance Reporting and Issue Resolution



Example Frequency

Example Activity

Daily

     — Supplier daily report is developed and reviewed between supplier first-level management and company's first-level management

     — Majority of key questions and tactical issues are resolved in the daily meetings

Weekly

     — Supplier weekly report is developed and reviewed between supplier first- and second-level management and company's first- and second-level management, and Procurement

      — Some of the remaining key tactical issues are resolved in the weekly meetings

Monthly

     — Supplier monthly report is developed and reviewed between supplier first-, second- and third-level management and company's first- and second-level management, and Procurement

     — Any escalated tactical issues are resolved at this level

     — Majority of strategic-related issues are identified and resolved at this level

Quarterly

     — Quarterly monthly report is developed and reviewed with supplier senior management and company's senior management

     — Any escalated strategic issues are resolved at this level





"Category Packs"

Figure 3

Figure 3. Category Pack Example
Balancing Supplier Risk Versus Reward - Category Pack Example
Supplier Six Sigma Program







  • Think big, start small, scale fast.
  • Obtain management buy-in for the program.
  • Use experienced supplier Six Sigma resources (e.g., Master Black Belts), either internal or external consultants, to help plan and implement your program.
  • Develop a stakeholder assessment and communications plan for both internal and external (suppliers) constituencies.
  • Partner with your suppliers to help identify what criteria and which Six Sigma projects to consider.
  • Document and agree upon key milestones for project reviews.

A Competitive Advantage



About the Author: btatsumi@kpmg.com www.us.kpmg.com

KPMG Disclaimer: The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG LLP. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.

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