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The failure of a key customer can cause businesses a great deal of damage – but you can take out insurance against that eventuality. Less considered is the potential effect a failed supplier could have on a company.

It’s an issue that could affect any type of business. Whether that’s an engineering firm which can’t get hold of materials to complete an order, or a ferry operator relying on the delivery of a new ship: managing supply chain risk is ever-present and complex.

So, what are some of the key areas to consider when looking to meet this challenge? Here are five areas to think about when looking at your business’s supply chain.

1.      It’s good to be in the know

Knowledge is power, as they say, and that’s particularly true when it comes to your supply chain. Have you thought about who your most important suppliers are? They may not be the ones that immediately come to mind. Make sure you’re considering financial, operational, and sales channels when reviewing internal data on all of them. If you need more information, you can request additional data from existing or future suppliers by adding this clause to the tendering process or terms of trade.

2.      The real cost of cost-cutting

For many businesses looking to make cash savings and realise economies of scale, it’s easy to focus on the best deal when sourcing products and raw materials. However, this short term gain has hidden costs and can bring with it significant risk. The insolvency of one of these suppliers could result in production stoppages or delays, stock running out, lost revenues, and the cost of adjusting your own production cycles to different materials with no prior warning.

3.      Outsourcing and sub-contractors

If you outsource any functions in your business, these suppliers need to be considered as part of any supply chain profile. The sudden loss of an IT or payroll provider could cause major disruption to your company. Similarly, for the construction sector in particular, reliance on sub-contracted labour can present significant risks. These are important parts of your business continuity.

 4.      How far up the tree can you see?

Know your suppliers’ businesses. Make sure you understand how they work, who their suppliers are, and how many customers they have. If one of them is too reliant on a single client, that can present a significant risk to your supply chain. Map out the tiers and relationships between suppliers to get a better understanding of how their businesses operate and the landscape in which they operate.

 5.      Devise a response plan

While you can’t always foresee the failure of a supplier, you can come up with a response plan in case it does occur. Think about how risk can be reduced. This might mean considering how to adjust production specifications without significant cost or disruption. Equally, it might also mean devising purchasing controls to restrict the quantity of product on order from any one supplier.

Having as much information as possible in your hands is the key to making sure you manage the risks in your supply chain effectively. It could help you avoid major cost, disruption, and damage to your business.

We have a highly skilled and experienced team specialising in supplier risk mitigation. Get in touch if you would like to discuss any aspect of your supplier base.

Michelle MB7H5306 (3)
Michelle Elliot - Director, Corporate Finance
 
Michelle  is a director in our Corporate Finance service line based in Glasgow and has over 13 years experience working with distressed corporates and advising lenders.
 
Michelle’s experience is varied and includes advising  stakeholders of businesses in financial distress, formal insolvency assignments, corporate advisory for stressed businesses and due diligence work.
 

 

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