Methods for Managing Supply Chain Risk and Contract Management Best Practices

July 19, 2018 • Procurement • 4 minutes

Supply chain risk isn’t a new topic to anyone familiar with purchasing. Hurdles such as supplier issues, defective products, and loss of business have long been common topics for procurement professionals.

Traditionally seen as the purchaser’s problem, mitigating these risks is essential for a smoother process. Education, consultants, and software to help manage any uncertainties that arise are first steps, but simply addressing the risk at all can be a daunting task for procurement and supply chain professionals.

What’s the solution? While the responsibility usually gets shifted to procurement departments, all departments should be aware of the supply chain process. Risk goes beyond just procurement, impacting all sides of the business in this digital age. Where old risks used to involve natural disasters, damaged goods, or faulty product services, now data infiltration, negative media exposure, malware, and viruses are all serious concerns as well. New methods are being created and adopted to counter these new issues.

While these more recent risks may be a concern, there are also benefits to them as well. Social media and transparency laws make it easier to analyze potential supply risks before entering into an official business relationship. New technology can assist in managing the supply chain process by enhancing security and protecting against threats.

Managing risk is indeed the responsibility of procurement, but not alone. An entire organization has the ability to mitigate risk and work with procurement to ensure that everyone is successful. Here are a few of the best methods for addressing supply chain risk.

Establish an effective supplier selection process.

Some risks, such as natural disasters are out of both parties’ control (a good reason for a force majeure clause), but many are within the power of an organization, as long as they are aware of them and well-prepared. Risks associated specifically with the supplier or vendor can often be avoided simply by implementing a successful supplier selection process.

Many companies already have these selection programs set up, and ensuring one is uniformly implemented and enforced throughout the entire organization is critical to avoid potential risks. The selection process itself will have already analyzed possible vendors, removed high risk suppliers, and determined a list of qualified suppliers to serve as business partners.

Check the history of potential suppliers.

Whether it’s checking references or past performance, being aware of a supplier’s track record is valuable information. Knowing supplier history provides insight into their process and efficacy, and can predict future performance and risks. Looking at the full picture and not just recent history is important to properly assess the vendor. Screening and business analysis are excellent methods for understanding both current and future performance.

While supplier site visits are essential for more traditional supplier relationships that include physical products as a component of the deal, in today’s world of digitization, on-site visits are usually no longer a necessity. However, speaking with the right references and doing thorough research are still critical elements when determining which suppliers are the best option.

Manage contracts effectively.

While all companies have contracts to manage, larger enterprise companies are often managing tens of thousands of contracts at any given time. Organizing and handling these documents effectively from the outset will help reduce any supply chain risk. For example, knowing which contracts performed well in the past and which ones had issues helps inform future supplier relationships and decisions. With just a repository or contracts in numerous different locations, these insights aren’t easily accessible. A full contract lifecycle management platform provides all the tools necessary to efficiently manage all documents.

Drafting supplier contracts gives organizations the opportunity to include clauses that will help protect against potential risks and a contract management platform that has comprehensive template and approval workflow features will allow these clauses to be viewed by the correct people and saved for future use. Elements such as indemnification clauses and other clauses that clearly identify potential risks and assign proper responsibility to both parties are a good start. Each side should feel that the terms are useful and protect them equally.

Leaving room for supply chain risks can cost companies millions of dollars—something that many businesses cannot afford. Setting up process, properly vetting suppliers, and maintaining proper awareness of contracts are key steps in mitigating potential risks.

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