science

Supplier risk management

Supplier risk management is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Supplier risk management rather than just read about it. In short: Supplier risk management (SRM) is an evolving discipline in operations management for manufacturers, retailers, financial services companies and government agencies where an organization is dependent on suppliers to achieve business objectives. The complexity and globally outsourced nature of modern supply chains, combined with the practice of optimization techniques such as lean and just-in-time manufacturing in or…

Key takeaways

Supplier risk management belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Supplier risk management to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Supplier risk management from memory before moving on to harder problems.

Reference excerpt

Supplier risk management (SRM) is an evolving discipline in operations management for manufacturers, retailers, financial services companies and government agencies where an organization is dependent on suppliers to achieve business objectives. The complexity and globally outsourced nature of modern supply chains, combined with the practice of optimization techniques such as lean and just-in-time manufacturing in order to improve efficiency, has increased supply chain vulnerabilities to even minor supply disruptions. While these models have allowed companies to reduce overall costs and expand quickly into new markets, they also expose the company to the risk of a supplier bankruptcy, closing operations, data breach or being acquired. Among the several types of supply disruptions, most severe are those that have a relatively low probability of occurrence with a very high severity of impact when they do occur. While such risks cannot be eliminated, however, its severity can be reduced.

Objectives To overcome these challenges, companies mitigate supply chain interruptions and reduce risk with strategies and tactics that address supplier-centric risk at multiple stages in the relationship:

On boarding: Bringing suppliers into the operation with registration that includes: A centralized supplier registration portal Integration of third party performance, financial data and predictive indicators into the supplier profile Monitoring for stability beyond financial data, including: Sanctioned countries, criminal and terrorists (i.e. Office of Foreign Assets Control) ties and operational performance Visibility into potential disruptions caused by geopolitical threats, acts of nature, etc. Cultivating strategic supplier relationships for the long-term: Leverage supplier scorecards for continuous improvement Establish and use benchmarks for measuring supplier performance Creating a system for collaboration and supplier development Establish control across the extended enterprise: Create integrated supplier networks Extend performance management benchmarks to second and third tier suppliers

Supplier risk in recession and recovery In 2008–2009, manufacturers experienced the startling speed at which suppliers can move from stability to shutting down operations. The devastating impact of a crucial supplier failure has moved risk management from add-on service to mission-critical. With a new focus on risk management, manufacturers have seen value whether the economy is stagnant or thriving. With a transparent, accessible and comprehensive set of supplier information, manufacturers have been able to monitor suppliers for behavioral changes which contribute to overall stability, including:

Changes in the supplier's management team Environmental legislation violations Health and safety incidents Quality issues Noticeable lags in response time to inquiries Foreign asset violations Changes in any of these conditions can be defined as parameters for raising an alert. For example, a financially stable supplier may in fact be about to lose it CEO to retirement – which may cause issues within the management team. Early visibility into that change gives the manufacturer time to ensure it does not affect customers negatively. Based on the criticality of the supplier and the nature of the alert received, the manufacturer can then choose to take necessary action, such as calling or visiting the supplier, increasing monitoring, or moving towards terminating the relationship with the supplier and finding a replacement.

Benefits Reducing supplier risk can:

Give insight to manufacturers to create defensive and offensive strategies that turn risk into a competitive advantage. Help determine whether or not it is beneficial for a company to conduct a customer intervention and know in advance what the potential outcomes might be for an intervention. Improve competitive position in the market. Lower supplier costs. Position manufacturers to better address customer needs by addressing supplier vulnerabilities before they become apparent. Prevent loss of customer's trust due to data exposure or systems being hacked.

See also Third-party management Business intelligence Master data management Risk management Supplier performance management Supply-chain risk management Volume risk

References

Further reading Understanding Risk: Avoiding Supply Chain Disruption, IndustryWeek, 11 May 2009

Worked examples

Example 1 — a first encounter with Supplier risk management

Start with the simplest possible case. Write down what Supplier risk management claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Supplier risk management before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Supplier risk management ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Supplier risk management

In research: Supplier risk management appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Supplier risk management in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Supplier risk management is common in secondary-school and first-year university syllabi. It links to neighbouring topics Business intelligence terms, Manufacturing, Operational risk, so understanding it makes those chapters shorter.
In everyday life: Look for Supplier risk management outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Supplier risk management in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Supplier risk management means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Supplier risk management out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Supplier risk management in simple terms?

Why does Supplier risk management matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Supplier risk management?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Supplier risk management.