Supplier research 101: why should we research our suppliers?
In 2022, Australian supermarkets were famously (or perhaps infamously) selling iceberg lettuce for over $10 a head because of sweeping problems in the supply chain caused by floods, war and the pandemic.
Just like the supermarkets rapidly running out of fresh green veggies, if one element of your supply chain fails to deliver, then your business can experience disruptions, delays, skyrocketing costs, shortages or other, more complex problems.
Clearly, researching a single supplier wasn’t going to stop natural disasters or geopolitical tensions affecting supermarket supply chains. But this example is one of a risk-aware supply chain that nevertheless experienced a convergence of supply problems that was exceptionally difficult to mitigate.
There are many reasons to make sure that you’re aware of any risks associated with your suppliers:
- Long term viability of the partnership: supplier relationships are vital to the long term and stable operation of your business. Researching your suppliers before you select which one (or ones) to contract with helps you determine whether your relationship is likely to have the staying power you need to smoothly operate in your market for a long time.
- Bringing a reliable product to market: your customers and clients need to know that when they purchase a product or service from you, it’s going to be delivered as advertised. Knowing for sure that your suppliers will provide supply to your business gives you the ability to fulfil your obligations to your customers.
- Foreknowledge of weaknesses in your supply chain: your organisation is probably willing to accept some risks, to some degree, particularly in cases where it can’t be avoided, transferred or defended against. Even so, knowing what those risks might be and their likelihood of coming to pass enables you to plan for contingencies.
- Selecting a supplier has an opportunity cost: your resources as a business are finite. That means that the choice of selecting one supplier means that you’re likely to forego selecting another. Researching your suppliers helps you feel certain that you’re making the best choice.
When you’re researching a supplier, you have to weigh up the costs and benefits of the relationship. For example, an overseas supplier might have the advantage of a wider variety of products at high quality and a lower price point, but a longer supply line may be exposed to risk from geopolitical factors; a shorter supply line and a local supplier might not be exposed to that risk, but may offer less variety.
Four key categories of risks to think about when you’re researching possible suppliers are:
- Operational risk
In business communications, “operational,” means that something relates to the routine day-to-day functions of the organisation. Operational risk in your supply chain is about policies, processes, or systems that might not be functioning as they should, and so it includes factors like the quality of the service or product supplied, the ability to meet the demands of schedules, lead time, logistics, staffing problems, or the organisation’s capacity to meet the scale of your demand for the product or service.
- Social and environmental risk
These risks could include supply disruption due to environmental hazards, like floods or disease—real scenarios with which many of us have undoubtedly become more familiar during the last several years. Land and energy use and pollution also come into play here. Social risks include factors like child labour or other forms of exploitation in the supply chain. Not all organisations are required to prepare annual modern slavery statements under the Modern Slavery Act 2018, but many businesses voluntarily reject this supply chain risk on ethical and reputational grounds.
- Strategic risk
This kind of risk is about the external events that can make it impossible to meet goals or responsibilities. Your business goals can be impacted by whether or not your suppliers are meeting theirs. Consider factors like their brand positioning and public relations, broad changes in the market, or new legislation on the horizon.
- Financial risk
These risks are perhaps the most obvious. Your suppliers might encounter circumstances or events that threaten their ability to meet their financial obligations. Procurements or accounts payable will typically be on the lookout for obvious red flags such as poor credit ratings, whether or not bankruptcy or insolvency seems likely, industrial action with a high likelihood of significant deleterious outcomes, or new costly legislative requirements. If your suppliers can’t pay their bills, then they will not long be able to supply you.
When one organisation operates in the marketplace, it is necessarily reliant on other organisations. Supply chain risk management is, for most of us, simply a necessary part of doing business.