How to manage supplier selection risk
Once a manufacturer has determined a supplier has the potential to provide what’s needed from a technology and operational perspective, it’s time to look at other factors that could pose a risk. This step can be performed manually or with a holistic supplier risk management solution like Z2Data. Avnet has partnered with Z2Data, the developer of an intelligent data platform for analyzing supply chain risks in order to improve the supply chain management experience for our customers.
While some of these factors could be thought of as more traditional considerations when evaluating suppliers, others go beyond the basic scope:
Financial health: Evaluating the financial health of a supplier is crucial to ensuring they can sustain operations and fulfill long-term commitments without risk of default. A supplier with a strong balance sheet is less likely to experience disruptions, thus providing supply chain stability.
Extreme weather and climate-related events: A Pew study compared two 20-year timeframes (1983-2002 and 2003-2022) found a “154% increase in the number of billion-dollar disasters and a 257% surge in costs.” The frequency and scale of natural disasters that cause over $1 billion in damage are increasing each year (the U.S. saw a record 23 of them in 2023 alone), and companies are scrambling to figure out the growing impact on supplier operations. It’s essential to know the vulnerability of a supplier’s manufacturing sites and a supplier’s preparedness to handle incidents when they occur.
Geopolitical concerns: It’s no secret there’s a growing trade war between China and the U.S. But that’s not the only geopolitical consideration looming in the minds of manufacturers. From the war in Ukraine and the conflict in Israel and Gaza to China’s military patrolling the South China Sea, the world feels on edge–and more conflict can mean critical parts are either delayed or never arrive at all. It’s important to understand where your suppliers are based and what risks those sites are vulnerable to if tensions flare.
ESG and sustainability: This is one of the fastest-growing considerations for companies determined to understand the risk their suppliers pose to their reputation and bottom line. Companies must understand how a host of new regulations can impact their supply chain and the network of suppliers and customers they do business with. Among the new regulations is the EU’s Corporate Sustainability Reporting Directive (CSRD), which requires companies to disclose everything from precise measurements of their environmental impact to labor practices along their respective supply chain. In the U.S. are recent efforts to track per-and polyfluorinated alkyl substances (PFAS) usage in both the manufacturing process and end product.
Cybersecurity: With the rise in cyber threats, ensuring that a supplier has robust cybersecurity measures in place is essential to protect sensitive data and maintain the integrity of a supply chain. A supplier with strong cybersecurity practices can prevent potential breaches and protect data.
Trade compliance: Companies can no longer sidestep the ethics of those they do business with. With new regulations like the U.S. UFLPA law, which sanctions companies caught doing business with Chinese entities known or suspected to use forced labor, companies can no longer remain in the dark about the practices of their business partners. New laws are demanding companies vet their Tier 1 and subtier suppliers and ensure they work only with companies looking to set a new standard of ethical manufacturing.
Data transparency: Many of these new factors (such as ESG and sustainability as well as trade compliance) require a higher level of transparency from suppliers. The fact is, Tier 1 and subtier suppliers must be more transparent than ever to help ensure that end companies achieve these goals. With that in mind, it’s important to find suppliers that make this process easy by being communicative and proactive in their efforts to meet new regulations and manufacturing standards. Suppliers that communicate clearly, accurately and proactively about their efforts to comply are far better long-term partners than those that hide or obfuscate their activities.
Another thing to consider is whether a supplier is a good cultural fit, which is just as crucial as their operational capabilities. That’s because a supplier that shares similar values, business practices and communication styles as its customers is more likely to understand and prioritize their needs, leading to stronger, more harmonious partnerships.
Taking the next step
A lot goes into finding a good, reliable supplier that meets all business needs. While in an ideal world, there is sufficient time to evaluate suppliers along every factor listed here (and more), there isn’t always time to do so for every supplier on a regular and iterative basis.
So, what can you do? The first step is to prioritize which factors matter most. Maybe certain factors such as capacity and adaptability are more critical in a given moment than a supplier’s ESG score. This isn’t to say only focus on the high-priority information! But that’s a good place to start, with plans to regularly collect more data.
The second step is to create a supplier evaluation process that is dynamic. As new information on suppliers comes in, a risk matrix should be able to take in that information and add it to your overall risk profile. If your current method for managing and updating supplier information is unwieldy and too difficult to maintain, collecting new information will become more of a burden than an opportunity to understand who you are doing business with. One way to tackle this is to consider tools that automatically log and update the information into your risk matrix.
Supplier risk analysis is shifting from a discretionary task to an integral part of effective supply chain risk management. Companies that can better understand their suppliers–and partner with the right ones–will give themselves a critical advantage in the face of growing consumer and legislative demands.
Cindy Eldridge, Director, Supply Chain, at Avnet contributed to this article.
More insights on selecting the right suppliers:
How to choose the right electronic component supplier
Key considerations for evaluating an electronic component suppliers
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