Real story of a Risk Management sucess

Before I start the balanced score card article on risk management, I recalled a situation I am in few years back.


A key supplier run into financial difficulties and bank has decided to liquidate the company!


If these issue cropped up a few years earlier, we are "dead-meat" and will have gone into serious issue ourselves. We will failed all our customers order and unable to ship the order until a new supplier is found and deliver the parts to us. The end result is customers will be extremely unhappy and start to look for alternative supplies. We will suffer severely!

But not  us luckily or rather we have the foresight to manage the RISK .

Prior to this incident, I manage to run a thorough evaluation of the supplier profile and discover that this company has only ONE REAL customer and that customer is us. When a supplier have only one major customer and that customer is you, one will work hard to make sure that this supplier really be contributing to your organization growth, It what we term as a Partnership relationship.

True enough we were working together in many projects together from quality issue to developing new product. This relationship was sustaining for more then 8 years. It the type of supplier you were looking for if we were to look from the plus side alone.

However like all things in this world, whenever there is a upside, there will also be some downside of things.

Question I am asking prior to this incident were:-

a) What will happen if one fine time forward, we have to diversify and our concentration of product purchase from them will be reduced?
b) What the minimum order we need to issue to this company for them to cover their their bare minimum overhead?
c) Is this partnership beneficial to us? What is the negative aspect of this?
d) Is the supplier investing time and effort to ensure the improvement we need are genuinely done?
e) What happen if we becoming over reliance on them that we become helpless?

These are risk management questions and analysis using Proctor 5 forces and SWOT is necessary.

From the analysis the findings were:-

a) The supplier will run into operational issue due to cash flow if our order are reduced and if one day our customers decided to switch some supplies elsewhere (this is a real possibilities no matter how comfortable we were), this supply operation will take time to adjust and causing disruption to supplies
b) Anything lower by 20% of the level we provided, they will not be profitable (based on guesstimate after running a cost analysis of the material we purchased)
c) The partnership is more beneficial to supplier as their cost cannot match overseas supplies, especially from the China suppliers and there were a number of occasion we lost out on  tender due to this issue
d) Yes, they are investing time and effort to correct and improve process but the progress was too slow moving
e) We will be over reliance on them and our negotiation power will be reduced severely if we need to do a real cost down and no back up on alternatives.

I am not stating here a real Partnership is no good. Partnership with suppliers are extremely beneficial but partnership with a supplier which has it own strength will be better. Partnership may begin with a growing supplier and underachieving supplier but there need to be progression on both side in order for it to be bring real benefit, provided the progression does not threaten each other competitiveness.

Another important aspect of partnership is that the cost side of the product has to be extremely competitive. If this is not, one of the key rule of partnership is gone.

Going back to the issue of RISK management, I decided to review most of the product with this particular supplier with another supplier which I managed to source out through a trade expo. We go through the necessary process of review including running an process audit, visiting the factory twice in a space of few months to make sure of thing.

Another check done was to find out who their major customer, and as always, I love supplier who can be honest with me. Honesty show sincerity in the process of qualification and future dealings. We discover that one of their customer was a major competitor but they assured me that since they can afford to tell us all these, it show to us that they have no worries. THEY DO NOT SHARE CUSTOMER SECRET WITH ANOTHER CUSTOMER

They willing to sign a legally binding confidentiality agreement as well on our products.

From then on, we tested the new supplier with few order of less importance and they pass with flying colours.

However, our partnership remain with the key supplier until the day the bomb drop on us.

We manage to switch most of the product immediately to this new supplier and we sailed through the crisis almost unscathed except for burning few thousands dollar on air freight of very critical product which we need almost immediately.

Risk management do not always eliminate risk but it help to cushion and reduce impact  and keep business flowing.