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Supplier Risk Assessment: Challenges and Solutions

Supplier Risk Assessment: Challenges and Solutions

Supplier Risk Assessment: Challenges and Solutions

Assessing potential operational risks associated with a particular supplier can be challenging for any organization. Besides the difficulty involved with conducting an investigation into a supplier's work history and credentials, there are many legal and technical considerations that must be taken into account when conducting background research during the course of awarding a bid.

In 2014, supplier risk assessment is becoming an increasingly important part of the solicitation process. After the emergence of high-profile scandals involving supplier misrepresentation, misappropriation of funds and outright fraud, purchasing managers across all industries are coming to understand the crucial role that research and due diligence play in the solicitation management process.

Scandals

A striking example of what can go wrong when procurement managers fail to undertake due diligence procedures was displayed in 2007. A small supplier that won contracts to supply the U.S. government with security equipment was discovered to have falsified information and grossly misrepresented their business experience. This scandal ultimately led to prison terms for the contractors and proved to be an embarrassing learning experience for the governmental purchasing departments involved.

More recently, in 2013, the owner of an electrical services company based in Maryland was charged with identity fraud, identity theft and other serious crimes. It was discovered that his company failed to comply with federal wage and record-keeping regulations while also using employees’ social security numbers in an unauthorized manner. Such flagrant violations of federal and state labor laws are unfortunately all too common, however in recent years, advancements in technology and an increasing willingness on the part of suppliers and organizations to proactively address such concerns has greatly improved the climate for supplier risk assessment initiatives.

In a 2011 report released by U.S. risk consulting firm Kroll, titled the Global Fraud Report, executives from major companies worldwide were polled about their concerns regarding fraud within their respective corporate structures. 42 percent of respondents identified their company as “highly or moderately vulnerable” to supplier or procurement fraud, an increase of 16 percent from 2010. Further, 20 percent of respondents said that they were in fact affected by supplier or procurement fraud in 2011. This data indicates that supplier risk is of growing concern, as real losses from supplier fraud are being absorbed by an increasing number of companies every year in the United States.

Standard Procedures

For purchasing managers, assessing supplier risk generally involves an examination of the supplier’s work history, legal records, and overall reputation within the industry community. This is usually accomplished by reviewing records available in the public domain or by speaking directly with representatives of organizations for whom the supplier has done work in the past.

However, these methods of verification are not optimal for several reasons. Manual processes like the examining of court documents and the reviewing of industry regulators’ records are time-consuming and labor intensive. Attempting to piece together the entire work history of a supplier who has been operating for many years leaves opportunities for important revelations to be overlooked and mistakes to be made. In the case of recommendation and referral, unscrupulous organizations can provide glowing reviews of questionable suppliers in exchange for compensation, eroding the reliability of informal recommendations.

Even major firms with a track record of completing large projects within very competitive industries such as aerospace, construction and engineering have been sanctioned for practices that would classify them as risky suppliers in future ventures.

Regardless of the size or scope of the operations and experience of a supplier, it is advantageous for buying organizations to have the tools at their disposal to assess and address supplier risk proactively, before beginning the laborious process of background checks and in-depth research.

E-Procurement and Supplier Risk Assessment

The SourceSuite SaaS e-procurement solution provides the functionality necessary to ensure that supplier risk is properly managed from the moment solicitations are published. The supplier pre-qualification module allows buying organizations to vet interested suppliers by using a configurable web-based form before the interested party can submit a bid on a solicitation. This powerful tool eliminates the need for time-consuming manual intervention when determining supplier qualifications and credentials.

SourceSuite also allows organizations to optionally publish solicitations by invitation, ensuring that supplier pools for projects are pre-qualified according to the experience and certifications that are required to bid. Each supplier can also create an individual profile, making the process more efficient by providing important qualifying information that can then be reviewed per solicitation.

Pre-qualification and invitational bidding modules provide the automated assistance that is crucial to eliminating wasteful manual processes from the initial phase of supplier risk assessment. Once suppliers have submitted bids, SourceSuite’s Quote and Item Management module allows buying organizations to quickly compare received bids and efficiently determine the best value offered by suppliers on any given item. The ability to compare bids from multiple suppliers on a per-item basis improves the transparency of the solicitation process and highlights any price inconsistencies in the bids of suppliers.

An effective assessment of supplier risk is dependent on accurate information and the ability to review and examine the information in an efficient manner. Traditionally, gathering the necessary information for risk assessment required an inordinate amount of effort and the commitment of valuable human resources. Once all of the available information was gathered, the amount of time needed to sort through thousands of documents was such that mistakes were commonplace, a situation that made the occurrence of fraud and mismanagement practically unavoidable.

With SourceSuite, supplier risk assessment becomes a highly efficient and automated process. By eliminating the manual processes used for risk assessment, buying organizations reduce the labor cost of assessing suppliers, while harnessing the power of pre-qualification to dramatically decrease the possibility of clerical error.

Conclusion

The availability of a robust solution to pre-empt supplier risk is improving the way procurement departments do business. SourceSuite provides tangible resource savings as well as a system of supplier qualification that allows organizations to mitigate supplier risk before problems have an opportunity to arise.

It’s been said that an ounce of prevention is worth a pound of cure. By empowering businesses to efficiently assess each and every supplier they are considering doing business with, and preventing instances of malfeasance before they can happen, the SourceSuite e-procurement solution provides the supplier risk assessment infrastructure that organizations need in order to avoid having to seek a cure down the road.

Nathan Munn | SourceSuite.com

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