Simple process to identify critical suppliers

Filed in archive Practical Tips on February 19, 2009

John Westerveld of Kinaxis has written an excellent post on supply chain risk management (the post can be read here). He uses an SCMR article as a basis for his arguments and mentions that you have to gather different set of data from your suppliers in order to assess the risk. This data range from financial data to operational data and on-the-ground intelligence.

In his post, he raises an interesting question: "How to determine which suppliers are most critical to your supply chain?" and as the answer provides very simple yet powerful guidelines to segment the suppliers based on criticality. Below I have provided you with his points, with some modifications, in a more structured manner:

Step 1) Create a profile for each of the top 50 suppliers of your company
Step 2) Determine which parts they supply
Step 3) Determine which end items those parts go into
Step 4) Look at the projected revenue that you plan to receive from the sale of those end items

Doing the first four steps, you will get an understanding of the potential loss which you have in the case each top 50 supplier goes out of the business. Now it's time to make action plans so what you need to do is:

Step 5) Do multi-supplier sourcing for critical components and suppliers
Step 6) Collaborate with critical suppliers and strengthen their position (e.g. Do supplier financing to ensure that infrastructure and financial health exists in the future to support your operations).
Step 7) Analyze the financial and operational data of suppliers on a regular basis.