In the survey Level conducted in late April with over 3,000 companies—roughly 80% being small service providers—one of the strategies reported as a means to prevent supply disruptions is monitoring strategic suppliers on a weekly basis.
Now, it is crucial to identify who the strategic suppliers are and what to monitor. Since respondents act as suppliers to large corporations, the purpose of this article is to provide insights to guide them in this initiative.
A first step is supplier classification; a best practice for defining a supplier's importance and complexity within the company is applying the strategic procurement matrix (Kraljic).
Supplier Classification:
Category Breakdown:
- Definition of Procurement Categories.
- Supplier segregation by category.
- Establish category groups and their respective suppliers.
Criteria:
- Purchasing Importance: Evaluate the cost of materials or services/total costs, value-added profile, profitability profile, among others.
- Supply Market Complexity: Evaluate monopoly, oligopoly, pace of technological advancements, barriers to entry, logistics costs, among others.
Classification:
- Strategic Items (Supply Management): High level of importance and complexity, representing the quadrant requiring the greatest focus and strategic definition. Key characteristics include: Long-term availability, global suppliers, scarce high-value items and services, and centralized decision-making.
- Leverage Items (Materials Management): High level of importance, but low complexity. Key characteristics include: Material and service flow management, cost/price monitoring, multiple local suppliers, medium-term tracking, and decentralized decision-making (regional perspective).
- Bottleneck Items (Sourcing Management): Low importance, but high supply market complexity. Key characteristics include: Cost management, short-term tracking, high impact on innovation and new technologies, purchases requiring availability and flexibility, and decentralized decisions with centralized governance.
- Non-Critical Items (Purchasing Management): Low importance and complexity. Key characteristics include: Functional efficiency, local suppliers, spot purchases, abundant supply alternatives, and decentralized decision-making.
With this mapping, it is possible to identify suppliers that meet the criteria established by the company for this definition, gain a clearer view of the supplier management model, and pinpoint the most critical vendors that require more precise and frequent monitoring.
Once this selection is complete, we must validate which information is needed most frequently from these suppliers. Since the goal is to avoid surprises stemming from severe financial distress of the service provider and potential supply shortages, the focus should be on corporate health. Furthermore, given the speed of the impacts generated by the pandemic, the frequency should be weekly or monthly, depending on the risk indicators available for these suppliers.
For this monitoring, a primary step is defining the dimensions to be evaluated.
- Financial
- Production and Logistics
- Market (supply chain)
- Tax
Once this is defined, we can detail which information will be collected and tracked, such as:
- Late payments
- Loss of sales contracts
- Lawsuits and debts
- Shareholder/partner defaults
Lastly, it is important to weight the evaluations based on their importance and establish the risk level for each supplier. For this assessment, we can generate a risk matrix and a consolidated report to compare suppliers within the same category.
Through this closer supplier monitoring, the company will be able to mitigate risks and develop action plans with its suppliers to ensure the proper functioning of the supply chain.
Authored by – Walter Freitas and Guilherme de Viveiros – committed to the principles of Fair Trade.
