How to Recognize and Manage Supplier Red Flags
Global trends, including the COVID-19 pandemic, have taught procurement professionals the value of identifying supplier red flags and mitigating the risks they may pose before it’s too late. To do this, some organizations are making local buying their top priority, while others are committing to consolidating their supplier lists or further diversifying as their needs demand.
Since reevaluating supplier portfolios and understanding where and how suppliers are falling short of the mark is easier said than done, it can be valuable to understand what exactly you’re looking for when examining your existing portfolio of suppliers and attempting to determine if any red flags are waving in the breeze.
While weighing those red flags will ultimately come down to your supplier and product needs, it’s helpful to know where to start when it comes to thinking about your options and protecting your investments. Here are a few helpful things to consider during your evaluations.
Look at Employee Turnover Rates
True, you might not care very much about the executives in charge of your suppliers’ operations and day-to-day business, but if your supplier is constantly hiring for a slew of positions, that could be a sign of financial instability or a lacking workforce.
If a supplier isn’t able to keep their employees and their facilities operating consistently, there could be disruptions in their ability to deliver what they promise, and that is a concern.
You don’t have to go incredibly in-depth on this; a simple Indeed or LinkedIn search of the company’s open positions should tell you everything you need to know. It’s a simple step that can save you a lot of money and anxiety along the way.
Examine the Price of Goods
Speaking of money spent, if you notice that your suppliers are bidding ridiculously low, that could also be a red flag. If you’re putting something out for bid and a supplier’s response is quick and cheap, it’s likely a sign that the supplier is trying to get quick cash instead of actually building long-term working relationships.
Especially in a post-COVID-19 world, this is a concern for many procurement professionals. It’s no secret that suppliers across industries are struggling to recover from the global disruptions the pandemic caused, but if your suppliers are borrowing from Peter to pay Paul, it’s not worth risking that your organization may be short-changed by this practice in the long run.
Consider External Factors
To be fair, it’s not just business practices and hiring or firing that could be throwing up red flags when it comes to your suppliers. Variables such as climate change and the COVID-19 pandemic can also impact suppliers.
For example, in states like Florida – where vaccination rates are relatively low and COVID-19 cases are relatively high – it is likely that suppliers will be impacted since, statistically, not everyone will be showing up for work six months from now. At the end of the way, it’s likely many procurement professionals will be wary of doing long-term business in those states.
It’s a similar issue with climate change. In Seattle – and all up and down the West Coast, for that matter – wildfires and extreme dryness are not just an environmental problem, but a supply chain risk as well. If a building, cables or vehicles fall victim to these fires, that spells trouble for organizations relying on these suppliers.
Take Stock of Suppliers
A weak pun, but an important concern; if your supplier is listed with the New York Stock Exchange and their stock appears to be in trouble, be wary – that could spell trouble on the horizon for all parties involved.
Be Prepared to Diversify
Recognizing supplier red flags is one task but responding to those red flags is another issue entirely. In order to properly respond to concerns raised as a result of supplier practices, procurement professionals should prioritize having a diverse population of suppliers – and supplier information – at their fingertips.
Reaching out to other companies who work with suppliers is a great way to gather a significant amount of information from third-party sources who might be able to speak to elements of their business practices you may be concerned about. It’s also a great avenue through which to understand where your peers are sourcing from and if there’s an opportunity to diversify.
Resources that provide unified and updated supplier data can also assist in crafting a broad and diverse roster of suppliers. That way, if you do encounter red flags, you’ll be able to easily pivot from one supplier to another.
Ultimately, there are many factors that go into assessing if a supplier’s red flags are enough to keep you from doing business with them. By examining potential threats and risks and having diverse suppliers at your fingertips, you can ensure you’ll be prepared for anything – even the most disastrous worst-case scenario.