Supplier vetting is one of the most basic steps in supplier management. It’s as basic as blocking and tackling or passing, dribbling, and shooting, or batting, bowling, and fielding or dodging, ducking, dipping, diving, and dodging!
While simple, the importance and potential impact of supplier vetting on your overall supply chain and organizational health is often greatly underestimated. The lack of attention given to something so fundamental exposes companies to a much higher level of risk. So why doesn’t supplier vetting get the attention it deserves?
It slows us down.
When we were picking teams on the playground, nobody thought much about the risks of having a player on their team, except for whether they could play the game. We were focused on playing the game! Supplier vetting gets similar treatment because it can slow a company down from getting the “real work” underway.
It’s not well understood.
We never knew exactly how to vet a player before recruiting them to our team on the playground. We didn’t even know the word “vet” at that stage in our lives! Many companies are reluctant to reflect on the potential risks suppliers pose to their business. It’s also frequently true that there has been little work to understand their risk appetite. Companies won’t get motivated to invest precious time and energy in vetting without an appreciation for the connection between their appetite and the potential exposure.
Assumptions are made.
We knew our friends on the playground so why do we need to vet them? We knew that one kid was a fantastic athlete, and the other kid wasn’t that great an athlete but could play a position and not cost the team the game. Businesses know suppliers – at least they think they do – and they know the risky work as compared to the mundane. These aspects are known intuitively which is simply biases developed through experience. Rather than deliberately unpacking and addressing those biases, companies rely heavily on the intuition of their experienced workforce during the supplier selection process.
It was always fun to be the team captain, pick the team, set the game plan, and take the field. We gave a moment’s thought to our choices but not much more than that. We certainly didn’t dig into our potential teammates’ capabilities to see if they were a good fit for the team. Business leaders picking suppliers are those team captains and they are busy with the big picture. Sidelining progress on the business strategy to perform careful and critical examination of a supplier is a cumbersome administrative task they would rather forego.
What is it?
If supplier vetting was better understood the apprehension, avoidance, and assumptions would evaporate. Most companies are not fully vertically integrated. Rather, they are comprised of an extended web-like ecosystem of supplier, producer, and customer relationships where each relationship exposes a company to risks which must be accepted, avoided, transferred, or mitigated. Supplier-Company relationships, due to the greater level of relationship control possessed by the company, offer a unique risk management scenario. Supplier risk management thus is an inherent aspect throughout the supplier relationship lifecycle where supplier vetting is a key step.
Why do I care?
To state the obvious, running a business is far different from picking a team on the playground! Risks don’t restrict themselves to only those companies that have identified their appetite and understand potential risks. A lack of understanding won’t save you. And supplier risk isn’t limited to whether they can “play the game” by performing high quality work at the right time, in the right place, and for the right price. Your intuition about their ability to get the job done won’t protect you.
What should I be aware of?
Let’s be specific about the tactical, administrative, yet critical aspects of vetting assuming that a robust process for supplier identification and selection is in place. Once a company has uncovered a group of suppliers with which they might need and want to work and filtered the list to those few with the best capabilities and pricing, it’s time to dig into the risk details. Vetting dives deeply into a potential supplier’s identity, health, and culture.
Who are they?
As odd as it might seem, not every supplier is really who they claim to be so it’s an important element to confirm. A simple review of the supplier’s address and phone number, banking information, website, articles of incorporation, and tax identification will verify their claims before you enter this relationship. It’s also important to understand who the supplier has working with them – are any of their employees, executives, investors, board members, or customers sanctioned, politically exposed, or on a denied-party list. Finally, do any of the suppliers’ employees have a relationship with your employees – an undisclosed potential conflict of interest should raise a red flag.
Will they be around tomorrow?
Analysis of recent financial reports and a credit check will sufficiently confirm the supplier’s financial health. Checking for litigation underway or pending might take more digging but should absolutely be done. Engaging a supplier when their doors will soon be shut for financial or legal reasons is a mistake that can and should be avoided in all circumstances.
What do they believe?
Checking the news, social media posts, and the internet for negative press or complaints are the more straightforward tasks in understanding a supplier’s reputation. A company should also check for their alignment with the supplier’s code of business ethics, mission statement, and published value statements.
What’s the end game?
Supplier vetting is not a task for a specific point in time even if it is one of the initial steps in establishing a relationship with a supplier. Companies change and so do their suppliers thus an ongoing, periodic refresh of vetting should occur to best manage risks.
And the playing field continues to evolve as any good game should! Environmental, social, and governance (ESG) criteria have become much more prominent in the supplier relationship decision process. Digital workflow connections and data sharing generate entirely new areas of exposure. It is now important for companies to be conscientious in verifying suppliers’ ESG commitments while still generating the appropriate financial returns. And it’s critical for companies to protect themselves against cybersecurity threats while continuing to innovate, digitize, and connect with their extended supply chain.
Invest the time and resources to do the administrative work (scouting) so you can pick your extended supplier team carefully and stay in the infinite game!
Stinnett & Associates is not a CPA firm.