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New Approach: Supplier Evaluation Frequency Formula

Supply chain risk management helps suppliers avoid a disaster threat. To ensure the safeguards stay current, suppliers should be evaluated at least annually.  However, more frequent evaluations may be necessary based on threat probabilities and other factors. You have to figure out if there are threats hiding behind the doors of certain supply sources.

For example, it’s not uncommon to find that a single source supplier in the third-tier is a source for multiple suppliers in lower tiers. When the single source in a low-lying area stops operating due to massive flash floods, all of its customers in the lower tiers will experience delays as they scramble to get parts from alternate suppliers who may or may not be have them immediately available.

Clearly, a plan to avoid a disaster risk management based on the threat factor is not sufficient. We need to consider a frequency formula that include other factors, such as supply item criticality, and United States anti-human trafficking regulation compliance.  This would help in determining how often primary and alternate suppliers should be evaluated within a year to ensure their availability and regulation compliance.

To build the formula, let’s start with the annualized rate of occurrence (ARO) that has been used in a risk management plan. This gives a threat probability value on the number of times a specific threat could occur within a given time frame. 

In a simplistic scenario, the probability value is set at 1.0 for a supply warehouse facility (asset) that a fire threat could happen within a year. If the single loss expectancy (SLE) is set at $230K, the annualized loss of frequency (ALE) is $230K per year.  Setting the value at 0.1 implies the warehouse might suffer from a big fire once every ten years.  The ALE is $23K per year. In both cases, the frequency is low.  

Probability

Frequency

0.01

Once every 100 years

0.1

Once every 10 years

1.0

Once a year

3.0

Three times a year

Some scarce metals or minerals that the United States imports to build electronic parts may be plentiful in foreign countries. Reliance on a single source in one country is not a good idea. The country may be prone to major earthquakes, tsunami, political instability or a myriad of other threats. 

Assign a weight to each level of the item criticality factor: 

Weight

Criticality

Meaning

1

Low

Alternate suppliers in safe locations are available to provide scarce minerals.

2

Medium

Alternate suppliers may not be in safe locations depending on geography and politics

3

High

Alternate suppliers are not in safe locations

Setting weight values for United States anti-human trafficking regulation compliance would not be an easy task. The State Department has ranked countries into three tiers: fully complaint, not fully compliant, and not compliant with the Trafficking Victims Protection Act's (TVPA) minimum standards. 

Let’s suppose the criticality of certain supply items has a weight of three.  The anti-trafficking compliance factor has a weight of two.  Add the weights and then multiply the total and the threat probability of 1.0 to get a weighted threat probability value of 5.0. This would imply the supplier may need to be evaluated five times or more a year.

By doing the math, OEMs can get a better handle on the risks that each of their suppliers brings to their own supply chain. Try it out and let us know what you find in the comments section below.  Are you doing supplier evaluations often enough?

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