March 2018
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Case - Assessing Supplier Risk

Assessing Vulnerability vs. Probability

A small technology company was on the verge of major success. They had created a superb product that outclassed the competition. A prestigious customer had placed a major order. The order had been big enough to fund the establishment of supply networks and start production without the need to raise more capital. The firm was planning its next marketing push, hiring staff, and developing new products. They were aware of their risks and the future looked bright.

If their risk assessment had assessed their vulnerability instead of the probability, they would have been less sure about their future. They did not see their reliance on one main customer as a threat to their existence. They were aware of their customer’s activities and knew that the customer faced significant risks, but the firm failed to assess their own vulnerability to relying on one customer.

The customer made a series of bad decisions that bankrupted both firms. Like most crises, it started slowly and then went very quickly. The firm sent a bill that the customer did not pay. After asking for an extension, promising to pay, and failing to do so, the customer offered to pay the bill in installments. The rest of the story fits a pattern as sad as it is common.

The risk assessment lesson, as regards vulnerability, is that probability was not an effective unit of measure. The customer was an established firm, industry leader, and had always paid on time. Past performance indicated that they would continue to pay on time.

Assessing probability failed to reveal the firm’s complete vulnerability to customer payment problems. They had taken no measures to protect themselves. They did not even have procedures in place to identify potential problems, until they turned up as late payments in the billing system. In this case, one late bill made everything else they were doing irrelevant. They had failed to discover their complete vulnerability until it was too late.

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