Feature Article : Financial Risk Assessment: Reducing New Supplier Risks
By: Michael L. Hetzel, VP/Americas Pro QC International
There are two major categories of supplier financial risks. First, there’s the economic condition of the supplier, where their financial health will directly impact their ability to finance ongoing operations and properly manufacture your product or component on time and with the lowest level of defects. At the extreme, there’s the risk of the supplier ceasing operations and leaving you with high switching costs, lost tooling and major supply disruptions.
The second category of supplier financial risk is in the area of supplier behavior from engineering and the launch of products through ongoing production. Included in this category are allocation of responsibilities under various contingencies such as sampling, tooling corrections and corrective actions and costs related to defective product populations and packaging problems.
There are several companies offering financial intelligence to enable your evaluation of the first category risk, while Pro QC offers Financial Risk Assessment (“FRA”) audits to enable your thorough evaluation of the second risk category.
A Pro QC FRA is comprised of an on-site audit of the following elements:
• Sampling, including charges for sampling, who pays for shipping samples, costs associated with correcting non-conforming samples and who pays the costs associated with expediting samples
• New program timing, including supplier processes for managing time to sampling and adherence to production schedules
• Product testing, including who pays for initial testing and certification (if required), documentation of conformance, and who pays for re-testing of non-conforming samples
• Production quality, including processes in place to control production quality, who pays for replacement of defects (including shipping, tariffs, disposal of defects, payment of end customer fines or other charges) and control of input suppliers and inputs
• Sorting and rework, including the supplier’s ability to conduct rework, segregation and containment of defective populations and who pays expedited shipping costs to reduce delays
• Cost of tooling, including responsibility for tool repair, refurbishment and replacement, special machinery investment and production line maintenance
• On time delivery, including the supplier production control systems and who pays for expedited freight costs for supplier caused delays
• Packaging, including the cost of packaging and who pays for redesigned packaging if the initial packaging fails during transport
How is an FRA different from simply asking the supplier to answer each question? The difference is that the supplier must show evidence for their response to each element to the auditor in order to receive a passing score. A potential supplier can say anything in response to your questions, but the verification by an auditor while on site is the key to risk reduction in these areas.
Reduce your financial risks when selecting new suppliers. For more information about the Pro QC Financial Risk Assessment audit, contact your account manager or contact Pro QC though our website at www.proqc.com.