Entity Level Risk Profiling

March 21, 2007 at 6:06 pm Leave a comment

I remember a story of a large auto manufacturer who hired a well known consulting firm to rationalize their vendor base.  After exhaustive scrubbing, decisions were made to cut suppliers and vendors of all types and sizes to aggregate spend for better prices.  The decision to cut one company in particular, a small seemingly irrelevant sole proprietorship, eventually shut the entire plant down for a full day.  That small vendor was the guy responsible for plowing snow from the plant entrances.  Without him, a full day’s production was lost and any savings attributed to this “cost cutting” project were lost immediately.

A vendor’s legal/tax status may on the surface appear to be irrelevant to you.  However, if you are a business of any material size you will have all types of vendors which carry inherent risks. I imagine that the high priced consultants dismissed the importance of this vendor based on spend and type of business.  Huge blunder.

A vendor’s type of business is an important indicator of it’s ability to deliver and support the products and services you purchase. While negotiating favorable vendor contracts can protect you from types of risks and liabilities there are inevitable pitfalls looming within your vendor base based on the types of businesses and the products and services offered. 

Issue / Problem Resolution

It is always painful and disruptive to business when problems arise with vendors.  Quality, responsiveness, on time delivery, cost to value, etc…. are great scorecarding measures.  However there is a big difference in the attitudes, incentives, and capabilities to perform and resolve issues between large, public, multi-national company’s versus a 2 employee sole proprietorship.  Bankruptcies, Liens, and Judgements have different impacts to different types of businesses.  A bankruptcy to a sole proprietorship means something completely different to you than a Worldcom or Delta Airlines. Those large companies continue operations with little visible impact to quality.  I would contend that quality indicators would have been visible long before the bankruptcy filing.  The sole proprietor could not escape so easily. 

Nature of Relationship

Are they a contracted vendor? 

Are the Principals of these vendors also your employees, board members or physicians of your organization? 

What is your spend dependency? Is this a minority owned business? 

Do they have access to employee/patient information? 

How dependent is a particular vendor on you? 

How dependent are you on the vendor to provide mission critical products and services?

Business Type  Definitions

  • Corporationsa group of people granted a charter legally recognizing them as a separate entity having its own rights, powers, privileges and liabilities distinct and separate from those of its members.
  • LLC’sA distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation (earnings are taxed only once).
  • Sole Proprietorships A sole proprietor is someone who owns an unincorporated business by himself or herself.
  • Joint VenturesAn enterprise in which two or more investors share ownership and control over property rights and operations
  • Public – a company which is permitted to offer its securities (i.e., stock, options, bonds, etc.) for sale to the general public, typically through a stock exchange
  • Private – ownership of a business company in two different ways—first, referring to ownership by non-governmental organizations; and second, referring to ownership of the company’s stock by a relatively small number of holders who do not trade the stock publicly
  • Non-Profit – an organization whose primary objective is to support an issue or matter of private interest or public concern for non-commercial purposes
  • For Profit – an organization whose primary objective is for commercial purposes
  • Multi-NationalOne that has a worldwide marketplace from which it buys raw materials, borrows money, and manufactures its products and to which it subsequently sells its products

Entry filed under: Uncategorized.

Vendor Risk Profiling: Long Overdue Props

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