MIT SCM Master's Candidates Romain Lucas and Pik Yien Lai, supervised by advisors Dr. Elenna Dugundji and Dr. Jafar Namdar, conducted a study that finds that small and specialized suppliers with low procurement spend represent a greater risk to a company’s revenue.
When business risk impact is measured qualitatively, there seems to be a tendency to associate procurement spending with the revenue or profits of the company. The company estimated that the total suppliers with a high-risk impact represent 73% of the total spend, while our method shows that true high-risk impact suppliers represent only 28% of the total spend. We also found that the company adopts part standardization as part of its sourcing strategy. Some of these parts are from small, specialized suppliers, which, because of their low spend in relation to the total procurement spend, were not labeled by the company as high-risk impact suppliers.
These key insights led the company to discover that the blind spots of small and specialized suppliers with low procurement spending that they had assessed as low-risk-impact turned out to affect 34% to 86% of the total revenue. The risk mitigation actions they had invested in were also minimal, which means if a disruption does take place, the consequences will be severe.