Key Takeaways

• Leading indicators help procurement teams anticipate supplier risks before they occur, enabling more proactive and strategic procurement decisions.
• Combining past performance (lagging indicators) with forward-looking data (leading indicators) provides a more comprehensive risk assessment for more strategic procurement decision making.
• Key leading indicator categories include business risk, safety, ESG factors, capacity, and cybersecurity, which help predict supplier stability and resilience.
• Leveraging technology, AI, and data analytics allows for more accurate risk modeling and scenario planning in the supply chain.
• Integrating leading indicators with procurement processes strengthens supply chain resilience, reducing the need for reactive crisis management.

‍

Introduction

Today’s supply chains face more challenges than ever before. Risk is not only everywhere, but also multi-faceted and complex. The challenge is not just a tier 1 challenge to address rather it is a tier N challenge.  

As a result, many companies have enhanced their supply chain capabilities by utilizing technology to not only monitor suppliers and map risk, but to use AI and analytical tools to assess leading indicators around business risk. This approach offers organizations the ability to assess the likelihood of specific issues at a supplier before they occur as well as model potential impacts when combined with other key information points.

In this post we will discuss why leading indicators are important as well as share some of the key types of indicators that procurement teams should pay attention to.

Why Leading Indicators Are Important

Traditional business and SCM/Procurement metrics measure performance from a prior period (week, month, quarter, year). These lagging indicators measure order fulfillment, cost, quality, lead-time, revenue, margin, customer satisfaction, etc., among other value drivers. Such traditional KPIs represent proven and accepted methods for measuring how a business has performed (past tense), and many organizations use this as a proxy for how they believe the business will perform (future tense).  

However, just as in the investment world, past performance is no guarantee of future performance, focusing only on lagging indicators will not necessarily translate into lower risk suppliers. As one seasoned CPO stated, “You cannot drive forward by watching the rear-view mirror alone.” This is why leading indicators around business risk, operational risk, safety risk, and R&D pipeline investment releases, among others, are important for providing a more comprehensive picture for strategic decision making in procurement.

As such, forward-looking SCM and Procurement organizations typically marry past performance metrics with leading indicators to develop a comprehensive view of how the supply chain may perform based on the expected demand profile. While there are no absolute crystal balls, statistical analysis tools can analyze such data to create robust models that predict the percentage of risk for adverse events and disruptions to occur.

When coupled with strong Sales Forecasting, S&OP, and Demand Planning, SCM/Procurement professionals can use leading indicators to more accurately establish category strategies, understand the markets, understand needs, source effectively, and ensure a consistent flow of goods and services to the company. Executed at the highest level, such a combined approach is able to build resiliency into the supply chain, reducing the risk of unexpected incidents, and ensuring consistent performance regardless of disruptions and risks that exist on the horizon.

Important Leading Indicator Categories

The following is a list of some of the most important types of leading indicators:

1. Business Risk Indicators

Overview

The predominant business risk indicators that many risk predication tools focus on are the financial and operational health of companies, including but not limited to payment history, credit, return on assets, quick ratio, % of labor turnover, management turnover, safety, inventory turns, and lead-times. These tools analyze patterns for correlation (if X then Y) and offer a percentage or odds that a company may experience a significant business impact up to and including bankruptcy within a period of 6 months or a year on average. These indicators provide valuable information that a category management or supply chain organization can use when planning production and supply to prevent disruptions and proactively take action well before any situation becomes a crisis.  

Examples of Business Risk KPIs:

• Financial Stability: Tools like Credit Safe provide predictive indicators based on historical financial data, helping forecast the probability of issues in the next 6-12 months. Financial stability, even if the risk of a full shutdown or bankruptcy is low, may indicate a particular supplier is incapable of or challenged to make the required investments in material, capacity, workforce development, etc., to maintain their performance. All of these are worthy information points for a SCM/Procurement professional to verify, consider, and incorporate into decisions and strategies.
• Adverse Media: Negative press or public scrutiny could indicate a supplier's operational or reputational risks that may influence future viability of the supplier as part of a buyer’s supply chain. Adverse media information is therefore useful for SCM/Procurement to take into account when hiring suppliers.

2. Safety Risk Indicators

Overview

Safety indicators provide insight into a supplier's operational safety practices, impacting their ability to meet demand without delays caused by accidents or lost workdays. Poor safety performance may impact a company’s workforce availability and therefore capacity, as it may be an indicator (symptom) of other financial and operational issues including but not limited to poor workforce development, high insurance costs, fines, poor machine maintenance, lower productivity, and high workforce turnover. Again, all important information that, when added to business risk and other evaluation criteria, provides valuable data and insight for SCM and Procurement teams to make more informed decisions and better strategies, resulting in sustained performance and reduced crisis management.

Examples of Safety Risk KPIs:

• Worker Training and Competency: Well-trained workers minimize safety risks and contribute to consistent production.
• Incident Management and Response: A supplier's ability to handle incidents proactively is a key predictor of their capacity to maintain consistent operations.

3. ESG Indicators

Overview

ESG indicators assess how well suppliers adhere to environmental, social, and governance standards. Leaders in this space demonstrate a focus on innovation, waste reduction, and investment. These are strong indicators of a company’s values and priorities. Often, in today’s complex supply chains, leaders demonstrate their ability to ensure continuity of supply by actively reducing use of the raw materials, energy, and other items that may pose risks and or lead to disruptions. Having strong social and governance processes also indicates healthy operational efficiency, which is a good indicator of supplier stability.

Examples of ESG KPIs:

• ‍Environmental Impact (Carbon Footprint): A supplier’s environmental policies can affect their long-term viability, and stricter regulations may impact operations.
• ‍Social Responsibility: Worker rights, diversity, and community impact are forward-looking indicators of a supplier’s stability.

4. Capacity Indicators

Overview

Capacity indicators are key leading indicators for determining whether a supplier can meet future demands. Assessing a supplier's current capacity utilization, lead times, workforce availability, etc., indicates their ability to scale up and/or maintain production levels to fulfill upcoming orders.

Examples of Capacity KPIs:

• Capacity Utilization: Typically, this is expressed as a percentage to indicate how much capacity (the availability to produce before requiring more resources) is available. A supplier operating at 80% has 20% in reserve to manage additional demand. A supplier at 100% either needs to conduct Continuous Improvement to free up additional capacity or invest in additional resources (Plant, Property, Equipment, Labor), otherwise they risk pushing out lead-times and failing to meet customer demand.
• Lead Times: While lead times can be both a lagging and leading indicator, they can be used in a forward-looking manner especially if robust real (or near real) time supplier profiles are maintained. This involves assessing whether suppliers are consistently meeting their lead times or, more importantly, undertaking projects to shorten their lead times, which helps predict their ability to meet future orders.
• Workforce Availability and Safety: A supplier’s workforce stability and safety metrics can be important as a proxy for available capacity. A strong safety profile (e.g., minimal lost workdays) is a leading indicator that the supplier will have a reliable and available workforce to meet future production needs.
• Access to Raw Materials: Although not technically a KPI, assessing the availability of raw materials can be a critical element for predicting capacity. If a supplier has reliable access to necessary materials, it's more likely they can meet future demand. Many companies will use tools which look at various materials markets and the futures which try to measure demand, availability, and cost.  

5. Cybersecurity Risk Indicators

Overview

Cybersecurity risk is a potential leading indicator that could impact a supplier's future viability. With increasing reliance on digital infrastructure, cyber threats can affect a supplier’s operations and service delivery. This metric may be particularly important depending upon the degree of electronic integration within the supply chain. If forecasts, demand, and purchase orders are enabled through an electronic exchange, the impact of a cyber event disrupting this information value stream may be devastating. No less so is the impact on intellectual property protection. Losing control of or poor hygiene around cybersecurity with suppliers exposes your critical product and service information to potential competition.

Conclusion

It’s important for procurement organizations to drive their supply chain like a high-performance sports car, using all available information to plan, design and execute. Balance your rear-view mirror KPIs with forward looking leading indicators to realize greater value through better planning, strategy, and execution. Early visibility provides an advantage to be strategic versus reactive and crisis management focused. Use of leading indicators in procurement allows stakeholders to act in aligned concert across the extended enterprise to optimize results, plan for production, and plan for information flows to drive the intended results

However, remember that all the data indicators mean nothing if teams do not integrate them with their processes, harness the right tools, and take action. The first step to doing so is benchmarking your data. In our next post we will discuss the power of benchmarking to show how strategically evaluating where your supply chain and company is compared to your competitors and other industries, can lead to powerful continual improvement cycles.

Avetta is a SaaS software company providing supply chain risk management solutions. Avetta’s platform is trusted by over 130,000 suppliers in over 120 countries. Visit Avetta.com to learn more about our supplier prequalification solutions.  

‍