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43Ways to Maintain Sustainable System of Managing Reputational Risks Within Suppliers Relations*
Taisiya IZNOVA
Economic Analysis Department, Financial University, Moscow [email protected]
Olga EFIMOVA, Ph. D, Professor
Economic Analysis Department, Financial University, Moscow [email protected]
Abstract. Reputational risk is the main threat to one's ability to maintain sustainable development because it influences company's long-standing position. However, very little empirical research has been carried out to determine how to manage reputational risk using sustainability reporting. This paper addresses the problem of reputational risk within supplier relations system. The paper proposes an approach based on identification of key suppliers to understand their needs and expectations and development of specific recommendations on disclosure. In the paper we propose a methodology of assessing reputational risk in supplier relations system. For this purpose it was proposed to divide suppliers depending on geographical criteria and duration of cooperation with the client company. Also an approach was proposed to select expectation criteria and indicators. It must be underlined that by reputational risk we understand the probability that reputation will suffer, and direct economic loss will follow. That loss can be regarded as reputational loss. Having assessed probable reputational loss it seems reasonable to propose indicators to disclose. Such indicators are proposed for both the internal accounting system (to manage reputational risk) and for disclosure to third parties. Results of the assessment showed significance of suppliers relationship system control and represented indicators to disclose.
Аннотация. Репутационный риск представляет собой главную угрозу для способности компании к поддержанию устойчивого развития, поскольку данный риск оказывает влияние на долгосрочное положение компании. Однако проведено крайне мало эмпирических исследований с целью определить, как управлять репутационными рисками с помощью отчетности по устойчивому развитию. В настоящей статье рассматривается проблема репутационных рисков в системе отношений с поставщиками.
В работе предлагаются подход, основанный на определении ключевых поставщиков с целью идентификации их потребностей и ожиданий, и разработка конкретных рекомендаций по раскрытию информации. В исследовании предложена методология оценки репутационных рисков в системе отношений с поставщиками. Для реализации данной цели было предложено разделить поставщиков в зависимости от географического критерия и длительности сотрудничества с компанией клиента.
Также было предложено установить критерии ожиданий и их показатели. Следует подчеркнуть, что под репутационным риском мы понимаем вероятность ухудшения деловой репутации и последующие прямые экономические потери, которые можно отнести к репутационным потерям. Оценив вероятные репутационные потери, представляется разумным предложить показатели к раскрытию. Такие показатели предложены для обеих систем - внутреннего учета (в целях управления репутационными рисками) и раскрытия информации для заинтересованных лиц. В результате проведенной оценки показана значимость контроля за системой отношений с поставщиками и предложены показатели к раскрытию.
Key words: Assessing reputational risks, suppliers relationship system, stakeholder expectations.
* Разработка устойчивой системы оценки репутационных рисков компании в отношениях с поставщиками
introduction
Sustainable development has been defined in many ways, but the most frequently quoted definition, which has been proposed by World Commission on Environment and Development (1987), is that sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. As it was marked by Steurer (2002) Brundtland Report outlined sustainable development as an environmental concept for the macroeconomic level.
Applying this definition regarding corporation limits we realize that on one hand corporations are definite parts of the world economy’s sustainable development process, on the other — they are economic units which face the necessity to maintain their own sustainable development.
As R. Steurer and M. E. Langer (2005) underline in their research from a historical point of view, shareholders relations management (SRM) emerges as the latest stage of an old research tradition which addresses various forms of business-society relations. Numerous works in this tradition can be found throughout the 20th century (Clark, 1939; Bowen, 1953; Heald, 1957; Walton, 1967). However, while neoclassical economists saw firms as closed systems only concerned about their shareholders, those focusing on business-society relations opened the firm up to its societal context and, thus, positioned themselves beyond the neoclassical mainstream (Dill, 1958; Andriof et al., 2002) — at least until the mid 1980s. In 1984, Freeman’s (1984) book Strategic Management: A Stakeholder Approach established SRM as a popular research field.
Based on Adam Smith, the neo-classical economic paradigm perceives firms as more or less closed systems with their only concern being the satisfaction of their shareholders. However, from the early 1980s onward, a new business-society paradigm unfolded, “articulating the need for business to be, in some respect, responsible to society” (Andriof et al., 2002). As it has been argued by Cragg and Greenbaum (2002), a critical point of this new paradigm is that “corporate officials confront the world as an arena of opportunities and constraints in relation to organizational goals”, whereby the definition of this arena strongly depends on stakeholder interests.
Edgley (2010) underlines that firms seem to have a pressing need to understand and meet stakeholder information needs, perhaps because firms need to better report information with a view to “inform or influence its target audience”.
As it has been demonstrated through numerous researches, the possibility of company to develop sustainably is determined by its ability to satisfy all the stakeholders groups and to keep the balance of their interests.
Suppliers relationship system and its reputational risk dramatically influence client company opportunities to maintain sustainable development for following reasons:
• Reputational risk is the main threat to sustainable development ability because the considered risk influences company’s long-standing position;
• Effective suppliers relationship system can minimize informational influence and manage expectations;
• Only by applying deep consideration system of suppliers perception client company is able to maintain long-lasting relationship, when all of the parties get their benefits.
1.1 context
The system of corporate reporting is a subject to constant development, caused by ever-changing expectations and demands on the part of stakeholders, particularly shareholders and investors. At the same time, the demands of this group are ultimately aimed at building the effective relationship system with a diverse group of stakeholders — employees, customers, suppliers, local communities and the media. By effective relationship we mean a system of relations where the costs are predictable and controllable, and cooperation leads to the increment of company’s value and contributes to the sustainable development of the company.
Reputational risk is the main risk, a threat to a system of effective relationships with stakeholders, and corporate reporting in its turn is the main tool for controlling this risk. At present, more and more companies realize that their corporate reporting can be a powerful tool that allows maintaining a dialogue with stakeholders, thus solving a critical problem of managing reputational risk.
Economist Intelligence Unit’s research (2005) demonstrated that reputational risk is at the top of risk managers’ list of priorities; it is perceived as substantially more significant factor than regulatory risk and human capital risk. Though the reputational risk has been ranked that high, the topic still remains uncovered. Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to control systems to supply chains
to political instability to natural disasters. Eccles (2007) underlines that, in the absence of agreement on how to define and measure reputational risk, it has been ignored.
The problem of reputational risk as category is widely covered by many authors (Arif Zaman, Jenny Rayner, Alex Harris). This paper addresses the problem of reputational risk within supplier relations system. The paper proposes an approach based on identification of key suppliers to understand their needs and expectations and development of specific recommendations on disclosure.
1.2. RESEARCH DATA
In the paper we propose a methodology of assessing reputational risk in supplier relations system. To develop this methodology we have analyzed the sensitivity of 9 groups of suppliers. To provide the analysis we have reviewed 15 suppliers: 30% of them were local; 13% were global overseas and 57% were overseas local suppliers. 13% of suppliers structure were agents, 87% were direct suppliers. Constant suppliers occupy 30%, new suppliers — 13%, existing — 57%. Suppliers provide the company with chemical raw materials and equipment.
1.3. HYPOTHESIS DEvELOPMENT
The above discussion on the value of information for managing reputational risks helps in formulation of the following hypotheses:
Hypothesis 1: Status of supplier company and duration of cooperation with the client company influence the sensitivity of information perception.
On the first stage we propose to analyze company suppliers’ structure depending on their geographical position and duration of cooperation with the company. Expectations from global suppliers are always higher than those from local partners. Yet making relationship with global suppliers lays risk-free basis for client company supply chain, while selecting international local suppliers provides added value.
Hypothesis 2: Status of the supplier company and duration of cooperation with the client company define threshold of sensitivity.
On the second stage we propose to use estimation of risk probability. Since reputational risk constantly influences the business, its minimal value is proposed to be (0, 1). Analyzing informational criteria we basically use interval (0, 1) for different suppliers groups. If compliance with proposed criteria has critical importance for new or constant supplier,
than probability of reputational risk occurrence can stay constant for local and overseas suppliers. If geographical characteristic of supplier has critical influence, than probability of reputational risk occurrence can stay constant for new and constant partners for example.
Hypothesis 3: Suppliers sensitivity to client involvement into cases where other stakeholders’ rights are infringed, prospects of cooperation are not clear and can only be assessed with interval value.
Hypothesis 4: Reputational losses differ from reputational risk, loss significance can be assessed.
Among most common reputational losses we define the situation when quality performance will be insufficient; probability of price increase; refusal to cooperate; failure to meet contract obligations on delivery.
Hypothesis 5: Internal accounting indicators can make significant contribution to identifying reputational risk.
A company willing to decrease reputational risk has to provide internal analysis of supplier relations practice to assess whether an inappropriate response is taking place.
Hypothesis 6: External disclosed indicators can make significant contribution to managing expectations which form reputational risk.
2. methodology
2.1. FIRST STEP: ANALYziNG SuPPLIERS structure conditionally on certain
CRITERIA
For the purpose of identifying the expectations of suppliers, which bring to reputational risk occurrence, we propose the following classification of suppliers — we distinguish three main groups depending on duration of cooperation with the company:
• New suppliers;
• Existing suppliers;
• Constant suppliers.
The expectations of suppliers also must be adjusted depending on the geographical characteristics:
• Local suppliers;
• Global overseas suppliers;
• Local overseas suppliers.
Local suppliers are those, whose country of origin matches with client company country; global overseas suppliers are widely admitted as “global suppliers”, have widely diversified branches and provide supplies all over the world. Local overseas suppliers are those, whose country of origin differ
from client company country and who do not have that much experience in export activity.
The main feature of the new suppliers is the lack of experience of working with the client, hence the expectation is automatically distorted in the direction of overstating or understating.
Usually in the relations with new suppliers concerning main points (project price, client qualification, transparency, etc) reputational risk level is on its maximal value, as this group is not aware of customer routine procedures in relationship with suppliers. When it comes to contract signing procedures or additional requirements from client, the risk level is a bit lower than for existing and constant suppliers.
Existing suppliers already have experience of working with the client, their expectations are generally already adjusted, but they have not yet moved into the category of constant, hence they have high expectations about the prospects of cooperation.
Constant suppliers are aware of all the features of cooperation with the client, and because of the relationship degree, customer reputation affects them deeply, so this group is most sensitive to changes associated with the reputation of the client, as well as to the prospects of cooperation, as they expect to be the first partners to receive information about upcoming structural, industrial changes of the client, new business directions, new contract possibilities.
If the customer company is a global client, who provides IFRS/GAAP reporting statement and leads finance activity in Europe or the U.S., then the requirements are becoming stricter. In this case it is really complicated for local suppliers to follow international standards and to meet the needs of global clients. Local suppliers’ prices are usually lower and the products are less competitive, while their expectations are minimal. Local suppliers are less susceptible to the news about the client company, as their own reputation is not that significant.
Local suppliers are able to respond more flexibly to the new order inquiry, if necessary, to make changes to an existing one, due to shorter period of transportation. The quality system is also easier evaluated in relations with local suppliers, as both parties lead their activity within one system of standards.
Global overseas suppliers have high expectations in every aspect — from selecting the right supplier to the allegations of the complaint. Also, these providers do not tend to individualize products that provide related services which are not regulated under the contract.
Contracts with overseas local suppliers bring the highest level of risk, so the services of agents can be used to mitigate the customers’ risks. It is reasonable to set the amount of costs of work with overseas local suppliers, highlighting the amount of agency contracts. The peculiarity of the relationship with the agents is that, usually the agents supply more than one type of products or services, and they are also interested in signing and bringing to the end of the transaction under any circumstances. Carrying collaboration with overseas local suppliers agents eliminate the risks, as the resolution of conflicts due to different technical and safety standards is the task of the agent.
2.2. SECOND STEP: IDENTIFYING SuPPLIERS expectations AND ASSESSING RISK SIGNIFICANCE
In order to provide suppliers relationship analysis it seems reasonable to identify the following 8 factors. Failure to meet expectations on proposed factors can probably bring to reputational risks occurrence (Appendix 1).
1. Placing order procedures is considered to be the first stage in negotiation process which proves seriousness of client’s intentions. Setting unfeasible deadlines to provide proposals, inexact order and timing of order requirements demonstrate client’s reluctance to select the most appropriate supplier.
Suppliers in their turn set their expectations while carrying preliminary contract discussions. The high value has been placed on such factors as: quantity of client inquiries which have been made before accepting supplier offer; sufficiency of client projected budget relative to market price of work required; client qualification as a customer.
Evidently that having received price inquiry without further contract conclusion is interpreted by supplier as market research carried by the client. At the time of next inquiry the price will probably increase, so it seems necessary to keep the statistics of price inquiries which have not lead to contract conclusion. Reasonable assumption is that when inquiry appeals once the probability of reputational risk occurrence has its minimal value which is 0,1%, the probability increases simultaneously with further appeals, reaching its maximum value (100%) after the third client inquiry.
Assessing project benefits the supplier analyses adequacy of client projected budget relative to costs required; when the current/market price ratio is on low level it implies higher expectations on further
collaboration or probability that product/service quality will be not sufficient in order to provide supplier margin. If the projected budget/current market price ratio exceeds or equals 1, client is free to choose the best supplier, reputational risks are at minimal value 0,1. 0,70-0,65 gap is valid when supplier has intention to sell the product at its cost value, which can be explained by one of following reasons — higher expectations concerning new projects, supplier cash flow gap or product illiquidity. When the current/market price ratio is lower than 0,65, probability of reputational risk increases up to maximum 1, because such ratio indicates that product quality is not sufficient.
Analyzing “client qualification as a customer” criteria we assess sufficiency of resources required to carry purchasing procedures. The list of required resources is defined by industry but includes existence of qualified employers, capable of making clear product technical requirements, carrying the delivery process, obtaining all the license, patents, carrying similar purchase experience. All the above factors presence reflects in documentation package; this package sufficiency can be limited to minimal, enhanced or provide additional data on client business.
2. The second proposed factor is transparency of supplier selection and approval policy. The factor is valuable as supplier has to have clear vision of criteria required to collaborate with client. If company is looking to provide additional value and selects the supplier whose activity does not respond to client supplier selection policy, following risks must be recognized.
To provide order details transparency, the data on suppliers’ requirements, consideration of submitted applications and sizing up deadlines are to be publicly available.
So that if required data is available, the probability of reputational risk occurrence is at its minimal value, if transparency is incomplete the risk probability is 0,3-0,5. If the price is inquired in low-transparent way, risk probability achieves 0,8 level.
3. Supplier approving and contract signing procedures duration. Long approving, control and contract signing procedures are peculiar to large corporations. If waiting period makes the contract performance impossible, disrupts production plan or brings to supplier significant losses, reputational risks increase. When assessing possible reputational losses one should realize that supplier can fail to perform the contract.
In every sphere there are routine supplier approval and contract signing procedures. The closer
duration to its extreme value, the higher reputational risks are. To manage such expectations the company management can publish required information on how long it takes to approve the contract through internal control system, underlining time required for new suppliers.
4. Quality of contract obligations fulfillment. If main contract obligations (first of all payment terms) are not fulfilled properly, this brings to reputational risks occurrence. When a client makes payment before the agreed period it leads to increase of supplier’s trust, but at the same time it raises suppliers expectations about payment terms practice. Still if the client violates payment term having tentative agreement it inevitably increases reputational risks. Reputational losses depend on payment terms.
5. Additional requirements, which are not regulated by contract. As the contract is being performed client can make demands concerning transportation conditions, time of delivery, payment terms, and documentation process. One should realize that if supplier’s expenditure required to satisfy these demands is higher than expected, supplier will reimburse it subsequently.
If the client doesn’t make such kind of demands, reputational risk is on its minimal value, but in practice it is very rare. When such demands do not damage the interests of the parties, reputational risks will mainly influence the relationship with constant suppliers, where agreed routine procedures exist.
When additional demands do violate the interests of the parties, reputational risks most insignificantly appear in international local suppliers relationship, as for such suppliers it is also routine when international client makes lots of additional demands, which are regulated by the law of client’s country.
6. Issues of relationships with other suppliers (litigation, payment defaults, etc.). The practice of relationships with other suppliers demonstrates the dangers that threaten the supplier. Mainly this contributes to high-profile events such as termination of contracts, defaults and subsequent legal proceedings.
7. Relationships with other groups of stakeholders, which may affect the supplier directly. Layoffs, termination of individual contracts with clients, failure to comply, environmental and social security, unreasonable credit policy, differences among the major shareholders and investors, facts of fraud connected with the client company’s activity — all this could have an impact on the customer’s ability to meet its obligations as the seller.
8. Prospects of cooperation: Suppliers who made a single-time delivery may have high expectations only about upcoming contracts. It is important that the supplier is informed of the results of the first delivery, aware of the reasons for refusal if another order is not planned. If prospects of cooperation are not quite clear, suppliers expectations are not satisfied, customer company can face future loss, if faces with the need to carry out an order from the supplier. To avoid such a situation, it is important to inform the provider about the prospects of the order, and the reasons of refusal.
2.3. THE THIRD STEP: ELIMINATING POTENTIAL reputational LOSSES AND INDICATORS TO DISCLOSE
We need to single out the main areas of reputational risk in relations with suppliers. The main method of minimizing is the constant monitoring of problematic issues and disclosure of information in case of need. By disclosing we mean creating analytical forms for internal analysis to manage the threats as well as providing information for external users to manage expectations.
After analyzing the stages of negotiations with suppliers criteria were identified to determine their expectations and possible future losses defining reputational risk. In order to minimize the risks key performance indicators that allow the client company to control the reputational risks were proposed. Internal accounting indicators are intended to provide the company management with selfassessment system, which is the way to manage reputational risk on the stage when the risk is still manageable. For example, by assessing its own staff qualification, adequacy of budget/market ratio etc., the company’s management gets an opportunity to understand possible reputational risks.
Indicators to disclose are necessary to manage stakeholders’ expectations. By revealing costs on long-terms contracts and routine admissions company can influence expectations hereby taking control of reputational risks.
Proposed data is shown in Appendix 2. Assessing supplier relationship system, following losses seem most common in practice: failure to meet contract obligations on delivery time; probability that quality performance will be insufficient; probability of price increase; refusal to cooperate. To avoid these losses, the suppliers expectations must be adjusted through the disclosure system, at the same time internal indicators must be analyzed to change relationship style where it is critical.
The proposed methodology can be applied to most significant suppliers, which are important to the client company because of high quality or internal value added, where it is critical to safe long-lasting relationships.
3. discussion, concluding comments
AND LIMITATIONS
The paper explores suppliers’ informational expectations and perceptions of customer behavior. Findings suggest probability of reputational risk occurrence and possible reputational losses.
Managing reputational risk is a complex challenge for every company. In the paper we propose part of supplier relationship analysis methodology. Final purpose of such analysis is to make a contribution to minimizing the risk.
On one side suppliers themselves bring the risk into company’s supply chain, on the other the system of supplier relations is subject to reputational risk. If risk level is not an object of proper control, losses can be enormous.
In the article we have examined suppliers. The problem is that many client companies underestimate the importance of relationship with suppliers, but this relationship dramatically influences client company’s own clients and whole business.
Reputational risk increases when stakeholders’ expectations are higher than reality, so the best way to manage the risk is to manage expectations. By improving disclosure policy the company can manage expectations.
The best way to manage expectations about standards and procedures is to disclose time usually required; about budget sufficiency — price justification; about conflicts of interests — reasons and following policy details.
Limitation 1: For sure every company has its own limitations of sensitivity to business events. Proposed expectation criteria can be changed as well. To carry this research we highlighted general positions. Every expectation area can be assigned with its share (specific weight) to assess aggregated reputational risk indicator.
Limitation 2: List of reputational losses can be specified. In practice a deep analysis cannot be applied to all suppliers, but to those whose contribution to value creating process is the most substantial.
The purpose of the research is to realize reputational risks in connection with client company behavior. Reputational risk is on its maximum in cases when:
• Quantity of client inquiries exceeds 3 times for all suppliers groups;
• Sufficiency of client projected budget relative to market price of work required is less then 0,65;
• Minimal data on client company profile is available (constant suppliers is the only exception);
• Order details transparency is not sufficient. In constant suppliers relationship risk occurrence probability is indicated as 0,75;
• Duration of supplier and contract approving procedures exceeds routine admissions (for all suppliers groups) and is less than admissions for new suppliers;
• Failure of contract obligations takes place (concerning payment terms; acceptance procedures of product/services; making claims);
• Client company makes requirements that infringe interests of the parties (new suppliers is only exception);
• There are no visible prospects of cooperation.
To propose reputational risk analysis system we can
define several expectations areas, where reputational risk level can be assessed only as an interval:
• Analyzing influence of conflicts in relationships with other suppliers on concerned supplier relationship system, we can say that interval value will start with 0,3-0,6 (depending on supplier group) and complete with maximum 1 value;
• Assessing influence of conflicts in relationships with other groups of stakeholders interval value will start with 0,2-0,6 (depending on supplier group) and complete with maximum 1 value;
• When prospects of cooperation are not critical the interval value will also depend.
To manage reputational risks company should provide independent self-assessment procedures. That is why we propose to define internal accounting indicators, to be implemented to assess how company fulfills its own obligations and how conflicts within other
stakeholders relationship can influence the suppliers business from supplier’s point of view.
We also propose informational indicators to disclose, which are to explain improper actions of client company and to minimize stakeholders’ reaction.
By developing the system of reputational risk controlling means and developing an independent self-assessment system, company is to answer the question “What do stakeholders really think?” To implement this purpose company has to assess step by step how its business attitude is being perceived by stakeholders. Approach which makes its contribution to realization of company’s influence on other stakeholders groups is the only proper approach to maintain sustainable development.
REFERENCES
Zaman A. (2004), Reputational Risk: How to Manage for Value Creation, Financial Times Pearson Education.
Rayner, J. (2004), Managing reputational risk: Curbing threats, leveraging opportunities, Vol. 6, Wiley.
Eccles R. G., Newquist S. C. and Schatz R. (2007), “Reputation and Its Risks”, Harvard Business Review, February 2007.
Economist Intelligence Unit (2005), “Reputation: Risk of risks’ [online at: http://www.eiu.com/report_dl.asp?mode=fi&fi=1552294140. PDF&rf=0].
“GRI Guideline G4 (developing version) “ (2012) [online at: www.
globalreporting.org].
“Report of the World Commission on Environment and Development” (1987) [online at http://www.un.org/documents/ga/ res/42/ares42-187.htm].
Steurer R., M. E. Langer, Astrid Konrad, Andre' Martinuzzi (2005) “Corporations, Stakeholders and Sustainable Development I: A Theoretical Exploration of Business-Society Relations”, [online at http:// www.environmentalmanager.org/wp-content/uploads/2008/01/ corporations-stakeholders-and-sustainable-development.pdf].
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Appendix 1.
Suppliers expectations Probability of reputational risks occurrence for different groups of suppliers
Expectations area Expectation criteria New Existing Constant
Indicators Local Overseas global Overseas local Local Overseas global Overseas local Local Overseas global Overseas local
Placing an order procedures Quantity of client inquiries 1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
2-3 0,5 0,5 0,4 0,6 0,6 0,5 0,8 0,8 0,8
>3 1 1 1 1 1 1 1 1 1
Sufficiency of client projected budget relative to market price of work required n 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
0,85-1 0,3 0,3 0,3 0,25 0,25 0,25 0,2 0,2 0,2
0,65-0,85 0,5 0,65 0,7 0,45 0,45 0,45 0,45 0,45 0,45
<0,65 1 1 1 1 1 1 0,9 1 1
Client qualification as a customer Min. data on company profile 0,75 0,95 0,85 0,45 0,65 0,55 0,15 0,15 0,15
Extended data 0,3 0,3 0,1 0,2 0,2 0,1 0,1 0,1 0,1
Additional data 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Transparency of supplier selection and approval policy Order details transparency Complete 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Incomplete 0,4 0,5 0,3 0,4 0,5 0,3 0,3 0,4 0,2
Unicast 0,9 0,9 0,9 0,9 0,9 0,9 0,75 0,75 0,75
Supplier approving and contract signing procedures duration Compliance of approving duration with routine admissions existing in the sphere Less than minimal required 1 1 1 0,3 0,3 0,3 0,2 0,2 0,2
Minimal required 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Maximum required 0,3 0,3 0,3 0,4 0,3 0,3 0,5 0,3 0,4
Failure to meet deadlines 1 1 1 1 1 1 1 1 1
Quality of contract obligations fulfillment Payment terms; Acceptance procedures of product/services; Making claims system; Fulfillment 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Fulfillment within max agreed period of time 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25
Non-fulfillment 0,9 0,9 0,9 0,9 0,9 0,9 1 1 1
Review of Business and Economics Studies Volume 1, Number 1, 2013
С-П
Suppliers expectations Probability of reputational risks occurrence for different groups of suppliers
Expectations area Expectation criteria New Existing Constant
Indicators Local Overseas global Overseas local Local Overseas global Overseas local Local Overseas global Overseas local
Additional requirements, which are not regulated by contract Timely informing on changing circumstances; Timely inquires on additional demands; Absence 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Requirements that do not infringe interests of the parties 0,3 0,3 0,3 0,35 0,35 0,35 0,40 0,40 0,40
Requirements that infringe interests of the parties 0,5 0,6 0,4 0,9 1 0,9 1 1 1
Conflicts of interest in relationship with other suppliers Withdrawal of significant batch from the market 0,4-1 0,6-1 0,4-1 0,4-1 0,4-1 0,4-1 0,3-1 0,4-1 0,3-1
Repudiation of significant contracts
Payment defaults
Litigations
Conflicts of interest in relationship with other groups of stakeholders Significant layoffs; Termination of significant contracts with clients; Failure to comply, environmental and social security; Unreasonable credit policy; High scale investment projects; Conflict of interest among the major shareholders and investors; Internal level of fraud within the client company 0,2-0,3 0,3-0,4 0,2-0,3 0,2-0,3 0,3-0,4 0,2-0,3 0,5-1 0,6-1 0,5-1
Prospects of Cooperation Prospects of orders Joint projects Commercial terms of delivery Attractive 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Not principal 0,2-0,4 0,2-0,4 0,2-0,4 0,3-0,5 0,3-0,5 0,3-0,5 0,8-0,9 0,8-0,9 0,8-0,9
No visible prospects 1 1 1 1 1 1 1 1 1
Review of Business and Economics Studies Volume 1, Number 1, 2013
Appendix 2.
Stage of negotiation process Expectations Criteria Potential Losses Internal accounting informational indicators Informational indicators to disclose
Placing an order procedures Quantity of client inquiries In case of placing an order, the price increases; Supplier can refuse to make business with the company The number of price requests, which did not lead to signing of contract Ordered product requirements
Sufficiency of client projected budget relative to market price of work required Probability that quality performance will be insufficient; Analytical comparative figures; Justification of price; Projected orders in this area;
Client qualification as a customer Improper performance of obligations; Litigation; Staff experience in procurement activity; Extended information company profile and the state of the resources;
Transparency of supplier selection and approval policy Order details transparency Supplier can refuse to make business with the company Deep analysis of supplier approval policy Percent of costs on suppliers, which have signed long-term contracts; Percentage of costs on new suppliers, which perform the order for the first time; The number of refusals on the stage of supplier proposal; The number of refusals according to results of full-scale testing;
Supplier approving and contract signing procedures duration Compliance of approving duration with routine admissions existing in the sphere Failure to meet contract obligations on delivery time; Probability that quality performance will be insufficient Probability of price increasing Comparative data on time required to approve the supplier concerning routine admissions existing in the sphere Average period of time required to approve the supplier/sign the contract; Percentage of contracts, approving time for which exceeds agreed duration
Quality of contract obligations fulfillment Payment terms; Acceptance procedures of product/services; Making claims system; Failure to meet contract obligations on delivery time; Probability that quality performance will be insufficient Probability of price increasing; Compliance of performance with contract obligations Payables by age; Number of claims;
Review of Business and Economics Studies Volume 1, Number 1, 2013
Stage of negotiation process Expectations Criteria Potential Losses Internal accounting informational indicators Informational indicators to disclose
Additional requirements, which are not regulated by contract Timely informing on changing circumstances; Timely inquires on additional demands; Failure to meet contract obligations on delivery time; Probability that quality performance will be insufficient Changes associated with the customer, which the supplier may not be aware, and which may affect the performance of the contract; Reservations about the possibilities of the client to put forward additional requirements;
Relationships with other suppliers Withdrawal of significant batch from the market Probability of price increase; Refusal to cooperate; Statistics of such cases, indicating the level of importance; Disclosure of information on the causes of conflict and internal control measures taken
Repudiation of significant contracts
Payment defaults
Litigations
Relationships with other groups of stakeholders Significant layoffs; Termination of significant contracts with clients; Failure to comply, environmental and social security; Unreasonable credit policy; High scale investment projects; Conflict of interest among the major shareholders and investors; Internal level of fraud within the client company. Probability of price increase; Refusal to cooperate; Statistics of such cases, indicating the level of importance; Disclosure of information about the causes of conflicts and the possible impact on other stakeholders and the internal control measures taken
Prospects of Cooperation Prospects of orders, joint projects, commercial terms of delivery. Probability of price increase; Refusal to cooperate. The practice of co-operation; The projected procurement plan. Prospects of orders; Number of terminated contracts.
Review of Business and Economics Studies Volume 1, Number 1, 2013
