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Critical suppliers and the analysis of suppliers' environmental, social and governance risk

05/29/2017 - 06:00 PM

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Critical suppliers – the Key Risk Indicator

As part of the Supplier evaluation and monitoring process, the “riskiness of suppliers” is one of the fundamental aspects examined: the Key Risk Indicator (KRI) tool adopted stems from the need to systemically structure the evaluations made, for example in terms of Qualification, Vendor Rating, Incoming Quality, and Economic/Financial Assessment.

This makes the KRI a tool that can be applied to Suppliers/Subcontractors already in the Register and to potential ones, providing a thorough framework of the risk factors of suppliers as part of the acquisition process, also in relation to the markets they operate in, through the use of specific performance indicators.

The tool defines 3 main categories of risk factors: strategic, operative and financial. This evaluation is in addition to the one linked to the risk on the market sector the supplier operates in.

The tool produces a risk indicator for each supplier which places it in a risk band and evaluation band with the relative actions to be taken. Suppliers identified as critical are those whose evaluation places them in a high risk band and a low evaluation band.

The analysis of suppliers 'environmental, social and governance risks

In order to assess risks which might jeopardize the sustainability of its supply chain - the so-called Environmental Social and Governance or ESG risks - TIM  assesses:

  • the risks peculiar to the industrial sector (the so-called "Procurement Market") to which each supplier belongs, and
  • the risks of individual suppliers, based on the findings of sustainability surveys and audits.

Risks of Procurement Markets

According to the ESG risks management model adopted by TIM, the phases of the analysis for the Procurement Markets are:

  • Risk Identification and definition of an appropriate metrics;
  • Risk assessment of each ESG procurement market;
  • Definition of four major classes of risks in which a procurement market might fall, based on  two parameters: ESG risk and "spending" (the amount TIM spends for purchases made in that procurement market):

     AA = high ESG risk, high-spending
     AB = high ESG risk, low-spending
     BA = low ESG risk, high-spending
     BB = low ESG risk, low-spending

ESG Risks of a single supplier

Each supplier is assigned an ESG risk profile determined by:

  • the results of socio/environmental audits conducted by TIM on that supplier and its subcontractors;
  • its answers to the sustainability questionnaire  sent by TIM;
  • the procurement market to which the supplier belongs.