As globalization continues to reshape the business landscape, the complexity of supplier risk management has amplified significantly. In today’s interconnected world, companies must navigate diverse global strategies to adhere to stringent regulatory standards, identify and mitigate risks, and sustain peak productivity levels. However, the intricacies of the global marketplace present manifold challenges, particularly concerning financial, compliance, and cybersecurity risks. Failure to effectively manage supplier risk can lead to severe consequences, including reputational damage, regulatory fines, and operational disruptions.
At SpendEdge, we understand the importance of supplier risk management for the smooth functioning of businesses. Therefore, in this blog, we are highlighting the step-by-step process that can lead to better supplier risk management.
Establishing a supplier risk management system is imperative for companies to mitigate risks. Request a free demo and learn how you can build an effective supplier risk management system for your company.
How to Manage Supplier Risks?
Step 1: Certify
Selecting a supplier is not easy and comes with its own set of challenges. A strong supplier risk management process mitigates that risk by incorporating values into the current metrics and ensuring that suppliers associating with the company are able to meet their deadlines on time. It basically requires you to practice these functionalities in supplier risk management:
- Gaining expertise about the marketplace.
- Asking the precise questions in the RFP process during the bid.
- Verifying the information provided by suppliers against a third-party source.
- Centralizing information for established suppliers.
- Repeat the information to keep it updated.
Step 2: Monitor
Not every supplier holds equal value for your business. Strategically identify suppliers who are important for your supply chain and those who can cause disruption in the manufacturing line or services. Evaluating suppliers strategically and critically will help you determine the types of risk levers that can affect suppliers or the supply base. This supplier risk management process will require you to:
- Determine the sources of information that need to be monitored.
- Establish a supplier risk management framework that can monitor external and internal in real time.
Step 3: Analyze
Implement technologies to reduce the amount of time and effort required to analyze and create reports that can increase visibility and provide actionable intelligence. Areas to analyze can include financial risk, supplier performance, or spend category depending upon the profile of your company.
By repeating the supplier risk management process over regular intervals, you will gain a better understanding of how your supplier performs and what are the acceptable behavior thresholds. The points you should be addressing while analyzing are:
- The performance of your organization.
- The supplier’s performance against service level.
Step 4: Mitigate
Since predicting a supplier’s failure with complete accuracy can be a difficult task, you can always compensate for the same by planning for it. Proactively prepare for these potentially damaging supplier disruptions with supplier risk management in place. Also, developing a supplier risk assessment process, and building contingency plans by documenting competitive suppliers can help improvise plans according to the updated information.
Strategy outline: Supplier risk management
Cross-departmental SRM team:
It might be difficult to identify and measure supplier risk at first, so it’s critical to have the correct team in place for management and governance of your SRM programme. Representatives from the teams in charge of risk management, data protection, legal and compliance, security and IT, and procurement and sourcing are among the possible participants. To comprehend the possible risks at each node in the value chain, it is also essential to interact with product management and manufacturing.
Choose a risk management framework:
Using a risk management framework as the cornerstone of your SRM programme can provide you with best practices and direction. Depending on their business and other considerations, many organisations align with either the NIST or ISO frameworks.
Pre-contract due diligence and account for risk in Rfx processes
Make sure that information on business, financial, and reputational risk is gathered for RFPs, RFIs, and other RFx processes when assessing prospective vendors. This information can be obtained from sources like Business news and adverse media coverage. lists of financial transactions, financial records, global enforcement lists, sanctions lists, state-owned enterprise lists, and lists of politically exposed persons (PEPs). Services for risk profiling and risk intelligence networks can aid in automating this procedure. Ensure a strong contract lifecycle management procedure is in place when choosing new suppliers to safeguard and expedite the process.
Focus on visibility over supplier profiles:
For an SRM programme to be successful, a centralised supplier database must be created and kept up to date. Comprehensive supplier profiles, role-based access to company contacts, demographics, 4th- and Nth-party connections, and risk intelligence should all be included in the database. This should begin with any external risk information and profiled risk data that were obtained during the sourcing and selection phase.
Categorize and tier suppliers based on inherent risk:
You should classify and tier your suppliers according to the inherent risk they pose in order to guarantee the efficacy of your SRM programme and make the most use of your limited resources. Inherent risk, as was previously mentioned, is the risk a supplier bears before taking into account any particular controls your company may need. Efficient intrinsic risk assessment (refer to the accompanying chart) can integrate data from straightforward internal surveys with any external risk information acquired during the procurement process.
Conduct a periodic risk assessment:
It should be easy to define the frequency and scope of subsequent risk assessments for each category of supplier once they have been identified, classified or categorised. For example, based on industry standards, regulatory mandates or unique organisational requirements, you can carry out an annual evaluation of critical suppliers. Information on Internal Security Controls, Business Continuity Plans, Disaster Recovery Plans and more may be requested in an evaluation.
Supplier Risk Landscape
In the contemporary business environment, supply chain managers grapple with a multitude of risks spanning various domains, each posing unique challenges and potential pitfalls. These risks encompass:
- Cybersecurity Risks: With the proliferation of digital technologies, organizations face escalating threats such as data breaches and cyber incidents. Suppliers, entrusted with sensitive data including Personally Identifiable Information (PII), become vulnerable targets for attackers, necessitating robust cybersecurity measures and incident management policies.
- Compliance Risks: Adherence to regulatory standards, including those set forth by ISO (International Organization for Standardization) and industry-specific regulations, is paramount. Non-compliance can lead to regulatory penalties and legal ramifications, underscoring the importance of comprehensive compliance management frameworks.
- Business & Financial Risks: Economic volatility, regulatory penalties, and financial uncertainties pose significant risks to supply chain resilience and profitability. Effective risk mitigation strategies are essential to safeguarding shareholder interests and maintaining financial stability.
- Third-Party Risk Management: As organizations increasingly rely on third-party vendors and partners, the risk landscape expands to encompass third-party dependencies. Proactive risk assessment and management frameworks are indispensable for mitigating potential vulnerabilities within the extended supply chain ecosystem.
- Event Risks: Unforeseen events, such as natural disasters, geopolitical instability, and supply chain disruptions, can severely impact supply chain operations and security. Vigilant monitoring of the security situation and contingency planning are imperative to mitigate event-related risks effectively.
- ESG Risks: Environmental, Social, and Governance (ESG) considerations play an increasingly prominent role in supplier risk management. Organizations must address ESG risks, including sustainability practices, labor conditions, and ethical conduct, to uphold corporate responsibility and stakeholder trust.
- Capacity Risks: Fluctuations in supplier capacity, caused by factors such as resource constraints or production bottlenecks, pose inherent risks to supply chain continuity. Proactive capacity planning and supplier diversification strategies are essential to mitigate capacity-related risks.
- Performance Risks: Suppliers’ inability to meet quality, delivery, or service level agreements can disrupt supply chain operations and compromise customer satisfaction. Rigorous performance monitoring and supplier performance improvement initiatives are vital to mitigate performance-related risks.
- NIST Supply Chain Risk Management Controls: Adhering to the National Institute of Standards and Technology (NIST) Supply Chain Risk Management Controls helps organizations establish robust risk management practices, including risk assessment, mitigation, and monitoring, to enhance supply chain resilience and security.
Supplier Risk Management Best Practices
Comprehensive Third-Party Assessment
To mitigate supply chain risks effectively, maintain accurate and up-to-date records of all third-party relationships, including their dependencies on other vendors (Tier 2). Understanding these interconnections allows for a thorough assessment of potential risks across different tiers of suppliers.
Risk Assessment and Vendor Evaluation
Conduct risk assessments on key suppliers, prioritizing those with the highest risk levels. Essential measures include on-site visits and procurement audits to verify compliance with ethical standards, corporate social responsibility, health and safety regulations, and financial stability. Regular monitoring and verification of supplied information are crucial to mitigating risks effectively.
Pre-Qualification of New Suppliers
Define minimum compliance requirements aligned with industry laws and regulations for all new vendors. Make compliance with these standards mandatory during the vendor selection process to ensure adherence to legal and ethical standards from the outset.
Special Attention to Sole-Source Suppliers
Sole-source suppliers require special attention due to their critical role in the supply chain. Conduct routine site visits to identify potential risks and develop contingency plans. Ensure that each sole-source contract has a backup plan (Plan B) readily available to address any disruptions promptly.
Centralized Supplier Information Management
Centralize all supplier information to gain visibility into potential risks. Fragmented or missing records can obscure the true level of risk posed by suppliers. By maintaining a centralized repository of supplier data, organizations can identify and address risks more effectively.
