As a business owner, you’re responsible for all of your company's transactions and financial posture. This includes the products and services that your business uses to generate revenue. Vendor risk management is essential. Vendors can be beneficial to any company because they offer lower prices than other avenues on the market, but they also inevitably come with risks. It’s important to be aware of supplier risks so that you can avoid a simple mistake from turning into a major financial problem. Here are five common vendor risks and how your business can prevent them:
Quality Control and SLA Breach
Quality control is a vital part of any business relationship, but oftentimes customers are unaware that their supplier's quality standards may not be up to par. There are many risks involved in relying on your suppliers for high-quality products or services, including the potential loss of revenue if you have to return faulty goods or cancel orders. Quality problems can result from insufficient expertise, poor manufacturing, and human error. To avoid quality control issues, it’s best to work with suppliers that have stringent quality standards.
Supply chain risk management is critical. If a supplier fails to deliver on time or does not meet your service level agreement (SLA) requirements, then they may be breaching the terms of their contract and could put your company at risk for financial losses. For example, if you order products from China and receive them five weeks later than promised, it will cost you more money to ship them to your customers. Before you sign any contracts, it’s important to conduct a sufficient supply chain risk assessment.
Suppliers must maintain strict service levels to ensure that your business meets its goals. If a supplier violates the terms outlined in an SLA, then you may choose to terminate the relationship or change suppliers entirely. As mentioned above, conducting adequate vendor risk assessment is critical to mitigating the aforementioned issues.
Suppliers are businesses, too; they have the ability to raise their prices for any reason at all. You should always anticipate that your supplier might increase its rates over time because of inflation or changes in the market price of goods and services. If you fail to plan ahead for this risk, then you may be faced with paying more than expected for goods and services that your company relies on.
Supplier Failure and Brand Damage
A supplier can fail to deliver products or services due to a number of reasons, such as bankruptcy, reorganization, or financial difficulties. When this happens, it’s important for companies who use that supplier to find an alternative source of materials or services as quickly as possible. This way, a crisis does not occur in your company when you are unable to obtain crucial supplies from your usual supplier.
Suppliers can damage your company's reputation if you experience problems with the quality of their products or customer complaints about missing orders, poor communication, and other issues that affect your brand negatively. If this happens, it’s in your best interest as a business owner to address any trouble areas before the reputation of your company is at stake.
Financial risks include credit default, bankruptcy, liquidity problems, and more. Suppliers must be in good financial health in order to provide goods or services that are of high quality, on time, and at reasonable prices. When you review a supplier's contract with your legal team, it’s important to look for clauses about payment terms and other issues related to credit risk management. It’s also a good idea to make sure that you have enough backup suppliers in the event that your primary supplier fails.
Compliance risks are the possibility that a company's legal or ethical standards could be breached. Contracts can help protect your business from compliance issues by outlining all of the necessary requirements for suppliers to follow, including environmental regulations and safety measures. For example, if your company wants to reduce its carbon footprint and make products that are "green" or environmentally-friendly, then you may want to conduct a supplier risk assessment before agreeing on the terms of a contract.
By implementing the proper supplier risk management protocols, you can mitigate many of the common supplier risks. Suppliers have a responsibility to provide clear information about their terms and conditions so that customers can anticipate any changes that may occur in the future. In addition, suppliers must provide accurate financial information about their company history and creditworthiness to enable customers make informed business decisions.