In this world of increasingly complex global supply chains, your company's success depends on your team's ability to effectively manage your third-party risks.
Without the right tools and processes in place, your business could find itself exposed to a variety of potential risks that can have a detrimental effect on operations. These risks can vary from financial issues and fraudulent activities to supply chain disruptions and delays in service delivery.
In this article, we'll discuss how your organization can focus on supplier risk management to protect your operations, as part of a successful third-party risk management strategy. By putting the right elements in place, you’ll make sure to maximize the value of your suppliers and keep your business one step ahead of your competition.
Supplier Risk Management: In Brief
In a nutshell, supplier risk management helps businesses handle the risks that come from working with third-party providers — it aims to protect your business from the inevitable heartbreak of getting into toxic business relationships that can affect the integrity of your operations.
An effective supplier risk management program helps you minimize your vulnerability to supplier-related risks by:
- Identifying potential risks at all stages of your value chain
- Assessing the severity and likelihood of those risks
- Developing risk mitigation plans
- Establishing controls and processes to manage the risks
- Monitoring your suppliers for compliance with your required processes, as well as areas of improvement
- Tracking and reporting on the effectiveness of your risk management program
Building a supplier risk management program can be a somewhat complex process with many steps. But by having a proactive strategy in place, you and your team can navigate these challenges and avoid potential financial losses.
Why Supplier Risk Management Matters
Unlike with vendors, who are usually the last link in a supply chain before a product or service reaches the end customer, your suppliers are responsible for providing the “value” element of your value chain — we’ve previously written about why the distinction between the two terms (i.e., vendor vs. supplier) is important.
Supplier issues can have a heavy cost to your business — both financially and in terms of your reputation. But getting an early start with spotting and mitigating supplier-related problems will help increase your supply chain resilience.
Other benefits of a good supplier risk management strategy include:
- Enhanced business continuity: Keep your operations running smoothly, even when your supplier encounters a problem and can't deliver on its commitments.
- Better and faster decision-making: Your team is empowered to make critical decisions quickly when faced with supplier disruptions.
- Easier regulatory compliance: By keeping your team on top of regulatory requirements, you minimize your risk of fines for noncompliance.
- Improved supplier relationships: When you’re able to maintain mutually beneficial relationships with your suppliers, this in turn helps you build a culture of trust and loyalty with your supplier base.
- Better negotiation power: By helping your team work out more favorable terms with your suppliers and better conditions for your contracts, this increases your overall profitability.
Combined with strategic vendor management, a strong supplier risk management strategy is a fundamental element of your competitive advantage, and one you shouldn't overlook in your approach to supply chain risk management.
Different Types of Supplier Risks
Generally speaking, any kind of third-party risk can disrupt your business operations and cause lasting damage to your business. Here are a few of the common vendor risks that will also apply to your integral suppliers:
- Financial risks: This covers elements like your suppliers’ financial stability, levels of debt, and whether they have the cash flow to be able to maintain their operations.
- Operational risks: This applies to disruptions in your suppliers’ ability to deliver products or services due to unforeseen events — for example, after natural disasters, data breaches, or material shortages. This kind of risk can also be associated with the quality and reliability of a supplier’s products or services.
- ESG risks: Covering the environmental, social, and governance (ESG) areas of business, these risks are associated with whether your supplier operates as a responsible business. As part of your ESG strategy, monitoring these risks can include tracking your suppliers’ emissions data and checking their compliance within areas like human rights and anti-corruption and bribery laws.
- Geopolitical risks: This looks at issues of social instability in the countries where your suppliers are located, due to events like war or economic sanctions — for example, Russia’s war in Ukraine affects global trade for various raw materials and has caused volatility in energy prices in local regions.
- Legal risks: These are associated with how suppliers comply with the laws and regulations of their home country, their industry, or your industry. This could cover regulations on product safety or compliance with international data protection laws.
- Reputational risks: Linked to the other risks, these can arise when your association with a supplier is damaging your brand's public image or company reputation. One example is Nestle’s (and other chocolate manufacturers') ongoing legal disputes around child labor claims within their cocoa suppliers.
It's worth noting that the types of risks that suppliers can pose vary widely, depending in part on factors like your level of dependence on their products or services. Some suppliers carry greater levels of risk — for example, suppliers involved in the early stages of your supply chain, like raw material providers, or suppliers involved in maintaining cybersecurity for your operations.
Challenges of Supplier Risk Management
All businesses can benefit from a sound supplier risk management strategy, but implementation isn't always a walk in the park. The sheer volume of suppliers, diversity of supplier types, and complexities of different regulatory environments make it a challenge to keep track of all the potential risks posed by your different suppliers.
Here are a few examples of the challenges businesses can face when trying to handle their supplier risks:
- Lack of internal resources: Some businesses don't have enough internal resources to do their due diligence and keep on top of their suppliers’ data. This makes it hard to notice specific risk trends or manage their supplier risk effectively.
- Lack of consistent processes: It can also be a struggle if a company is inconsistent with its approach to managing supplier risk — for example, by not having formal procurement or onboarding processes, or not having clear escalation processes in place to handle supplier issues as they arise.
- Low priority for senior management: Without senior management support, it can be hard for teams to prioritize supplier risk management as one of their key risk challenges.
- Lack of visibility over supplier relationships: It can be difficult to keep track of your supplier risks when using different data sources and apps to gain visibility over the supply chain. Relying on manual processes, like spreadsheets, or outdated systems to track suppliers' performance isn't ideal for coordinating different stakeholders.
To overcome these challenges, it's important to build a solid foundation for your supplier risk management program — one that touches all elements of your operations and incorporates both proactive and reactive approaches.
6 Steps to Build a Successful Supplier Risk Management Program
Just like with your vendor management processes, creating a sound supplier risk management program starts with knowing exactly what type of risk you're dealing with and where you need to focus your efforts. But it’s important to remember that the longer-term relationship you’ll have with your suppliers creates a more significant potential point of failure.
To create an effective supplier risk management program, here are the steps we recommend to get you started:
1. Develop a standard procurement process. Begin by working with your senior management team to decide on clear objectives, the company’s risk appetite, and mitigation controls for new suppliers. Then develop and implement consistent processes to help your team manage the entire supplier lifecycle — from selection to contract negotiation and eventual termination, where needed.
2. Identify your key suppliers. Understand which suppliers are most important and which are least critical to your business operations. This helps you prioritize your risk mitigation efforts and allocate your resources accordingly.
3. Collect the right information. For new suppliers, use an intuitive third-party lifecycle system like Certa to automate your onboarding workflow so you're not spending time manually collecting the relevant operational data. This will streamline your supplier management processes and give you time to focus on what matters to your business.
4. Understand who your suppliers are. Create scorecards to help you understand the status of your suppliers over time. To get the most out of your scorecards, build a comprehensive set of metrics that align with your goals, covering areas like financial stability, compliance, contract terms, and other key metrics. Monitoring risk scores will help your team identify, at a glance, which suppliers pose the highest risk to your business.
5. Keep communication channels open. To keep on top of new risks throughout the relationship, you need to facilitate open communication with your suppliers. A secure, centralized risk management platform with integrations for your preferred communication tools, like Slack or Microsoft Team, will help you identify and react quickly to issues when they arise, all while protecting your information security.
6. Monitor and review your suppliers regularly. To make sure your suppliers are meeting their goals and mitigating any risks, you can use automated tools to track and monitor how your suppliers are performing over time – helping you identify potential issues before they arise and prioritize your improvement efforts accordingly.
By taking the time to evaluate each supplier (and potential supplier), you’ll have the information you need to make the right decisions for your organization.