Third party risk management is an important part of any business. A vendor risk can be something small, like a typo in the text on your website that creates confusion for customers, or it could be something big, like being unable to fulfil orders because you don't have the product in stock. In this blog post, we will discuss common vendor risks and how they affect your business.
What is Vendor Risk Management
Vendor risk management is any action or inaction that could result from human error, negligence, cybercrime, natural disasters, etc. These risks can impact your business in several different ways, including financial loss or lack of revenue caused by disruptions to supply chains or services, among others.
Why is Vendor Risk Management Important?
Reducing vendor risks can help save you money, time, and resources. It’s important to incorporate risk management into every aspect of your business, including work with suppliers (vendors), employees, company policies/procedures, and technology systems.
Failing to identify and manage vendor risks can have a significant impact on your business. You must be aware of the possible risk factors for each of your vendors, as well as how these potential risks could affect your company's bottom line.
Common Vendor Risks
Before we get into ways to manage your vendor risks, let's take a look at some of the most common ones:
The most common vendor risk is cyber security. This includes any criminal activity such as phishing, identity theft, and even ransomware attacks that target your company's data and cause financial losses. Businesses that fail to take the right precautions will be responsible for any liabilities.
Risks such as credit default, liquidity, and interest rate risk are common vendor risks. It’s important to note that these risks are also associated with financial institutions. It becomes vital to conduct due diligence before onboarding vendors to reduce the risk of financial loss.
Supply Chain Risk
This type of vendor risk occurs when a supplier fails or cannot deliver products or services agreed upon in a contract. This can result in revenue loss or expensive penalties for non-compliance with contractual terms. It's important to go over all clauses within a contract alongside the vendors you’re working with to ensure there are no surprises.
Ways to Reduce Vendor Risks
There are several ways to reduce and manage vendor risk. Here's a list of some effective solutions:
Make an effort to conduct your research on vendors before onboarding them, including looking at reviews from other customers or conducting in-person interviews. This way, you can gain insight into the type of business they conduct and ensure that they are best suited for your needs.
Vendor Risk Scorecard
A risk scorecard is an easy way to identify all of the risks associated with a vendor, allowing you to prioritize which ones require immediate attention. You can use this information to tailor your contract terms or negotiate better rates if needed!
Vendor Lifecycle Management (VLM) Tool
A VLM tool will allow you to organize all of your vendors in one place. This type of tool provides real-time updates for new supplier deliveries, which can help improve supply chain management and reduce order fulfilment errors. It also allows you to monitor the cash flow status of suppliers, identify potential risks before they become issues, and more.
Implementing a vendor lifecycle management program allows you to keep track of all your vendors and their statuses. However, this process must be easy enough to use so employees can update it as needed, and be secure in case there are any legal concerns with the data stored on it.
Specialized Vendor Insurance
General business insurance policies might not cover all of the risks associated with a vendor. Specialized contracts can be tailored to your specific business and needs, reducing the financial loss if something goes wrong.
This is an important clause that many businesses fail to include when onboarding vendors. It's best to include this clause within the contract to avoid surprises if something goes wrong.
Warranty - This guarantees products or services provided by vendors, typically lasting up to 12 months, depending on your business needs.
Indemnification - The indemnity agreement stipulates that partners/vendors will be liable for any damage (including financial loss) resulting from negligence.
As you can see, vendor risk management is vital to business success. If any one of these issues arises, it could cost your company in many different ways. To avoid unpleasant surprises, ensure you’re doing due diligence on all new vendors before onboarding them, and reduce your risk of financial loss!