Outsourcing is a crucial business strategy for many companies, especially regarding supply chain logistics. Businesses often rely on third-party suppliers to source, package, and ship products to consumers. However, by outsourcing any part of your business, you ultimately lose some control and put your company and customers at risk.
Understanding these risks and implementing mitigation strategies is the best way to protect your business and its employees.
What is Supplier Risk Management?
Supplier risk management is the task of assessing and mitigating supply chain risks. When choosing a new vendor, it's important to implement strategies to predict and reduce any risk. Pinpointing the most common supplier risks ahead of time can help businesses maintain third-party relationships, predict risk, protect the company's reputation, and tackle any supplier threats at once.
Common Supplier Chain Risks
Supplier risk can occur during any stage of the business partnership, including when onboarding, managing finances, creating product agreements, managing mergers, or even effectively dealing with criminal or natural threats. Some of the most common supplier risks include the following:
- Shipping delays
- Damaged products
- Production delays or disturbances
- Theft of products
- Inventory shortages
- Cybersecurity risk
- Ineffective policies
- Operational difficulties
- Fluctuating economy
- Geopolitical concerns
- Climate challenges
- Compliance fines
- Operational risk
- Supplier failure to deliver
Because most businesses work with multiple vendors, assessing and resolving risk can be overwhelming. However, once your business and procurement team can successfully put an effective supplier risk management strategy in place, it can lead to greater supply chain resilience.
How To Assess and Identify Potential Key Supplier Risk Factors
Supply chain disruption can easily threaten any business's stability. A single security threat can damage an organization's reputation. Delayed or damaged supplies can lead to chargebacks and impact a brand's bottom line.
Identifying and assessing potential supplier risks help businesses avoid expensive and inconvenient issues. Rather than waiting until a faulty supplier puts your business at risk, predicting the likelihood of supply chain disruption and compliance problems can save an organization a lot of time and money. A supplier risk analysis typically includes the following steps:
- Make a list of all vendors.
- Review and build an assessment based on your organization's goals and risk tolerance levels.
- Provide all potential suppliers with an assessment to complete and return to your team.
- Examine and analyze the assessment of each third-party vendor.
- Put specific strategies in place to mitigate risk.
- Continue issuing assessments to all vendors on a pre-decided schedule.
There are numerous strategies that a company can take to assess and mitigate risk. Your chosen strategy depends on your most common risks and the business's specific needs.
Vendor Risk Trends To Know
Supplier risk is an evolving concept that changes along with modern technology and supply chain logistics. Therefore, businesses must stay up-to-date on vendor risk trends to properly assess and mitigate them.
In the coming years, third-party data will continue to impact supply chains, making vendor risk management even more important. As a result, compliance will also become an important issue.
Businesses can expect frequent environmental, social, and corporate governance updates (ESG). In addition, new regulations may require businesses to prioritize supplier risk management to protect consumers better. Failing to prioritize third-party risk management needs could lead to expensive fines.
Finally, many brands will likely adopt an automated approach to supplier risk management over the next few years. Vendor security breaches will continue, meaning businesses will require more thorough, automated strategies to minimize and overcome that risk.
Strategies and Best Practices To Mitigate Supplier Risks
Here are a few of the latest strategies you can implement for mitigating supplier risk:
Use a Scoring System
A scoring system is especially beneficial when considering new vendors. By assigning a numerical value to pre-designated categories, you can calculate the risk level of varying suppliers. Categories include the financial risk of the vendor, existing customer reviews, quality control processes, regulatory compliance threats, supplier performance history, and delivery times.
Dropping the risks of each supplier into the Supplier Risk Assessment Matrix can also help brands narrow down vendors to choose the best ones. The scoring system also offers brands a guideline for assessing the most common risks they're likely to experience.
Automate Everything With User Review
Some risks can be easily automated and scored using a generic assessment. Others, however, require user review and consideration. The best strategy for managing supplier risk is to automate the supplier data collection you need to make important decisions and then allow humans familiar with the business to make those decisions. Automated processes can also help organizations prepare for upcoming compliance changes.
Prioritize Information Security Risk
With the modern technological upgrades over the last decade, many aspects of supply chain management are digital. Unfortunately, this puts your supply chain at risk of information security and cyberattacks. Therefore, information security and the protection of confidential data should be a priority.
Don't Overlook ESG Risks
Many emerging trends in the industry focus on predicting and avoiding potential risks rather than proper resolution. As a result, environmental, social, and governance compliance risks are more important to supply chain risk management in the third-party risk management industry today.
Create a Standardized Review
Focusing on the risk criteria most important to your organization is a great way to choose the best suppliers with the least risk. Create a standardized assessment of questions most important to your company. Some great questions you may include are:
- Does the vendor have a good reputation?
- Has the supplier had any prior security breaches?
- What is the supplier's safety record?
- What is the supplier's capacity for delivery?
- Does the vendor have sufficient insurance?
- How does the company manage compliance regulations?
A standardized review process can greatly speed up important tasks like vendor due diligence and risk assessment.
Monitor High-Risk Suppliers
Some suppliers will carry a higher risk than when compared to others. Identifying the specific areas of risk for each of these suppliers helps businesses create a proactive plan to solve any issues that may arise.
Collect Data From Multiple Sources for a Comprehensive Risk Assessment
Data collection is important when assessing a supplier's risk accurately. In addition to inside information from the vendor, gathering data from press reports, local resources, previous history, and industry norms may also be important. A comprehensive risk assessment and enterprise risk management approach also make it easier for brands to prioritize current vendors who carry the greatest risk when implementing a new supplier risk management strategy.
Supplier risk management is crucial to any product-based business. Choosing the wrong vendors can affect your business processes, production capabilities, delivery of products, and revenue and profits. Compliance issues with vendors can also lead to expensive fees.
Common Mistakes of Managing Vendor Risks
Not all supplier risk management strategies are effective or best suited for your specific business goals and chosen vendors. These are some of the most common mistakes when it comes to managing supplier risks:
Assessing Only the Second-Party Suppliers
It's not enough to assess the risk of second-party suppliers. For example, the supplier you choose to transport goods to customers may use a third or fourth-party supplier to fulfill these duties. Understanding the risk of any supplier involved in your company's supply base chain logistics is crucial.
Only Assessing Risk Once
Suppliers' risk exposure levels can change frequently. That's why effective risk management requires routine reviews and ongoing risk mitigation. An automated system makes it easier for organizations to assess all third-party vendors regularly. Additionally, compliance laws frequently change, making it crucial to assess risk regularly.
Failing to Account for the Uniqueness of Your Business
Every business and its needs are different. That's why a customized approach to risk management is usually the best strategy. You'll need a personalized assessment to get the most out of risk management and the ability to mitigate the risks most important to you.
RiskRecon makes it easy for businesses to learn more about their vendors with actionable insights, including their vulnerabilities. We order these risks based on the needs of your business, so you can easily develop a plan.
Failing to Monitor and Measure the Effectiveness of Supply Chain Risk Management Efforts
Continually monitoring and measuring the effectiveness of any supplier risk management efforts is also important. Supplier risk management is rarely a one-step strategy. Integrating an ongoing supplier risk management strategy with a contingency plan is the best way to minimize risk and ensure business continuity.
Using Technology To Improve Supply Chain Risk Management Processes
Technology is crucial in managing supply chain risk. Technology-based solutions offer many benefits, including the ability to automate risk assessment. Technology offers many benefits to supplier risk management, including:
- The ability to collaborate with other team members and vendors to assess and overcome supply chain risk.
- The ability to set automated warning indicators when a vendor may have a higher-than-average risk.
- The opportunity to continually assess and improve supply chain risk management strategies.
- The capability to predict likely problems with the supply chain in the next month, quarter, or year allows businesses to make proactive changes.
Technology also improves data accuracy, ensuring you have the analytics you need to make the most informed decisions.
Companies Successful in Managing Supplier Risks
Some companies have a successful track record in managing supplier risks. For example, Informatica, a data intelligence company, recognizes the importance of third-party cyber risk. Tufts Health Plan has implemented automated strategies using technology to protect patient records and data and maintain ever-changing compliance laws. NACCO Industries, Inc, a company with a strong presence in natural resources, is made up of hundreds of companies, making third-party risk management extremely important.
Strategic sourcing can help your supplier relationship management and reduce your overall risk profile. Supplier risk is more prominent today as businesses rely on third parties to fulfill orders and make deliveries. Assessing, managing, and responding promptly to supplier risks and compliance changes is the best way to ensure supply chain resilience.
