When you have a supply chain that is at risk, you must ensure you mitigate that risk as best you can to avoid supply chain disruption. With proper supply chain risk management, you can avoid disaster. With the fast pace and ever-changing supply chain today, it's more important than ever to know the threats.

Before employing supply chain risk management strategies, it's important to get a complete risk assessment done and a deeper understanding of your cyber hygiene . First, let's look at supply chain risk management and the types of risk you might face.

What is Supply Chain Risk Management?

Supply chains are key components of every industry, yet any disruption in them can have devastating results. For example, a sudden natural disaster, financial crisis, or security breach can cripple an entire network and cost millions, if not billions, in lost revenue for companies that remain operating.

Supply chain risk management (SCRM) offers businesses an effective way to mitigate supply chain risks and keep the business operating successfully.

SCRM refers to identifying, quantifying, and managing known and unknown risks across a supply chain. For example, predictable risks like supplier bankruptcy can be assessed through systems that analyze partners' financial histories as well as the impact on products and markets. At the same time, unknown threats such as cybersecurity vulnerabilities can be reduced by creating a unified vulnerability management system and developing an emergency response playbook alongside partners.

Various methods are available to you for risk mitigation in the supply chain, from strengthening payment protocols and developing stronger relationships with suppliers to establishing nearshore supplier networks and using regional supply centers for faster turnaround times. The key is to build a strong system. Gaining better insight into suppliers' financial health may also help lessen exposure. Some major credit rating agencies even offer predictive financial stability reports on thousands of potential partners!

How Does the Supply Chain Bring Risk to My Data?

Supply chains are intricate networks of partners and suppliers who rely on one another to deliver products and services to customers. Yet, each touchpoint introduces risks that must be assessed, managed, and mitigated before moving forward with operations.

These risks may be economic, environmental, political, or ethical in nature and fall into one of four categories:

  • Supplier bankruptcy
  • Natural disaster
  • A work stoppage at a manufacturing partner
  • Unethical sourcing practices such as using child labor

An unstable link can have disastrous repercussions for production and delivery, which in turn can damage customer relations and the reputation of your business. Furthermore, cyber-attacks pose an existential threat by exposing sensitive data or disrupting information flows, inventory, or money flows. To effectively mitigate such risks, your supply chain should be integrated with a third-party risk management solution that gives full visibility of supply-demand networks and relationships between your suppliers and the organization.

To identify and minimize risks associated with supplier networks, start by mapping them. This can be accomplished with spreadsheets or supply chain software; just be sure to update it as your network changes over time. Once this map is complete, evaluate each supplier (and their subcontractors) according to various factors.

For example, it's crucial to ensure data security by reviewing each supplier's policies and procedures for handling confidential information. Furthermore, stress test your supply chain by simulating worst-case scenarios.

Accessing all your data in an organized system is key to harnessing predictive analytics, machine learning, and other advanced tools. However, with so many solutions in your software ecosystem, gaining the visibility required for risk reduction and performance enhancement can be hard. To simplify this process further, choose a supply chain management platform that keeps all your information stored centrally so all teams have easy access when they require information.

When Do Suppliers Come into Contact with My Data?

With constant headlines of cyber-attacks and data breaches, it's clear that any company can become vulnerable to an attack. This is especially true if their suppliers handle sensitive data. However, there are ways in which you can mitigate this risk.

  • Verify the suppliers you employ. This requires much more than a simple background check; a thorough assessment of each supplier's security posture must take place, using direct and measurable information to gain visibility into your supply chain's cybersecurity health. Furthermore, this should be an ongoing process rather than an isolated event.
  • Create and include in their contracts an emergency procedure for suppliers in case of data breaches, including requirements that they notify you promptly and keep you updated as the incident is investigated.
  • Demand that your suppliers encrypt data and follow best practices, such as multi-factor authentication for accessing critical assets. This will reduce the risks of cybercriminals stealing and using your information for illicit means.
  • Consider asking suppliers to conduct vulnerability scans on their systems and provide the results directly to you. This will enable you to assess which vulnerabilities your supplier faces and whether they have appropriate controls in place to protect themselves against these vulnerabilities.
  • Ensure your contract with suppliers includes terms and conditions to ensure that they comply with relevant legislation, especially the UK Data Protection Act. That way, should anything go amiss, you will have some grounds against which to take legal action against them.
  • Establish the types of damages you will seek from suppliers who contribute to or cause a data breach and include them in your contracts. This will enable you to negotiate terms that benefit both parties while reflecting actual costs associated with breaches (e.g., notifications to affected customers, letters sent out via the post or phone calls made directly to affected customers, call center/1800 number costs, credit checks costs, legal fees, etc.).

Warning companies about securing their supply chains has become nearly tiresome. However, risks still exist despite global supply chains and the complex digital environments that we live in.

What Are the Four Types of Supply Chain Risk?

Supply chain risk strategies encompass understanding four distinct risks within the supply chain - economic, geopolitical, environmental, and cybersecurity risks.

Companies can reduce risks by diversifying their supplier networks, maintaining on-hand inventory, and carefully considering each supplier's implementation lead times, production capability, and performance abilities.

Environmental Risk

Companies reliant on their supply chains need to manage environmental risks within them carefully to minimize disruptions caused by natural disasters, extreme weather events, or unethical practices from suppliers. Establishing buffer capacity at manufacturing plants during known threats can help cushion adverse consequences and lessen their effects.

As natural disasters continue to impact supply chains worldwide, companies need contingency plans in case natural events disrupt their workflow. But not only natural events are capable of disrupting supply chains: global political events such as the COVID-19 pandemic can leave companies scrambling for alternative suppliers.

Loss of key components can quickly cause production delays and cost overruns, especially if the supplier cannot quickly source an alternative product. To minimize operational schedule risk, identify regional suppliers to cut travel time for components and materials and stress test your network frequently. Back-up supplies must also be available should one supplier fail due to natural disasters or political unrest.

Geopolitical Risk

Geopolitical risks involve global events threatening your business, such as corruption, climate change, and terrorism. These factors can disrupt supply chains in multiple countries or regions. Software solutions designed to integrate all aspects of supply chains can help mitigate geopolitical risks by providing demand forecasting, sourcing planning, and payment processing as part of one seamless supply chain solution that gives more control and visibility of operations.

Trade policies that put businesses at risk also pose a threat. Protectionist measures by one country could spur retaliatory measures by other nations and hinder global trade flows.

Ethical risks in supply chains, like child labor and companies without adequate safety equipment for workers, should also be part of your supply chain strategy.

Economic Risk

Financial or economic risk arises from many sources, such as supplier bankruptcy or fluctuations in currency exchange rates. In addition, labor strikes or political unrest could also threaten your company.

Economic risks involve price volatility caused by shifting supply and demand patterns. Rising inflation, for instance, can increase production costs and make negotiations with suppliers more complex; global labor shortages prevent companies from having enough people available to build products and ship them directly to customers.

Cybersecurity Risk

Supply chain risk is the risk associated with the flow of information, materials, and products between suppliers and companies, then customers. It can arise due to many reasons - being able to meet orders on time and within budget, disruptions to the flow of goods, the need for safety stock and pricing volatility, as well as any possible impacts of hedging strategies on costs of goods being delivered, are just some examples of risks to supply chains.

While these are the four main risks you may face when it comes to your supply chain, you may also face the following two risks:

  • Internal risks can also pose significant problems. This includes cooperative risk, management decision risk, information sharing risk, and operational schedule risk; they all lie within the control of a company but still impact the entire supply chain network.
  • Operating schedule risk refers to the possibility that not meeting production deadlines could result in late deliveries, increased costs, and decreased sales or customer satisfaction.

Effective Supplier Relationship Management (SRM) can help reduce risks. This involves working with suppliers who meet requirements while being trustworthy and ensuring all departments communicate efficiently among themselves and share information effectively.

Properly vetting suppliers can also help to reduce your supply chain risk. Your vetting process should ensure you're only working with ethical businesses; knowing who your supplier partners really are can help identify any bad actors who could jeopardize your business.

This process is often called end-to-end visibility and monitoring, and it involves scoring each supplier on key factors like risk tolerance, financial dependence, credit history, and natural disaster risks as part of the procurement process.

The Pillars of Supply Chain Risk Management

Effective supply chain management has risen to the top of boardroom agendas during today's risky business climate. Successful companies put into place strong teams and processes that remain operational all of the time to provide optimal supply chain operations.

For example, legal liabilities must be managed through compliance with laws related to health and safety, environmental impact assessments, or financial activities. So let's look at the pillars you should know regarding supply chain risk management.

Pillar #1 - Vulnerability

Supply chain disruptions caused by natural disasters or cyber-attacks can devastate businesses with limited cash reserves, making it essential to implement efficient systems for monitoring known and unknown risks.

Effective risk monitoring systems must be tailored specifically to each organization, taking into account impact, likelihood, and preparedness perspectives. For instance, one company might monitor production line deviations to predict quality issues; another might use real-time Caribbean weather reports to monitor hurricane risk at its Puerto Rico plants.

Companies must ensure they vet suppliers properly. Some businesses are taking measures such as categorizing supplier portfolios according to financial spending or assigned risk to provide structured feedback regularly, identify opportunities for improvement, and enhance overall risk management.

Pillar #2 – Management Culture

Establishing a culture of risk-informed decision-making within your team requires shifting how it approaches supply chain planning. Starting at the top level and providing insights that enable individuals to make better choices is necessary to create this decision-making environment.

One of the key steps is helping them understand the risks they are exposed to by collecting, analyzing, and operationalizing supply chain data. Doing this lets you understand any threats facing your business and craft proactive contingency plans accordingly.

By planning for known and unknown risks, you can lower the vulnerability of your business to disruption by planning ahead for both known and unknown risks. A key part of this strategy should include regular and thorough supplier risk evaluation that also accounts for sustainability concerns. Furthermore, collaboration across departments should help gather signals across supply chains for gathering, interpreting, and acting upon them.

Pillar #3 – Procurement

Procurement processes are integral in driving cost, quality, and velocity in an organization's supply chain. Typically, these involve competitive bidding processes that result in long-term supplier agreements awarded through competitive bidding or negotiations.

Suppliers must also be capable of meeting sales operations, physical distribution efforts, and new product development activities. A company's procurement team should be able to identify key suppliers' specific needs - especially within gray areas such as supply chains where visibility may be low - while simultaneously communicating these to key vendors.

Timely investment in relationships and dialogue between suppliers and supply chains is essential in mitigating risk. In addition, supply chains depend heavily on reliable supplier networks; to protect themselves from risks, they must monitor these partners regularly.

Pillar #4 – Operations

Building a reliable supplier base that supports business expansion requires more than purchasing power and negotiation efficiencies; leaders must create an environment of collaboration, communication, and trust among their suppliers; monitor regional backup distribution; optimize shipping logistics; and consider FX hedging strategies to protect profits.

Supply chain leaders must evaluate suppliers' risks, financial viability, and capability when planning strategic sourcing and material pricing strategies with SCRM solutions activities at their highest maturity levels.

This pillar requires the appropriate processes and technology to identify disputes, non-compliance, or supplier insolvency risks. These issues should be effectively prevented or resolved amicably in order to reduce supply disruptions and ensure smooth operations. Dispute management activities include regular supplier assessments as well as feedback reports.

Pillar #5 – Demand & Visibility

Following a string of supply chain crises, companies have finally realized the importance of effectively managing suppliers and risks to business success. However, to do so successfully, companies need to implement a process that can identify emerging threats while simultaneously assessing risk at a supplier level.

For this to work effectively, they need to adopt an all-encompassing strategy that considers not only procurement but all areas of their organization as a whole. That means each department should comprehend its role in the supply chain network while helping identify and mitigate risks.

It also involves thoroughly screening potential third-party partners and monitoring supplier performance on an ongoing basis. Furthermore, technology tools like warehouse management systems or ERP stock modules should be employed to gain full inventory visibility - the best companies have this type of visibility which allows them to quickly react to disruptions by redirecting orders through other distribution centers or customers quickly.

Can I Avoid Supply Chain Risk?

Though some risks cannot be eliminated completely, many can be managed. To effectively mitigate supplier risk, companies need to assess suppliers on multiple factors, including financial health, environmental responsibility, and ethical compliance standards - these evaluations should also be updated regularly.

Organizations looking to reduce supply chain risks should perform an in-depth evaluation of each supplier in their supply chain and conduct regular stress tests on it - as well as review each supplier annually. Diversify supplier networks to avoid being overly dependent on any one supplier.

It is also beneficial for organizations to source from suppliers closer to their center of operations or end customers so as to minimize travel times that increase risks further down the supply chain. Ideally, stress tests should occur frequently, with suppliers being assessed yearly by stress testing them and performing regular reassessments annually by stress-testing their supply chains regularly and reviewing each supplier annually for assessment.

Keeping up with the supply chain risk innovation and trends can also help you to avoid or at least mitigate supply chain risk.

What Happens If My Data is Compromised Due to a Third Party?

When breaches occur, they're rarely the fault of just one party - third parties like vendors, suppliers, and contractors can often become targets of cybercriminals as they act as an essential part of the supply chains that comprise businesses today. Unfortunately, third-party breaches have become all too frequent with globalization increasing integration in supply chains resulting in data flowing freely between them.

Therefore, it's essential that you thoroughly vet and evaluate all potential partners. A recent Ponemon Institute survey discovered that more than half of data breaches involve third parties; these breaches typically cost two or three times as much to address compared with regular breaches due to impacts such as brand reputation damage, lost business revenue, or reduced share values - thus having devastating repercussions for companies of all sizes.

If your data is compromised due to a third party, it's time to implement your contingency plan. But, first, start contacting all those impacted and get your team working on shoring up the breach.

Do I Need an IT Team to Handle Supply Chain Risk Management?

Understanding its full scope of potential risks and establishing an effective risk mitigation framework is at the core of every successful supply chain. This requires having a full picture of all threats to supply chains—demand, quality, regulatory, environmental, and business risks alike—while simultaneously building strong supplier relationship programs, an accurate picture of tier-one suppliers, and creating an emergency response playbook.

As with any process, success depends on constant monitoring and updating. Your contingency plan must be readily available for employees when needed so everyone has a clear path ahead. In addition, conducting a risk analysis before signing any new supplier contracts and creating data stewardship protocols that clearly delineate what data each employee can access are essential to ensure its smooth running.

An effective governance mechanism for supply chain risk management should include a cross-functional risk board composed of participants from each node in the supply chain. This board will review top risks regularly and determine the most suitable course of action to address each one; then, its members take ownership of implementing risk mitigation plans tailored specifically for their functional nodes.

How to Protect Against Supply Chain Risk

Supply chains are interdependent systems, making them highly vulnerable to cyber-attacks. In addition, their complex structure increases the probability that one entity's vulnerability will have an exponentially worsening effect across the system - for instance, if cybercriminals compromised one account, they may use watering hole attacks or social engineering techniques to spread malware across endpoints in a company network.

Human mistakes and inadequate third-party cybersecurity tools are two other significant vulnerabilities to keep an eye on. Employees or suppliers could send data to the wrong recipients or lose vital files accidentally, and cybercriminals may use watering hole attacks against external suppliers to gain entry to an organization's systems by hacking them for access. Other vulnerabilities may come from lacking visibility into third parties or excessive access rights that give rise to privilege misuse and data theft.

An effective way to lower risks is to seek local suppliers, which will reduce cycle times and shipping times for products to reach customers more quickly. Furthermore, your supply chain must undergo periodic stress tests by mapping existing suppliers and identifying vulnerabilities; additionally, it's advisable to conduct risk assessments with each new supplier to discuss security, continuity management, and third-party risk management (SCRM) practices with them.

How can RiskRecon help me?

At RiskRecon by Mastercard, we offer the right solutions to all your cybersecurity needs. Our team will help assess your supply chain and systemic risks and provide solutions you can count on. Check out our 30-day trial here now.