Top 5 Supplier Risk Management Strategies To Implement In 2023

December 30, 2022
Procurement Management

Can you imagine a business capable of providing critical services, products, and solutions to customers in any industry without collaboration with reliable suppliers? Probably not.

Maintaining a diversified supply chain contributes to an organization's consistent success and could even give them a leg up on the competition. 

But the risk to their business grows with each contract they enter with a supplier, each piece of equipment they procure for the production lines, and each operation they outsource. Thus, it's hard to avoid taking on that risk unless the company doesn't require the services from an external supplier. 

There will always be some degree of operational risk to manage regardless of the sector they operate in or the nature of their business. This is where supplier risk management steps in. 

Here is a comprehensive guide covering the significance, types, and vital strategies associated with supplier risk management. So let's delve deeper to understand the concept further.

What is Supplier Risk Management?

When an organization's ability to deliver products and services to its clients and customers gets threatened by challenges posed on the suppliers' end, such as a security breach or an operational breakdown, the company engages in Supplier Risk Management (SRM).

When there is a risk to customer relations, overall revenue generation, profitability, or other aspects of running a business, SRM kicks in to keep the supply chain operating uninterruptedly and consistently.

Effective SRM systems address interrelated risks that might cause destabilization, inefficiencies, and downtime in the supply chain through efficient practices like: 

  • Supplier assessments
  • Consistent monitoring
  • Data analytics
  • Risk mapping,

and much more.

Measurement and analysis of key performance indicators (KPIs) for continuous program optimization are also integral parts of well-formulated mechanisms, as are procedures for mitigating and transferring risk.

What are the Prominent Types of Supplier Risk?

Supplier risk describes the risks and vulnerabilities that a company's suppliers may bring to the client's business in terms of finances, operations, ethics, etc.

Supplier risk may be enormously detrimental to a firm if not addressed, as modern businesses operate in a highly interwoven business matrix with several suppliers.

Supplier risk can be broken down into five categories:

1. Operational Risks

Supplier quality assurance risks and delivery process security concerns fall within this category.

Throughout the pandemic, for instance, operational risks like delivery interruptions and delays owing to border restrictions significantly impacted enterprises' capability to deliver products and services to their clients and customers effectively.

2. Cybersecurity Risks

Safeguarding confidential and sensitive data and information is paramount in today's highly digitized business environment.

Failure to ensure cybersecurity can have cascading consequences, jeopardizing other businesses and customers that a company deals with. It makes cybersecurity among the most crucial issues among business risks. 

A security breach in the stack of everyday transaction volume between the company and its many suppliers can be a potential cause.

Therefore, keeping company data and information safe from illegal access is crucial in today's corporate environment.

3. Financial Risks

When it comes to the supplier's finances, financial risks encompass everything.

These include the supplier's current market worth, any debt or default risks this might encounter, and the catastrophic prospect of insolvency.

The long-term health of a business could be at stake if it doesn't manage the financial risks posed by suppliers adequately.

4. Compliance Risks

Regulations imposed by law and industry are essential for establishing credibility in economic and market relationships.

For a business relationship to begin and endure securely, both parties must be confident that neither is breaking any laws or violating any standards set by the other.

Companies expect their business partners to follow all relevant legislation and industry standards to the letter to avoid any suspicion of fraud.

Sanctions compliance is also a crucial part of conducting business with suppliers.

Legal ramifications for any company could be grave if it collaborates with a prospective supplier that is not in compliance with sanctions against specific firms, organizations, or individuals.

Prior to supplier onboarding, businesses must prioritize sanctions screening leveraging updated data.

5. Environmental, Social, and Governance (ESG) Risks

Boosting one's company's top and the bottom line is just one of the several measures of its success.

The responsibility of an organization also prevails in conducting business ethically. Policies that are beneficial to the environment, zero-tolerance laws for discriminatory practices, etc., all fall under this category of requirements. 

Although a company stays on top to adhere to such parameters, it cannot be certain that all of its potential suppliers would as well.

Hence, the disparity in ESG standards between the company and its suppliers could have an adverse impact on the brand's image.

Top 5 Supply Chain Risk Management Strategies to Implement

Mitigating potential risk events and vulnerabilities in the entire supply chain requires in-depth knowledge and comprehension of the risks that imperil the supply chain and the application of the most effective solutions for supply chain risk management (SCRM).

Here is how to do it:

1. Leverage Advanced Technology Solutions

Managing supply chain risks in the digital realm requires a combination of human competence, AI technologies, and advanced analytics tools.

Having a standardized, cloud-based data administration system augmented by capabilities like ML-backed analytics and robotic process automation (RPA) is essential for efficient and precise supply chain risk management. 

Businesses need to invest in digital resources to equip their procurement team with the latest tools required to gather, monitor and analyze purchasing and supplier data.

Installing a holistic procurement system that features a dedicated supply chain, inventories, and supplier relationship management packages can streamline the supply chain management process, reducing risk levels substantially.

2. Emphasize Strategic Sourcing

Companies can implement enterprise risk management (ERM) principles throughout the initial stages of strategic sourcing and supplier engagement to avoid an excessively concentrated supplier ecosystem.

A well-rounded supplier portfolio that fits one of two criteria is ideal for strategic sourcing. It allows the service provider to establish a presence in several different areas and expand its reach. 

Another strategy involves splitting the provider contract into primary and secondary components. It guarantees that the supply chain will keep running even if a single unit goes down.

3. Prioritize Risk Assessment and Planning

Prevention and restoration are incredibly vital aspects of supply chain risk management.

SCRM and business contingency planning overlap when it concerns safeguarding the company's capability to maintain routine business operations and provide the processes and services that drive production.

Such preparedness emphasizes smart, adaptable, and preemptive tactics to foresee and avert supply chain disruptions whenever feasible and on detailed and concrete steps that companies may take to promptly and efficiently reinstate normalcy after an interruption.

Conducting a comprehensive risk assessment has to be the priority.

Establishing a context for designing policies and contingencies to mitigate and eliminate risks requires recognizing external and internal risks that may lead to or generate breakdown patches in the supply chain or operations.

The company's contingency plan should include several distinct solutions, each of which is prioritized according to the degree of risk it encounters.

4. Encourage Better Risk Awareness Among the Workforce

Risk mitigation in supply chain operations is not just the responsibility of procurement and supply chain professionals and senior executives.

When all parties involved have the same knowledge of the circumstances and the same set of tools at their disposal, supply chain risk may be identified and mitigated readily. 

Thus, companies should conduct risk management and awareness training for the entire workforce and ensure they understand their role clearly. 

5. Perform Thorough Research on the Prospective Suppliers

By conducting due diligence, businesses can learn about the business practices of a partner supplier company.

Maintaining one's company's high benchmarks requires conducting a comprehensive risk assessment, which can help reduce undesirable risks, such as not knowing if suppliers have a solid track record of honoring contractual obligations or if there are any conflicts of interest in the existing business dealings.

Organizations, especially manufacturers, should ensure their present supply infrastructure can fulfill their requirements before seeking new suppliers and partners.

Practicing Smart Supplier Risk Management

Smart risk management for the company's external suppliers is essential for any company that purchases in bulk or is reliant on them for essential services or components.

By implementing the above-discussed strategies, companies can better safeguard their interests, strengthen their supply chain, and prepare for unexpected events by proactively recognizing and assessing the risks connected with their supplier relationships.

Wrapping Up

As with the globalization-induced supply chain ecosystem, global supply risks cannot be reverted.

Executives need to understand that implementing effective risk management requires more than just new organizational structures and procedures. 

Organizations can improve their odds of avoiding or mitigating supply-chain interruptions and crises by implementing certain tactics like strategic sourcing, supplier research, and deploying technology solutions like AI, ML, and RPA, while also realizing the full potential of those techniques.

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