Supplier Risk Management: Why It Matters More Than Ever in 2023

Why is Supplier Risk Management Important

Supplier risk management is a critical aspect of supply chain management that has become increasingly important in recent years. While supplier risks have always existed, incidents such as the Tottenham Hotspurs football team’s illness and the Foxlink factory fire in India have highlighted why is supplier risk management important. In today’s globalised business environment, supply chains often include multiple partners, and sourcing and offshoring activities are becoming more extensive and sophisticated to capture cost savings and processing efficiency. Without adequate supplier risk management processes in place, organisations face unexpected risks that could result in significant financial and reputational damage.

Businesses are becoming increasingly reliant on third-party suppliers; making it critical to have a comprehensive and robust supplier risk management framework in place to manage and mitigate the risks associated with supplier relationships. By implementing effective supplier risk management practices, organisations can identify and manage risks, ensure business continuity, and ultimately capitalise on the potential benefits of strategic supplier relationships.

Read more: How to Effectively Mitigate Supply Chain Risk in the Manufacturing Sector

Ever-expanding scope of risks:

The increased use of sourcing and outsourcing arrangements in modern business operations has led to more complex and extensive supply chains, which in turn has increased the likelihood of supplier risks. These risks can be significant and varied, and may include:

Reputational risk: This type of risk arises when a supplier fails to deliver on agreed service levels or quality standards, resulting in service or supply interruption. This can lead to a loss of confidence in the organisation and can damage its reputation in the eyes of its customers, stakeholders, and the public.

Resilience risk: A supplier failure can cause an immediate interruption to business, leading to resilience risk.

Information security and privacy: The risk of sensitive data, including customer data, being compromised by a cyber-security breach or failure in a supplier company is an ever-present danger in modern business operations. Such risks can lead to significant financial damage.

Regulatory risk: The risk of non-compliance with regulatory requirements or commercial undertakings associated with sourcing, outsourcing, or offshoring arrangements in the jurisdictions a business operates can result in significant penalties, fines, and legal costs.

Commercial risk: The risk of financial loss or cost overruns due to poorly managed sourcing arrangements, supplier failures, and inaccurate billing from outsourced parties.

Managing Supplier Risks: Supply risk management is an essential strategy for any organization that aims to proactively identify events that may adversely impact their supply chain. To manage supplier risk effectively, businesses need to have an overall framework that provides a structured approach to identifying, assessing, and mitigating risks throughout the sourcing lifecycle. This includes not only the initial selection of suppliers but also ongoing monitoring and management of supplier relationships.  The procurement function’s relationships with its suppliers are typically the foundation of how sourcing and supplier risk management programs perform. 

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Effective supplier risk management is critical to ensuring the continuity and resilience of your supply chain. With a complex and interconnected global supply chain, identifying and mitigating potential risks can be a challenging task. Here are 7 key considerations that are critical for procurement and sourcing professionals who need to evaluate and mitigate risks associated with their supply chains:

1. Do you have clear visibility of all stages and suppliers in your supply chain?
2. Does management routinely require suppliers to provide details of their own sourcing/outsourcing and offshoring arrangements?
3. Do you regularly monitor the operational, ethical and financial risk and performance of your suppliers?
4. How are you assured that your supply chain complies with the relevant regulatory and legal requirements?
5. Does management take a risk-based approach to assessing and managing supply chain risk?
6. How are you assured by management that you are operating within your supplier/offshoring /risk appetite?
7. Are you confident that you are not being defrauded by employees and/or suppliers?

Read more: Emerging Supplier Risk Management Trends and Technologies to Watch Out For

How A.I. is Transforming Supplier Risk Management:

An intuitive supplier risk management tool that increases accuracy, transparency, and uses the available data to build comprehensive reports is essential for organizations that want to proactively manage supplier risk. One way to enhance the effectiveness of supplier risk management is through the use of technology. Artificial intelligence (AI) and other technologies can play a crucial role in identifying potential risks and providing real-time insights to mitigate those risks. AI can help organizations analyze large amounts of data and provide valuable insights into supplier performance, financial stability, and compliance with regulatory requirements.

Other technologies, such as blockchain and Internet of Things (IoT), can provide greater transparency and visibility into the supply chain. Blockchain can help track and verify transactions, while IoT devices can collect real-time data on supplier performance and provide alerts in case of any potential risks.

Read our blog on: Riding the Digital Wave: The Evolution of Supplier Risk Management in Procurement

Conclusion:
The cost of being blindsided by a supplier issue is always higher than the cost of preventing it. Therefore, it is essential to invest in supplier risk management to ensure business continuity, protect against reputational damage and financial loss, and ultimately capitalise on the potential benefits of strategic supplier relationships. Our eBook series provides readers with a comprehensive understanding of supplier risk management, the detrimental effects of poor supplier risk management, and outlines best practices for managing supplier risks effectively.

Related Read:

1. Blog – How to Effectively Mitigate Supply Chain Risk in the Manufacturing Sector
2. Blog – 4 Formulas for Supplier Risk Management
3. Blog – Vendor Landscape: Supplier Risk And Performance Management
4. Zycus’ iSupplier, Supplier Information Management Software
5. White paper – Ensuring Efficient Supplier Risk Management with Supply Chain Transparency
6. TechWatch: Transform Supplier Risk Management with iRisk