The list of risks continues to grow as supply chain complexity increases. Developing a supplier risk management strategy is a proactive approach to protecting the business through the procurement process. -BY Gerald Donald

Supplier risk management, also known as vendor risk management (VRM) or supply chain risk management, means identifying, assessing, and mitigating risks associated with suppliers or vendors. These risks include financial stability, operational reliability, compliance, security vulnerabilities, and reputational issues, among other factors. Supplier risk management strives to ensure the organization can effectively manage and mitigate potential disruptions or negative impacts arising from supplier relationships. This involves implementing strategies and processes to evaluate and continuously monitor suppliers, establish contingency plans, and develop risk mitigation strategies.

Effective Risk Minimization Strategy Development: First Identify the Potential Risks

Businesses face the potential for disruption on a routine basis. What is different today is that the list of supply chain risks has grown.

Gartner names seven risks. There are the risks of weather and geopolitical changes or upheavals. Additional risks include financial risks, the risk of suppliers not complying with sustainability and ESG goals, the risk of a lack of compliance with legal and regulatory requirements, the risk of supplier capacity being unable to meet performance requirements, and cyber security risks. Performance risks are a major category, usually tracked with supplier performance dashboards. This category includes items like on-time delivery, quality metrics, logistics metrics, etc.

With so many risks, supplier risk management is needed to minimize business disruptions. Management begins with developing a comprehensive strategy that addresses supplier and vendor risks from sourcing to offboarding. VRM strategy develops processes for sourcing and selection, onboarding, risk scoring, risk assessment and remediation, continuous risk monitoring, financial stability and contract or service level performance, and termination and offboarding.

Today, most businesses using vendors and suppliers have created direct or indirect links to their systems through technology. For example, suppliers, like healthcare or payroll vendors, are given access to customer information. The procurement organization is at high risk of reputational damage if it fails to protect customer or employee private information. If a supplier accesses proprietorial information via a software system and misuses the information, the buyer loses a competitive edge and costly resources. Some suppliers are not financially stable and are at risk of bankruptcy but manage to hide it until close to announcing their financial problems. There are so many ways a business can experience reputation damage today because consumers have easy access to information about companies and use the internet to make the supplier’s issues public, i.e., labor exploitation in a low-income country, money laundering, covering up product design flaws, unethical hiring practices, etc. Environmental, social, and governance (ESG) practices are also associated with risks. Supplier ESG risks include CO2 emissions, destruction of biodiversity to obtain resources, pollution, human rights violations, and poor workplace performance and safety. The Kellogg School of Management reported on a study that found a significant link between the level of ESG risk in a supply chain and future stock prices. One reason is that companies with a healthy supply chain ESG are more stable due to fewer disruptions, the ability to attract socially conscious customers and investors, and the ability to stay ahead of new regulations better.

Developing a Supply Chain Risk Minimization Strategy

Each supplier and vendor presents unique supply chain risks, but there are critical steps in every risk minimization strategy. The goal is to thoroughly assess potential and existing suppliers to evaluate their capabilities, reliability, and risk factors. Procurement can identify and categorize the different types of risks associated with suppliers and analyze and prioritize each risk's likelihood and potential impact. This determines qualitative risks that are then quantified. Quantitative risks have values attached, like an estimated financial loss. This enables establishing tiers of suppliers based on whether they are high, medium, or low risk.

Standardized evaluation tools, like supplier scorecards utilizing KPIs, are great for current and potential suppliers to ensure fair and comprehensive evaluations. A rule-based system keeps current suppliers on track and ensures future vendors and suppliers brought into the supply chain can meet risk standards. Linking this with supply chain mapping allows managers to identify current supplier relationships and dependencies that are creating vulnerabilities.

Risk mitigation strategies will vary because no single strategy applies to all suppliers, except for financial health assessments. Based on the risks identified, procurement may decide to further diversify the supplier base by adding more diverse local suppliers or sourcing from suppliers in multiple locations. A mitigation strategy could include negotiating contractual terms with a new supplier that reduces specific risks and implements new controls. Working with senior leaders, procurement can develop a contingency plan to identify alternative solutions for a business disruption.

The procurement team identifies all the potential risk scenarios for evaluation, meaning the team must work with other organizational leaders to identify all risks. For example, procurement is typically not involved in monitoring trade agreements between countries or natural disasters, but other organizational experts may have the expertise to help procurement develop a process that includes strategic sourcing, supplier risk evaluation, RFP terms that include risk minimization, supplier selection, and contract negotiations. Some organizations create a cross-functional team to identify all potential risks and assist with risk mitigation strategy development and response.

Continuously Monitor to Proactively Detect Risks

Once a risk minimization strategy is implemented, it must be continuously monitored. This discovers threats as they develop so they can be quickly addressed. Continuous monitoring also includes regularly doing risk assessments and analyzing results. The risks are analyzed against the type and level of risk identified during the development of the supplier risk management strategy, guiding the appropriate response.

Numerous companies are selling vendor or supplier monitoring platforms, enabling monitoring of suppliers at deeper levels than Tier 1 and 2. Tech-based monitoring programs can track activity and identify vulnerabilities and deviations through data analysis. Risks can appear anytime, disrupting organizational operations, harming reputation, and causing financial losses. Investment in an effective vendor or supplier risk management program is an investment in organizational sustainability.