Supplier risk management: 5 best practices to follow

Every business faces supplier risks, i.e. the probability of events caused by third-parties that can, or will, present challenges to their operations. Businesses that lack visibility of their suppliers and their agreements are unable to complete supplier risk analysis - and are often unaware of the potential risks they may face as a result. 

Managing supplier risk - sometimes referred to as managing third-party risk or vendor risk - means identifying what can go wrong in advance and having a plan in place to manage or mitigate these events.

Failing to do this or being under-prepared will generate some unwelcome surprises that can impact the business from a financial, operational or reputational aspect.

Supplier risks range from supply interruptions, environmental and safety crises and information security breaches through to assaults on brand and reputation."

These risks can all impact your business's reputation - causing significant financial issues either through loss or penalties. Failure of a key supplier may be critical or even fatal to your business. 

In this article, we take a look at some supplier risk management best practices your business can apply to improve its analysis, monitoring and mitigation efforts.

Common supplier risks that can impact your business

In the past few years, businesses have faced global issues that have increased supplier risk throughout their organisation.

From COVID-19 through to the war in Ukraine, businesses have faced all sorts of disruptions; from suppliers not being able to fulfil their obligations to a weakened supply chain causing operational issues.

These events simply can’t be predicted, but there are lessons to be learned for events that can be somewhat controlled. 

Businesses need to focus on resilience and supplier risk analysis is crucial for this. Your business needs to know the probability of a risk, the impact it could have and how it plans to mitigate or manage it."

This sort of analysis is built on knowing your suppliers and having complete visibility of them, including their records, their current level of performance and the strength of their collaboration with your business.

Businesses that aren’t able to analyse risk and put supplier risk mitigation strategies in place could face: 

• Discontinuity in the supply of essential goods or services
• Poor supplier performance
• Key supplier financial failure or cash flow problems
• Supply chain disruptions
• Quality issues 
• Avoidable cost increases in raw materials, services and project costs
• Product contamination and recall
• Critical technology failure or cyber attack
• Environmental pollution or safety incidents
• Legal non-compliance, regulatory lapses or supplier fraud

These are some of the most common supplier risks and are by no means exhaustive; there may be others that may occur within your supplier relationships. Being able to analyse these relationships, identify potential issues and proactively get ahead of mitigating risks will be key to protecting your business from any disruption. 

prioritise supplier risk analysis 

ProcureTech100 2022  highlights that just over half of suppliers (57%) are typically evaluated during the risk analysis process.

And according to analysts at Spend Matters, many companies deal with risk on a piece-part basis. Spend Matters believe that this fragmented approach is the wrong one and that a holistic view is needed, backed by technology

There are three main steps to developing a risk management plan, built around effective supplier risk analysis; Identify the risks, evaluate the risks and create a contingency plan. Let's take a look below. 

1. Identify the risks

Is the supplier risk high, medium or low? It requires a team effort to define the most critical risks. Ideally, a compliance or risk manager should help generate these ideas in both group and one-on-one settings, and then allocate ownership for individual risks.

2. Evaluate the risks

With every risk quantified, the team can evaluate which supplier risks need to be addressed and in how much detail. The decision on whether to accept the specific risk (carry the cost) or take action to prevent or minimise it depends on the organisation’s appetite for the risk. The cost of insuring the risk may be so high that it does not make financial sense.

3. Build a contingency plan

Developing actionable supplier risk management plans is the most important step. Alternative solutions for an adverse event should be created where relevant, according to priority, and include all the details necessary to actually take action.

This could involve defining escalation procedures that your company must follow when an event occurs. Your business should use a RAG status system to denote which risks are most prevalent and need urgent attention. 

There are really only four ways of managing a risk: accept it, transfer it, reduce or eliminate it.

If we accept it, we may be able to insure it. However, some costs are uninsurable, such as damage to a company's reputation.

Stay ahead of  supplier compliance

To mitigate risk you need visibility into whether or not suppliers are working within regulations, fulfilling contractual obligations and keeping their information up-to-date. Ensuring supplier compliance - and being able to monitor this aspect - removes any potential guesswork of potential for being blindsided. 

If you are managing your contracts manually, or your record-keeping is fragmented, it can be easy to lose sight of your suppliers’ compliance statuses. Following the steps below will put your business in a stronger position but implementing supplier management software will help to enhance your entire approach. 

1. Simplify document gathering with delegation

Improving supplier compliance means having thorough processes from the start of your relationship. By making document gathering mandatory ahead of onboarding, suppliers will need to provide you with their records before the relationship goes any further. Data-delegation via a dedicated portal is key here, rather than spending hours chasing your suppliers back and forth over email.

This protects your business from risk and non-compliance immediately, also saving time further down the line as you won’t need to chase for missing information or documentation. Delegating the information you need puts the onus on suppliers to be compliant and prove that they are doing so.

2. Centralise compliance documentation

If you don’t have visibility of the status of supplier compliance, you increase the risk of your business being non-compliant too. Visibility relies on being able to easily access accurate, up-to-date information and is the bedrock of controlling the level of supplier risk throughout your organisation.

Centralising documentation in a secure repository gives you a single source of truth about the status of your suppliers. This will bring to light any certificates that are expiring, any data that needs updating or any gaps in your supplier information - allowing you to take early action and minimise potential risks.

3. Continuously track supplier compliance

It’s not enough to simply centralise supplier information such as compliance certificates. If you put all documentation in one place and never look at it again, non-compliance can quickly occur without anyone knowing.

A failure to complete supplier risk monitoring can increase risk, disrupt your business, damage relationships and lead to legal action."

Tracking your suppliers, whether it's their compliance status, their performance against agreed KPIs or whether or not they have met obligations,  is a fundamental supplier risk management best practice. 

Protect your business from Information and cyber risk

Supply chains are becoming increasingly dependent on information technology systems and software. There is a growing threat from cyber risk and an urgency to prioritise this, maybe even beyond some physical risks.

Ponemon Institute 

recently revealed that 59% of respondents to their survey confirm that their organizations have experienced a data breach caused by one of their third parties, with 54% occurring in the past 12 months."

KPMG recommends doing due diligence on key suppliers. This means researching each one, their reputation and linked companies. It also includes examining their IT security, invoicing, contact methods, system logins and access control. Completing a supplier risk assessment will help your relationship start on a stronger foot. 

This due diligence can take place before the supplier has even been onboarded and should continue throughout the length of your relationship with them.

Five Supplier risk management Best Practices

To summarise, the best way to manage supplier risk is to complete an analysis,  monitor levels of risks continuously and have mitigation plans in place. Here are five risk management best practices to use. 

1. Have a clear view of your total third-parties and their relationships. Ensure that the data is accurate, reliable and up-to-date. For strategic suppliers, it is recommended that you gain insight into their reliance on their own vendors (your Tier 2). Understanding the relationships that exist between different tiers of suppliers allows you to assess the extent of any possible supply risk.
2. Assess key suppliers by their risk level. With the highest-risk vendors, site visits and procurement audits are essential. Ensuring compliance with specific laws and regulations around ethics, corporate social responsibility, health and safety and financial security is vital. Verify all information supplied and monitor it regularly. Research conducted by Achilles and IFF Research revealed that 43 percent of businesses are aware of a high-risk supplier failing to meet compliance requirements.
3. Pre-qualify new suppliers. Establish your minimum requirements for compliance with laws and regulations in your industry and make these mandatory when selecting new vendors.
4. Give sole-source suppliers special attention. Routine site visits are one of the most effective methods of not only identifying supply chain risk but also helping develop contingency plans. Any sole-source contract should have a plan B in place that can be activated with immediate effect.
5. Centralise all information and keep tracking suppliers. You can't know what you don't know and if your supplier records are fragmented, hidden or missing, you won't be able to see the level of risk they bring to your business. 
   
   

If you're ready to manage supplier risk more effectively and want to know how technology can support you as you seek to apply these best practices, book a call today.