The Fundamentals of Supplier Risk Management

Supplier risk management (SRM) can be defined as the process of identifying, evaluating, and effectively managing various risks associated with the activities of third-party or external suppliers. It can be considered as an important part of an overall risk management strategy within an organization. Suppliers play an important role in framing an organization's business operations, as they provide materials or services that the organization requires to grow and establish a profitable business. However, availing the services from the external suppliers also exposes our organization's internal operations to them, which may create chances of potential risks that arise from working with external suppliers. Therefore, Supplier risk management must be an integral part of an organization's risk management strategy to manage potential threats effectively. In this article, we have covered all the important topics related to supplier risk management that you must know.

What is Supplier Risk Management?

Supplier Risk Management refers to the practice of recognizing, evaluating, and addressing the risks that emerge from working with external or third-party suppliers. Potential risks associated with third-party suppliers include data violation, financial risks, operations failures, cyberattacks, and other business interferences that directly impacts an organization’s ability to provide goods and services to its consumers accordingly. With the growth of an organization, its business relationships also grow and require more suppliers to fulfill the demand, which also increases the chances of new risks that need to be managed to ensure the company’s success and survival.

Types of Supplier Risk

Below mentioned are some of the most common types of risks associated with the suppliers: -

• Cybersecurity Risks- Cybersecurity risks are one of the most common types of risk faced by many organizations. It includes data breaches, infringement, and cyberattacks, which can put an organization’s operations at risk and negatively impact its customer service.
• Financial Risks- It includes risks associated with the supplier’s financial failure that directly impacts business performance of the organization that is engaged with that supplier.
• Environmental Risks- It involves supplier's activities & operations that will cause environmental pollution. Organizations engaged with such suppliers are at risk of getting into negative publicity and damage to the company's image.
• Event Risks- The supply chain networks have become much more complex due to the rise of globalization. Event risk involves the risk of facing supply chain disruptions due to natural calamities, war, or changes in political conditions.
• Ethical Risk- It constitutes risks associated with the supplier’s participation in any illegal or unethical conduct, such as child labor.  Collaborating with such suppliers can significantly impact your organization’s reputation badly.

Importance of Supplier Risk Management

Supplier risk management is crucial for any business that collaborates with external suppliers or, we can say, businesses that rely on third-party suppliers for some materials or services. The major objective of supplier risk management is to effectively maintain supply chain processes in an alarming event that could negatively influence client relations, customer service, professional relationships, and the organization’s profit. Supply chain interruptions are likely to occur in organizations that lack knowledge about risks associated with suppliers, engage in badly structured contracts, poor evaluation of the supplier, and weak backup plans to minimize risks and enhance the reliability of the supply chain.

Thus, it becomes important that organizations should have an effective supplier risk management strategy to avoid repercussions resulting from supply chain disruptions and protect the organization from its consequences. Supplier risk management is important for your business due to various reasons that are as follows: -

1. Minimizes Financial Losses

It is crucial for an organization to be ready with a strategic plan on how to handle supply chain disruption and prevent or reduce financial loss. SRM helps your organization to analyze supplier performance and address potential risks associated with it.

2. Adherence to Set Policies & Regulations

There are certain policies and guidelines set by industry bodies or government agencies that organizations must follow to grow their business legally. If a supplier is not be able to meet all these regulations, it puts the organization at risk of being in trouble for not operating in compliance with regulations. Thus, having a good plan will ensure that suppliers are working in compliance with all the necessary regulations.

3. Preserve Organization’s Image

An organization needs to preserve its image and maintain its position in the market. For example, an organization engaged with a supplier that is involved in some unethical activity, such as child labor, will get adversely affected due to such issues. Organizations may have to experience a huge loss due to decreased consumers. However, incorporating supply risk management strategies into your business operations can help you avoid such instances by taking necessary precautions.

4. Reduce Risks of Supply Chain Disruptions

Disruptions in the supply chain can adversely impact an organization’s business performance. It might result in potential inefficiencies and material shortages that will also decrease the organization’s productivity. However, an effective supply management plan can help you deal with such disruptions by identifying them in the first place and implementing steps to avoid them. That way, you do not have to sit back and wait for such incidents to happen and instead actively prevent such losses as well as keep your organization’s reputation afloat.

Identifying problems from the highest point and responding with robust measures can prevent interruptions in an organization’s operations without impacting its business processes. Supply risk management strategies help you analyze the weakest links in your supply chain and create safety stock along with flexible contingency plans to be prepared for all scenarios. In simple words, supplier risk management strategies enable your organization to effectively utilize advanced tools and expertise that provide real-time information with analytical forecasts so you can make data-driven decisions and respond quickly to new threats. A well-rounded risk management process protects your supply chain, enhances your business performance, and enables your organization to stay competitive in the market.

Any little disruption in today’s ever-evolving, fast-paced market can shatter a company that has worked hard to acquire a position in the market and paved its way to success. It is important for you to be in control and not let unforeseen complications or market changes impact your meticulously organized business negatively. You need to proactively manage new and existing supply risk management techniques and effectively incorporate them into your business activities.  At Procurement Resource, we share our market research, cost modeling, supply chain intelligence, and effective supplier risk management strategies. Prepare before crisis strikes. Establish a modern, proactive risk management for your supply chain now. Talk to our experts today and find out how we can help you build a resilient supply chain that allows your business to run smoothly through all challenges!

Author

Ayushi Raj Prabhakar (Associate Business Analyst in Procurement Resource)