For years, a supplier may provide fine products, but suddenly become a problem when things go wrong. A financial challenge, occurrence with cyber security, regulatory issue, production failure or geopolitical problem could impact the company more deeply than just in the supplier relationship itself. That is why supplier risk management should be an integral part of the procurement process, not a periodic exercise just done when there is a problem.
Supplier Risk Starts Before The First Order
An organization will be exposed when it thinks about partnering with a new supplier. The supplier might be responsible for handling sensitive data or information, offering materials that are integral to the business operations, making payments, or a designated agent for an important line of business.
These exposures can be better understood by early due diligence before entering into a contract. Simple due diligence would involve ownership, financial health, certifications, regulatory compliance, capability and previous performance.
The depth of assessment would depend on the supplier and towards the nature of the relationship. The vendor of office stationery doesn’t need to be handled in the same way as the vendor of confidential business information that we call a technology provider.
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Different Suppliers Create Different Risks
Supplier risk is not a single category. A supplier can expose a company financially, operationally, in legal terms, through cyber security, quality control, lost reputation, strategic, or geopolitical terms.
Financial insecurity might impact a supplier’s capacity to meet orders, for instance, or a cyber security imperfection might open up to vast amounts of company, or client data. A quality problem might stop production, a regulatory violation could result in a legal or compliance problem.
Identifying the differences will help organizations not apply the same assessment process for all vendors. A risk evaluation process that is able to incorporate actual relationships and potential outcomes is more helpful.
Due Diligence Creates A Starting Point
Supplier due diligence is the basis for risk assessment. Organizations may ask for related documentation and assess information prior to hiring a vendor.
It may be financial information, financial certifications, insurance documents, security assessments, compliance records, references and operational information depending on the nature of the relationship.
But, doing your homework isn’t something to do just once. Data gathered at the time of the onboarding process reflects a suppliers’ place in history. It can be quite different after the business’ life.
Contracts Can Define Risk Controls
When contracts are used, they can help set a firm expectation for risk. Procurement teams can define terms for service level, security of the data, compliance, reporting, quality requirements, insurance, incident notification etc.
Supplier risk management can assist in finding a linkage to match each supplier with a mechanism to address these contractual requirements and their corresponding exposures. Services can be measurable agreements of expectations as well. If the supplier will be supplying a critical service they will be included in the contract, for example response time or availability requirements, delivery targets and escalation procedure.
A good contract condition is not a solution to risk problems; it may lay the groundwork for meeting risk problems when they arise.
Monitoring Supplier Performance Matters
The term risk can not necessarily be found in securities or regulatory disclosure. It’s possible that warning signs can be given in every day supplier performance.
When items are delivered late regularly the quality of the product may be lacking, the services may not fit the bill, the invoices may be in error, or the response may be late, this can indicate problems with the business operations. If these trends are noted over time, procurement teams can determine whether a problem is happening on a one-off basis or it’s a pervasive issue that needs to be addressed.
Performance information can also be used as a basis for supplier discussions. Rather than general impressions, procurement professionals can conduct a discussion over a service history and anticipated service performance.
AI Adds Speed To Risk Analysis
With the rise of AI in procurement, the ways teams can process supplier information is changing. Procurement can have a high turnout of contracts, questionnaires, certificates, performance details, and other documents.
An AI-based tool would be useful to analyze the facts, identify trends and patterns, organize the information available up there on suppliers, and flag those that still require human attention. This can aid some of the time consuming manual procedures that involve a lot of procurement information.
AI must not be used in a way that would take the place of good judgment. Even a flagged risk requires context, verification and appropriate action. Its main benefits are increasing the speed of information processing and directing focus.
Preparing For Supplier Disruption
Relationships with suppliers, no matter how good they are, are subject to sudden and unexpected changes. Supply continuity can be impacted by natural disasters, transportation issues, cyber events, shortage, geopolitical affairs and/or sudden financial considerations.
Contingency planning offers a choice of options when a disruption happens. This could include working with alternative sources, holding safety stocks, sourcing geographically and having back-up logistics.
It will be determined by the effect of the loss of the supplier on the businesses. Typically, critical categories have more detailed continuity plans than categories where replacement is easy.
Conclusion
Understanding supplier risk management isn’t something that is done in the case of unforeseen disruption, it’s a continuous, integral process of procurement. Effective supplier risk management is the process of evaluating and measuring suppliers, their past and predicted performance, defining terms of supplier contracts, monitoring supplier performance over time, and engaging in contingency planning, which leads to a clearer understanding of the supplier landscape.
Proco Inet works as a solution for businesses looking to technology that helps them organise those activities, while providing procurement capabilities that include supplier information, workflow, monitoring and procurement processes, all in a more connected environment, increasing the chances of managing your supplier relationships with visibility.
