Your company relies on suppliers. They provide you with the raw materials and services you need to make your products that you sell to your customers to generate revenue and generate loyalty. Now imagine a scenario where a key supplier of a must have component or service suddenly stops providing it to you because they went bankrupt, or maybe they got entangled in a legal scandal and the government shuts them down. What happens to your business if this happens? You will likely not only not be able to sell your products to your customer, losing both revenues and customer loyalty in the process. This is a reality many businesses face, making it extremely important to implement a supplier risk management process.
Running a Supplier Risk Management Process
A supplier risk management process will look at several key elements of supplier performance:
- Financial Risk: The risk that a supplier may face financial difficulties, affecting their ability to deliver goods or services. This is determined by conducting an analysis of each supplier’s financial statements, including their revenues, growth rate, costs, cash flow, available assets and liquidity. Gathering this information usually comes from public financial statements, 3rd party assessments, and through formal surveys to suppliers.
- Operational Risk: Risks related to the supplier’s operational capabilities, such as production delays or quality issues. This is determined typically through ERP data by tracking supplier deliveries against target schedules and assessing supplier quality by tracking defect rates against agreed to amounts.
- Compliance Risk: The risk that a supplier may not adhere to legal and regulatory requirements, potentially causing legal issues for your company. This is typically collected via surveys, 3rd party assessments, or through public disclosures of information via news sources.
- Strategic Risk: Risks arising from the supplier’s strategic decisions that may not align with your company’s goals. This is determined typically via surveys and can include items such as the choice of company location in a geographically unstable area. Or it might include a choice to do business with a country that is subject to trade sanctions by the government, leading to the risk the supplier may itself be sanctioned.
- Reputational Risk: The risk that a supplier’s actions could harm your company’s reputation. This can be due to many items including, for example, the company being involved in illegal activities such as bribery. Or it can include being involved in societally damaging activities such as rain forest deforestation or child labor.
- Cybersecurity Risk: In an era of increasing digital threats, evaluating a supplier’s cybersecurity measures is essential, especially if they will have access to sensitive data or systems. This is typically accomplished via supplier surveys.
The Importance of Supplier Tiering
A key challenge in supplier risk assessment is that a company may have thousands, if not tens of thousands of suppliers. Quantifying the risk of each of these would be simply too time and effort prohibitive. The right approach then is to segment the suppliers into tiers. The top tier – call them Strategic Suppliers – will be the ones that are the most important, the ones without which the business would be impacted. The middle tier will be the suppliers that are important but are substitutable, i.e. there are alternative suppliers available. The bottom tier will be those suppliers who are completely interchangeable. For example, a supplier of a commodity items like office stationery. In this way, you can focus your supplier risk assessment efforts only on the top two tiers, with much more focus on the top tier of vital suppliers.
Best Practices in Supplier Risk Assessment During Onboarding
A best practice to mitigate supplier risk as much as possible is to run a supplier risk assessment during the onboarding process before the supplier becomes integrated into your supply chain. This makes sure that only the best suppliers with the lowest risk are included in your approved vendor list. A comprehensive risk assessment process during the onboarding process should take into account both the importance of the supplier to your organization and then their risk profile. Consequently, a best practice for risk assessment involves the following steps:
- Determine the importance of each supplier. This can be done by understanding what they supply, where it is being used, the impact of not receiving supply for that component, the possible substitutes, and the ease with which substitutes could be obtained. This will allow for the tiering of suppliers.
- Once the suppliers have been tiered, the following steps can be followed to determine supplier risk.
- Initial questionnaire and information gathering
- Due diligence and background checks
- Risk scoring and categorization
- Assessment and remediation planning
At the conclusion of these steps, all information is recorded, and an assessment is made for each supplier. If they pass risk tolerance levels, then they can be onboarded.
Conclusion
In an increasingly complex and interconnected business environment, assessing supplier risk is not just a best practice – it’s a necessity. By implementing a robust risk assessment process, organizations can protect themselves from potential disruptions, financial losses, and reputational damage. Importantly, a robust supplier risk assessment also ensures that your ability to provide products and services to your customers is not impacted.
The best practice is to implement a risk assessment during supplier onboarding and to do so by first tiering each supplier by their importance to your company. However, the benefits of thorough supplier risk assessment extend far beyond the initial onboarding phase. It lays the foundation for strong, sustainable supplier relationships and contributes to the overall resilience of the organization’s supply chain. While challenges exist, the long-term advantages of effective risk management far outweigh the initial investment of time and resources.
Running a robust risk assessment process across suppliers requires the right tools. This is where Gainfront comes in. We are a leading provider of supplier risk assessment and the only one that harmonizes data from multiple sources to give you a full view of your supplier risk. We integrate supplier surveys with 3rd party information, and Gainfront’s proprietary LLM supplier risk process. We use GenAI to summarize all available public information and harmonize this information against internally collected information. In this way, Gainfront provides a detailed assessment of supplier risk that helps ensure you only work with the best suppliers for your business.
Rahul Asthana has a PhD in Operations Management from the Anderson School at UCLA. He has 25 years of experience in supply chain management, starting his career in IBM working in supply chain operations. He then moved into product management and product marketing of supply chain software while at SAP and Oracle. He manages product strategy and product management at Gainfront. In terms of hobbies outside of work, he really enjoys tennis. Follow Rahul Asthana on Linkedin!