An organization’s risk management approach includes supplier risk management (SRM). Direct procurement entails coordinating with vendors to secure essential supplies.
Organisations require additional vendors as they grow. Multiple suppliers might reduce risk if one fails, but they also pose new hazards. Risk management is crucial to your company’s success and survival. So supplier risk management is needed.
Supplier risk management, third-party risk management best practices, and more will be covered in this article.
Supplier Risk Identification
Supplier risk is the risk of financial losses or business disruptions from third-party organisations, notably suppliers. This may involve supplier bankruptcies, quality difficulties, delivery delays, or ethical violations.
The expense of supply disruptions may damage any brand, thus supply chain risk management is crucial to company.
While risks and interruptions can’t be eliminated, a strong supply chain risk management programme can reduce their impact on the organisation.
Types of Supplier Risk
Suppliers pose many hazards. Some common ones are:
Financial Risk
Outsourcing is mostly for cost reductions, but if a supplier has financial issues, it could affect your business. Risk reduction measures are needed since this type of risk is hard to foresee or prevent. If suppliers don’t follow the contract, it could lead to future complications.
Ethics Risk
A supplier’s child labour or other unethical actions might hurt your brand and business. Careful supplier screening and continual monitoring reduce ethical risks.
Environmental Risk
Supplier operations may pollute the environment. Manufacturing and mining can pollute soil and water with harmful compounds.
Bad publicity and reputation damage might result from a supplier taking this risk. Your corporation indirectly pollutes the environment. Careful supplier screening and continual monitoring reduce environmental risks.
Political Risk
A supplier from an unstable country may have lower-quality products and services. Careful supplier selection and diversity reduce political risks.
Economic Risk
Suppliers may struggle to meet your needs due to the economy. It can effect its product and service prices. A volatile currency in the supplier’s country makes it hard to estimate product prices.
Describe Supplier Risk Management.
Supplier risk management involves detecting, assessing, and managing third-party supplier risks. SRM is essential to an organization’s risk management plan and helps prevent supply chain disruptions, quality difficulties, and financial losses.
SRM minimises supplier issues to protect an organisation. Your SRM plan must identify supplier-related issues that could impact the company, estimate their likelihood and severity, and implement measures to reduce them.
Why Is Supplier Risk Management Important?
The following supply chain disruptions are inherent in supplier collaboration:
- Lack of supplier risk knowledge
- Poor third-party risk assessment
- Poor contract design
- Uncertainty about disruption effects
- Insufficient risk mitigation and supply chain resilience plans
- Fragmented supplier risk management across organisations
Protecting an organisation from disruptions requires adequate supplier risk management.
Major reasons supply management is important:
1. To prevent financial losses for the company
Supply chain risk management benefits from being proactive. An organisation can avoid or minimise financial damages by adopting a disruption plan.
2. For regulatory compliance
Industry and government rules often apply to organisations. The company may be in violation if a supplier cannot meet regulatory requirements. A plan can help suppliers follow all regulations.
3. To maintain company reputation
A supplier with ethical or other concerns might undermine a company’s reputation. If a corporation exploits child labour in its supply networks, the word will spread and customers may boycott its and its affiliates’ products.
With supply chain risk management, you may be proactive and avert such calamities.
4. To prevent supply chain interruptions
Further delays and material shortages can result from supply chain disruptions. But a supply management plan can recognise these interruptions and implement rules to minimise or mitigate them.
5. To ensure operating continuity
Supply chain interruptions might shut down operations. Companies that use just-in-time material delivery are especially affected. A disruption plan can let activities continue, albeit at a reduced capacity.
How to Manage Supplier Risk?
Organisations must handle supplier risks like other business risks. This includes knowing what could happen if a provider doesn’t deliver and taking efforts to mitigate it.
Supplier risk management can be approached in numerous ways, but one common paradigm is identification, evaluation, and mitigation.
1. Identify
You must identify the most dangerous suppliers before controlling supplier risks. The organization’s total exposure and supplier-specific risks must be examined.
Start with these questions:
- The supplier offers what?
- How much did we buy from the supplier?
- How dependent are we on the supplier?
- How is the supplier financially?
- The supplier’s history? Have they had quality issues?
- How stable is the supplier’s country politically and socially?
2. Evaluation
After identifying the riskiest providers, evaluate their impact. This step entails understanding what could happen if a supplier defaults.
Ask yourself these questions:
- The effects of a supply chain disruption? For instance, would production stop? Would sales drop?
- How likely is a supplier disruption? Which danger indicators should we watch?
- The impact’s severity? Will it be a mere nuisance or a huge crisis?
3. Mitigate
Develop risk reduction methods after identifying and assessing them. Reducing disruption risk and impact is the goal.
Many methods exist, but some are:
Diversification
Working with several providers for the same product or service reduces risk. This way, you’re not completely dependent on one source if they have a problem.
Redundancy
To quickly switch suppliers if one fails, set up redundant systems. If a supplier goes down, you may store up on other parts to continue production.
Contracts
To decrease risk, insert language in contracts that safeguard you in case of issues. If production stops, you may ask the supplier to offer free replacement parts.
Regardless of your method, you must have a plan for supplier issues. This plan should contain essential contacts, alternative suppliers, and mitigation strategy implementation instructions.
Smartly Manage Supplier Risk
Business that uses external suppliers for goods or services must manage supplier risk. By recognising and assessing supplier relationship risks, firms may manage them, defend their interests, and improve supply chain resilience.
There are numerous supplier risk management strategies for firms. Still, understanding the risks and creating a comprehensive plan to mitigate them is crucial.
Businesses can avoid supply chain disruptions and maintain efficiency by following these steps.
