How to Evaluate Supplier Risk

A Practical Approach to Global Supplier Risk Management

In today’s disruptive business environment, your suppliers’ risks are your risks. It’s time to develop a comprehensive risk management program that protects your brand, customers, and bottom line in a world where global supply chains are symbiotically intertwined and interdependent.

 

Introduction

Building supply chain resilience has become a strategic imperative for organizations of all sizes and across all industries in today’s disruptive business world. With new worries and threats lurking around every corner, geopolitical issues, natural disasters, and data breaches are just a few of the potential hazards pushing the number of supplier failures to new heights.

Fraught with potential challenges, today’s global supply chains are also symbiotically and strategically intertwined, thus increasing the number of companies impacted when just one small, Tier 3 supplier of parts runs into financial problems, goes out of business, or is hit by a natural disaster.

In this eBook, we explore the increased prevalence of supplier disruption, show how it’s impacting companies across all industries, and outline the key steps organizations should take to create a comprehensive, effective supply chain risk management program.

 

Making Business Continuity & Resilience a Priority

The best companies in the world leverage all that the global supply chain has to offer – understanding what they do best, and where they need to call on another’s expertise to fill in the gaps. Engaging in our now agile global supplier ecosystem, however, is a challenge that requires a more holistic, strategic approach than years passed to handle the increasingly complex networks that can span multiple entities across multiple countries to create just one product.

For instance, to remain efficient, many companies have put a lot time and energy into creating “leaner” logistics operations that are both responsive and cost-effective. They’ve learned to operate with very low levels of inventory—a plus that many are starting to understand could impose real risks on their supply chain, if implemented alone.

A sound supply chain management system, however, can bridge the gap of major business functions such as logistics, sourcing, and procurement within and across companies into a cohesive and high-performing business model.

 

Additional Sections in Full Download:

  • Supply Chain Disruption Lurking in the Shadows
  • How Evolved is Your Approach to Supplier Risk Management?
  • Managing Supplier Risk: Complex and Nuanced
  • Focused Supplier Risk Assessments
  • Is Your Global Supply Chain at Risk

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Your 4-Step Journey to Managing Supplier Risk

It’s imperative to get buy-in from the impacted business groups and from senior management, both of which will play critical roles in the implementation and orchestration of a good supplier risk management approach.

4 steps to create a comprehensive supplier risk management program:

1. Develop the plan.

Understand your organization’s key risks. Part of this includes deciding what risks your organization can mitigate, and defining which suppliers are critical to your business along with the level of analysis they should be evaluated with.

 

2. Take risk mitigation action.

Understanding risks is not enough; a successful program includes a defined action plan, broad communication, and clear accountability.

 

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3. Implement the program.

Decide on which data and tools will be necessary to evaluate the risks you’ve identified as the most important for your organization.

 

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4. Conduct ongoing evaluation and monitoring.

Monitor the overall risk levels of your suppliers and ensure you monitor healthy companies on a regular cadence for any deterioration.

 

 

Focused sections on critical components of your supplier risk management program also include:

  • Supplier Segmentation
  • Developing a Master Supplier Portfolio
  • Critical Key Risk Indicators (KRIs)
  • When Should You Assess Suppliers?
  • Risk Committee Helps Your Organization to Take Action
  • Creating a Dialogue with Your Suppliers to Strengthen Relationships

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The Window of Opportunity is Closing

The business world isn’t getting any less complex, and the world’s supply chains aren’t getting any less sophisticated. With more companies doing business overseas, more political disruption in the cards, and more market volatility ahead, being able to fully grasp the strengths, weaknesses, and trends of your key business relationships is only going to become more important.

For example, companies have had cheap and easy access to capital over the last 10 years, creating an environment where even the weakest companies have been able to stay alive by refinancing their debt over and over, masking underlying operational inefficiencies. In the coming years, however, this advantage will start to disappear as interest rates continue to rise, leading to more failures as refinancing is no longer an option. Right now, supply chains are riddled with companies that will be affected by these and other disruptive issues. If supply chain managers aren’t identifying risk hotspots in their supply chains now, it’ll be too late when those entities blow up. The window to adopt sophisticated programs ahead of these and other disruptive trends is closing.

Whether you’re working with public companies that are required to publish their financials, or private firms that keep that information close to the vest, the RapidRatings FHR brings transparency to your business relationships, giving insight into the business integrity of all of your third-party partners, suppliers, vendors, and customers. Every decision is better informed when you have a clear picture of financial health to guide you.

Key Takeaways

  1. Building supply chain resilience has become a strategic imperative for organizations of all sizes and across all industries in today’s disruptive business world.
  2. Companies have created “leaner” supply chains that are responsive and cost- effective, but that can turn problematic when supplier disruption happens.
  3. Good supplier risk management is based on four foundational steps: develop the plan, implement the program, take risk mitigation action, and conduct ongoing evaluation and monitoring.
  4. By thinking and acting proactively, companies can effectively shore up their supply chains and ensure their own longevity and continuity.
  5. Global supply chains are symbiotically and strategically intertwined, thus increasing the number of companies impacted when just one small, Tier 3 supplier of parts runs into financial problems, goes out of business, or is hit by a natural disaster.
  6. The companies with the most evolved risk management processes are examining a range of risk factors, communicating those risk factors across the entire enterprise, and effectively leveraging predictive risk analysis.
  7. With more companies doing business overseas, more political disruption in the cards, and more market volatility ahead, being able to fully grasp the strengths, weaknesses, and trends of your key business relationships is only going to become more important.

 

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