Understanding Supplier Risk Management
Weaknesses in the supply chain that were brought to the forefront by the pandemic should have made it clear that understanding supplier risk management and why its implementation is crucial should be top of mind for today’s procurement executives. Here is an overview of supplier risk management and 5 strategies for mitigating your company's risk.
Weaknesses in the supply chain that were brought to the forefront by the pandemic should have made it clear that understanding supplier risk management and why its implementation is crucial should be top of mind for today’s procurement executives.
However, Deloitte’s Global 2021 Chief Procurement Officer (CPO) Survey revealed that supplier risk was only the sixth highest priority and 52 percent of respondents said their company did not use supplier risk management tools.
Software companies that offer supplier risk management solutions, however, are taking it more seriously. In SAP Ariba’s 2022 Q4 features update there are six updates to the Supplier Risk Management module. That’s a lot of updates to one module for a single release.
What is Supplier Risk Management?
Supplier risk management is an evolving discipline in operations management for manufacturers, retailers, financial services companies and government agencies – any scenario where an organization is dependent on suppliers to achieve business objectives. Managing supplier risk is about managing the potential for disruptions in your company’s supply chain due to an unforeseen impactful event.
The pandemic caused many disruptions in the supply chain, making it difficult to source products that are commonly used by manufacturers, retailers and other industries. In addition to manufacturing and supply chain disruptions, quality-related recalls of food, medicine, and even toys mean that those suppliers are now unavailable to the companies that rely on them. Sometimes closures and recalls, or just bad management, can force a supplier into bankruptcy.
Other types of risk may involve sensitive data and the potential for information losses, or even environmental impacts.
There are numerous scenarios that can put your company at risk of supply chain disruptions. And the narrower your supplier network is, the more vulnerable you may be to losing an important link in your supply chain.
How can you reduce potential supplier risk exposures?
There is no way to completely eliminate risk, but you can mitigate it with a supplier risk management plan. Whether that is SAP Ariba Supplier Risk Management software or another solution, it’s crucial to have a program in place.
Here are 5 recommendations for reducing supplier risk:
- Diversify. The expression “don’t put all your eggs in one basket” is an apt one here. Relying on only one supplier for a part or product puts you at exceptionally high risk for supply chain disruption in the case of a recall, late shipping, environmental disasters, bankruptcy, or anything that can affect that supplier.
- Identify. It’s crucial to have full visibility into your supply chain. Again, referring to the Deloitte survey, only 70 percent of CPOs said they have good visibility into their “direct supplier base.” Even if you do have visibility you may not have the full picture of your suppliers’ situation if you aren’t leveraging neutral third-party insights. By taking advantage of the tools available, you can gain insights beyond the exposure that you have directly to your supplier and identify and mitigate issues.
- Rank. We’ve written extensively about the importance of good supplier management. That includes not only data cleansing, but also identifying your top suppliers and having alternative suppliers for your most critical categories.
- Review. Supply chain risk mitigation isn’t something you do once and then you’re done. It’s important to periodically review the data and be sure it’s still up to date and relevant. At the very least, an annual review, inclusive of internal category manager feedback should be part of the process.
- Collaborate. Mitigating supply chain risks can seem overwhelming, having a third-party solution can make the task much simpler. The right software can help you track, identify, assess, document and mitigate risk.
There may be more that your company needs to do to identify and mitigate risk, that probably depends a lot upon your particular industry.
But the most important thing to understand is that there are risks along all supply chains. Not acknowledging that and taking preventative action to avoid these risks can cause disruptions that may be difficult to recover from.
Supplier Risk Management Solutions
Many companies that are looking for supplier and vendor risk solutions don’t realize that they already have one — it’s included with SAP’s Strategic Sourcing Suite.
