Supplier Risk Management: Building A Stronger, Safer Supply Chain

Every product, service and operation relies on a complex web of external suppliers, each introducing potential vulnerabilities. Effective supplier risk management is necessary for maintaining operational continuity, safeguarding reputation and ensuring financial stability. 

This guide will explore the ins and outs of supplier risk management, the common challenges and hidden risks, and provide actionable strategies for building a strong, resilient, compliant supply chain.

What Is Supplier Risk Management?

Supplier risk management is the systematic process of identifying, assessing, and mitigating potential risks associated with an organisation’s third-party vendors, suppliers, and contractors. It involves understanding the various threats that can emerge from external relationships and developing strategies to minimise their impact on business operations, reputation, and financial performance.

These supplier management risks can span a wide array of categories, including:

• Operational risks: disruptions in supply due to a supplier’s financial instability, natural disasters, labour disputes or production failures.
• Financial risks: a supplier’s bankruptcy, price volatility, or unexpected cost increases.
• Compliance and regulatory risks: a supplier’s non-adherence to legal, ethical, or industry-specific regulations, can expose your organisation to fines, penalties, or legal action. This is a significant concern, with 59% of leaders seeing working with external vendors as the biggest potential source of corruption within their organisation. This risk is particularly elevated in industries like pharmaceuticals (83%) and technology (72%).
• Reputational risks: negative publicity stemming from a supplier’s unethical practices, poor labour conditions, or environmental damage, which can reflect poorly on your own brand.
• Cybersecurity risks: data breaches or system compromises originating from a third-party vendor with access to your systems or data.
• Quality risks: substandard products or services delivered by a supplier affecting your own product quality or service delivery.

Effective supplier risk management aims to create a transparent and controlled environment where these potential threats are identified early, assessed accurately and managed proactively. 

Related Reading: How To Know If Your Supply Chain Is Sustainable

Challenges In Supplier Risk Management

The complexity of supplier management risks has grown dramatically in recent years. Organisations today rely more heavily on extensive networks of external partners, often operating across multiple locations and regulatory jurisdictions. This increased resilience brings vulnerabilities that require sophisticated risk management approaches.

There are several factors responsible for the rising challenges in supplier risk management:

1. Globalisation of Supply Chains: Longer and more intricate supply chains increase exposure to geopolitical instability, natural disasters, and varied regulatory environments.
   
2. Increased Outsourcing: Companies are increasingly outsourcing core functions, leading to greater dependence on third-party service providers.
   
3. Digital Transformation: The widespread adoption of digital technologies means more data sharing and interconnected systems, amplifying cybersecurity risks from suppliers.
   
4. Heightened Regulatory Scrutiny: Governments and industry bodies are imposing stricter requirements on organisations to manage risks within their supply chains, particularly concerning ethics, sustainability, and data privacy.
   
5. Focus on ESG (Environmental, Social, Governance): Stakeholders increasingly demand that companies demonstrate responsible practices throughout their entire supply chain, making a supplier’s ESG performance a critical reputation risk.

Vendor risks often only become apparent for many companies after due diligence and during the ongoing relationship. Research shows that 83% of legal and compliance leaders identified vendor risks only after due diligence, with 31% resulting in a material impact, and a staggering 92% stating these material risks could not have been identified through due diligence alone. This highlights the crucial need for continuous supplier risk management.

Related Reading: What Are The Causes Of Construction Supply Chain Disruptions?

Benefits Of Proactive Supplier Risk Management

Proactive supplier risk management offers numerous benefits for contractors and their clients, transforming potential vulnerabilities into strategic advantages.

1. Ensures Operational Continuity

The most direct benefit is the ability to maintain operations despite disruptions to a supplier. Businesses can avoid costly downtime and maintain service delivery by identifying alternative suppliers or implementing mitigation strategies.

2. Protects Financial Health

Proactive management reduces financial losses from supplier failures, breaches, or disputes. This includes avoiding non-compliance fines, mitigating the costs of operational disruptions, and preventing costly remediation efforts.

3. Safeguards Reputation And Brand Value

A significant supplier management risk is the potential for reputational damage. If a supplier engages in unethical practices or experiences a major incident, it can reflect poorly on your brand. Effective management helps protect your organisation’s image and stakeholder trust.

4. Improves Compliance And Avoids Penalties

Organisations are increasingly held accountable for the compliance of their supply chains. At Veriforce CHAS, we help contractors demonstrate compliance across various risk areas, benefiting suppliers and clients by ensuring adherence to regulations.

5. Drives Efficiency And Innovation

Engaging in supplier risk management often leads to a greater understanding of your supply chain, identifying inefficiencies and opportunities for process improvement or collaboration on innovative solutions.

6. Builds Resilient Supply Chains

By continuously monitoring and adapting to emerging risks, organisations can build stronger and more agile supply chains capable of withstanding future shocks.

7. Provides An Advantage

Clients are increasingly looking for suppliers who can demonstrate robust supplier risk management practices. Veriforce CHAS certification signals a commitment to safety, compliance and effective risk handling for contractors, giving them a significant edge in securing contracts.

Related Reading: 9 Strategies to Reduce Supply Chain Risk

Key Strategies For Effective Supplier Risk Management

Effective supplier risk management involves a multi-layered approach that spans the entire supplier lifecycle, from selection to ongoing monitoring. 

1. Robust Supplier Due Diligence (Initial Onboarding)

While initial due diligence cannot identify all risks (as 83% of leaders found), it remains an important first step. Before engaging with any new supplier, conduct thorough background checks, including:

• Financial Health Assessment: Review financial statements to ensure stability.
  
• Compliance and Certification Checks: Verify that the supplier holds necessary certifications and adheres to relevant industry standards and regulations (such as health and safety, environmental, and data protection). This is where Veriforce CHAS’s pre-qualification services are invaluable, providing assurance on contractor compliance.
  
• Reputational Screening: Check for negative media mentions, litigation history or ethical concerns.
  
• Operational Capacity and Capability: Assess their ability to meet your demands and their track record of reliable delivery.
  
• Cybersecurity Posture: Evaluate their security controls, especially if they will handle sensitive data or integrate with your systems. 

The 2023 State of Risk & Compliance Report by Navex highlights that only 26% of organisations rely on unique risk assessment factors during initial onboarding. This statistic showcases an area where many businesses can significantly improve supplier risk management.

Related Reading: Ensuring Social Sustainability: Key Questions for Your Supply Chain

2. Continuous Monitoring And Performance Management

The most significant learning from recent surveys is that a substantial portion of vendor risks are only identified during the ongoing relationship. This necessitates continuous monitoring rather than a one-off assessment.

• Regular Performance Reviews: Beyond delivery metrics, assess a supplier’s ongoing compliance, ethical practices, and responsiveness to issues.
  
• Audits and Inspections: Conduct periodic audits of supplier sites, operations and documentation, particularly for high-risk vendors.
  
• Real-time Risk Intelligence: Implement systems to monitor news, social media and regulatory updates related to your key suppliers.
  
• Communicate and Collaborate: Maintain open lines of communication with suppliers to address issues proactively.

Navex’s survey also identified a critical weakness: 27% of organisations apply the same risk management approach to all third parties, regardless of risk level. Instead, supplier risk management should be dynamic. The most optimistic statistic from the Navex survey shows that 29% of organisations categorise vendors by risk level and apply different levels of checks and precautions based on that risk throughout their relationship. This differentiated approach is a best practice.

3. Risk Categorisation And Tiered Approach

Not all suppliers pose the same level of risk. A tiered approach to supplier risk management is highly effective:

• Critical Suppliers: Those essential for core operations, whose failure would have a severe impact (e.g., sole source, unique technology providers). These require the most intensive due diligence and continuous monitoring.
  
• High-Risk Suppliers: Those operating in high-risk geographies, handling sensitive data, or with a history of compliance issues.
  
• Standard Suppliers: All other suppliers require regular but less intensive monitoring.

This approach ensures that resources are allocated efficiently, focusing the most effort on the areas of greatest supplier management risks.

4. Contractual Safeguards

Your supplier contracts are an important tool in supplier risk management. Ensure they include:

• Service Level Agreements (SLAs): Clearly defined expectations for performance, quality, and delivery.
  
• Compliance Causes: Mandating adherence to all relevant laws, regulations and your organisation’s policies (e.g., anti-bribery, data protection, environmental standards).
  
• Audit Rights: Clauses allowing your organisation to audit the supplier’s operations and records.
  
• Indemnification Clauses: Protection against losses from the supplier’s actions or negligence.
  
• Termination Clauses: Clear conditions under which the contract can be terminated due to non-performance or non-compliance.

5. Develop Contingency And Exit Plans

For critical suppliers, having contingency plans is of great importance. This includes:

• Alternative Suppliers: Identifying and pre-qualifying backup suppliers.
  
• Escalation Procedures: Clearly defined steps for addressing supplier performance issues or incidents.
  
• Exit Strategy: A clear plan for transitioning away from a supplier if the relationship becomes untenable or has a major disruption. This minimises the impact of disengagement.

6. Use Technology And Automation

Technology can significantly improve supplier risk management. Here’s how:

• Vendor Management Systems (VMS): Platforms for centralising supplier information, contracts and performance data.
  
• Risk Management Software: Tools that automate risk assessments, compliance tracking and incident reporting.
  
• Supply Chain Visibility Platforms: Technologies that provide real-time insights into supply chain operations and potential disruptions.
  
• VeriforceONE: We’ve launched a new global supply chain risk management platform, VeriforceONE, designed to streamline processes and keep businesses running smoothly. 

The increasing threat of supplier management risks, often identified only after relationships are established, underscores the need for continuous, proactive strategies. For risk management contractors and their clients, mastering these approaches is key to safeguarding operations, protecting reputation, ensuring compliance, and creating sustainable growth.

Related Reading: Why Is Supply Chain Security Important

Ready to Optimise Your Supply Chain Risk Management?

Don’t let supplier management risks undermine your operations. Take control of your supply chain’s safety and compliance by partnering with Veriforce CHAS, the UK’s leading provider of supply chain risk management solutions. Our expertise and award-winning solutions help clients manage risk and build more resilient, efficient supply chains.

Get in touch with Veriforce CHAS today to discuss how we can help you strengthen your supply chain risk management approach.