When a business enters into a partnership with a supplier, it rests its customer satisfaction, brand loyalty, and positive reputation on the promise that the supplier delivers. If anything goes wrong – production shutting down, financial issues, delays – your company is the one that will suffer.
To avoid potentially damaging your brand reputation and disappointing your customers, picking the right partners is vital. Supplier risk assessment paves the way for an actionable strategy that lets you assess, qualify, and partner with potential vendors without as much risk.
Supplier risk assessment is more critical than ever in 2024. Over the past few years, supply chain disruptions have dramatically increased. In 2019, there were 3,700 worldwide supply chain disruptions. Yet, by 2021, this figure had risen to over 11,500.
Source: Number of supply chain disruptions worldwide from 2019 to 2021.Â
Why Is Supplier Risk Assessment Important?
When businesses think of supply chain risk, they tend to think of global disruptions that impede the movement of goods. Over the past few years, COVID-19 and disruptions in the Suez Canal have brought the global supply chain to a halt.
Yet, global disruptions are only a part of the potential challenges that a business could face during the supply chain. Research indicates that over half of all supply chain professionals find shortages an extreme challenge in their industry. Issues with individual suppliers can quickly delay a company’s delivery speeds, reducing customer satisfaction and upsetting business relations.
With that considered, supplier risk assessment is vital as it can help safeguard business relations and reduce the likelihood of a supplier-side disruption from occurring. Less supplier risk leads to:
- Stable and predictable delivery times.
- Improved customer satisfaction.
- Fewer major disruptions to the supply chain.
By taking proactive steps to conduct supplier risk assessment evaluations, your business can find reliable partners that help to create a consistent supply chain for your organisation.
Supplier Risk Management FundamentalsÂ
Supplier risk management is the process of assessing partners to identify potential risks and design mitigation strategies. The specific risks that each supplier may have can vary. For example, some suppliers may have a high variance in the quality of the products they deliver, while others may have ethical concerns that make you choose an alternative vendor.
Suppliers are typically the point of origin for your supply chain. Your suppliers will manage or manufacture the products that you then ship all over the world. Any disruptions to this first stage will instantly impact every other stage. It’s vital to engage with supplier risk management to ensure that your brand has strategies in place to ensure the continuous flow of products across your supply chain.
The degree to which organisations feel prepared for potential supply chain risks varies greatly by country. Countries like the UK and Japan have a high degree of risk management practices in place, with over 75% of organisations believing they have appropriate controls to mitigate supply chain risk.
Yet, other countries don’t report the same positive outlook, with Australia and Germany being far below the global average of 64%.Â
The graph below points to some of the potential risks that businesses face across the globe. Some of these risks, political instability, are unavoidable. However, a company can avoid many of them with enough mitigative planning.Â
For example, your business could conduct a cybersecurity supplier risk assessment to determine whether or not they have sufficient defences in place. As cyber events one of the leading risks to the supply chain, this will dramatically reduce the chance of encountering delays.
These assessments will protect your business against potential disruptions in the future.
Source: Distribution of the most significant business risks worldwide in 2023.
Supplier Evaluation and Risk Rating
Supply chain businesses will likely have to deal with numerous vendors at any one time. To streamline the process of evaluating and assessing current and new vendors, it’s useful to develop a risk rating system.
A comprehensive rating system that your business uses will help to score vendors on their risk potential. When the time comes to renew your contracts or choose different vendors, you can use their risk score as an important evaluation factor.
You can either use a supplier evaluation risk system that already exists or create your own based on your own criteria. Of these options, we recommend the latter. Your business can tailor a bespoke system to your company’s unique requirements and considerations, making it more effective.
Here’s how to create a risk rating system:
- Determine Influencing Factors: Outline the factors you will consider, like a businesses total assets, location, number of employees, historical delivery rates, and ownership of facilities.
- Determine a Ranking Scale: Will you rate companies out of 1-10, 1-1000, or on a grading scale?
- Employ Statistical Models: Based on the weightings given to different influencing factors, you can then calculate the supplier risk figure using statistical modelling tools.
- Rank and Classify: Based on your findings, you should establish a cut-off point for your rankings where you deem that a company is too unstable to work with. For example, if you rank on a scale of 1-100, scores under 60 are unacceptable.
- Standardise: Use this vendor risk assessment with all partners to establish a standard process when dealing with suppliers.
Useful techniques for supplier risk analysis include scenario planning, SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis, and industry research to see how a company reacted to a wider disruption.
Over time, you can observe how effective your model is and optimise accordingly.
Tools and Strategies for Advanced Supplier Risk Management
As your business adds more vendors to its list of suppliers, the task of managing and monitoring potential risk becomes more complex. If your business is scaling and needs help with advanced supplier risk management and monitoring, we suggest you use the following tools and strategies.
Leveraging Cutting-Edge Supplier Risk Assessment Tools
Leveraging existing supply chain management tools allows businesses to rapidly gain full visibility over their suppliers. Platforms that can access existing data to streamline risk assessment will save your business time, reduce costs, and improve transparency.
The Tier-N Transparency tool is an example of a useful system for advanced supplier risk management. Tier-N monitoring uses three layers of data to create a comprehensive view of the supply chain. It leverages shared data from existing customers, private data from the supply chain, and public international trade data to build a comprehensive picture of suppliers and connections.Â
Integrating Tier-N monitoring into your supply chain will instantly improve your visibility over your suppliers. Equally, you’ll be able to see the connections between your company and potential suppliers, helping to identify potential weak links.
With the information Tier-N Transparency offers, your business can easily conduct more effective risk assessments.Â
Developing Enterprise-Wide Supplier Risk Management Programs
Supplier risk management extends beyond the efforts of a single department. Risk could come from any angle, including financial, legal, or procurement issues. With that in mind, it’s vital for businesses to establish cross-team commitment to supplier risk management programs.
Organisations should include at least one representative of each major department. As experts in their own field, these leaders can more effectively identify potential risks in the documents that suppliers may send to your business.
Each department will understand how risk mitigation strategies may impact them. Additionally, they’ll have a more comprehensive knowledge of the metrics that will apply to track the efficacy of supplier partnerships.
Where possible, create open communication lines to allow your entire enterprise to engage with your supplier risk management program.
Riding the Wave of Emerging Trends
Supplier risk management is a dynamic part of wider supply chain management. As those who work in the supply chain know, this industry is always shifting in line with emerging trends and technologies.
Integrating supplier performance and risk management technologies helps businesses streamline the process of risk identification, management, and mitigation. Emerging technologies are at the forefront of these integrations, each providing valuable opportunities to enhance the assessment process.
Let’s explore some of the most pressing emerging trends in the supplier risk assessment space.
AI and Machine Learning in Supplier Risk Management
Artificial intelligence is one of the most explosive technologies we’ve seen enter the supply chain over the past decade. AI in the supply chain is currently growing at a CAGR of 45.55%, demonstrating its significant impact on the sector.
Businesses can use AI and machine learning technologies to streamline data-intensive processes. Finding patterns in previous supplier performance will identify hidden risks. Equally, predictive analytics will help foresee future disruptions, giving your business more time to plan effective mitigation strategies.
Recent academic research has further investigated the potential of machine learning to identify and mitigate supply chain risk. The article, published in Managing Sustainable Development: Technology, Modelling & Applications, suggested that AI risk assessment can significantly improve risk visibility, response times, and anomaly detection in the supply chain.Â
By using artificial intelligence and machine learning, businesses can conduct comprehensive statistical analyses of vendor risk. Combining AI tools into existing supplier evaluation and rating systems will help streamline the process of detecting and assessing risk.
Blockchain for Transparent Supplier Relationships
Blockchain technology acts as an immutable ledger. Any information saved onto the blockchain is permanently visible, leading to a high degree fo transparency. Businesses that engage with blockchain technology when working with suppliers will be able to effectively trace the origins of materials and products.
Equally, investigating labour payments can help identify potential unethical labour practices that vendors are engaging with. Across the board, the visibility that blockchain technology provides helps to minimise the possibility of fraud and counterfeit materials entering your production line.
Blockchain has a similarly impressive CAGR as AI in the supply chain, boasting a predicted 46.4% between 2023-2028.
Best Practices for Effective Supplier Risk Assessment
Supplier risk assessment goes beyond creating a framework. Businesses must endeavour to develop strategies that help guarantee the success of supplier risk assessment. These base techniques will improve organisations’ ability to integrate and sustain supplier evaluations.
Let’s explore some of the best practices for effective supplier risk assessment.
Proactive Mitigation Strategies
The more time a business gives itself to search for risk, identify it, and develop strategies to mitigate it, the more effective those strategies will be. Another step to this is taking proactive steps to develop mitigation strategies based on potential scenarios.
Developing contingency plans that you can use in the face of any potential disruption will help mobilise your teams and empower you into action the moment a scenario arises. Planning ahead to mitigate risks with each of your suppliers, perhaps through diversification, will help keep you one step ahead of problems.
Know Your Supplier (KYS) Programs
Know your Supplier (KYS) programs allow businesses to mitigate many of the risks of working with an unknown third-party vendor. These programs will help your business understand who your partners are, the supply chain links they have, and how they interact with products.
KYS programs are a baseline level of due diligence that your business should conduct when partnering with a supplier.
Decreasing Supplier Power Through Effective Practices
When businesses rely on a small handful of vendors, any one disruption can turn into a major event that delays your shipments and can impact your customer satisfaction. Instead of putting your eggs in one basket, it’s always a good idea to reduce the power of any one supplier.
Here are some leading strategies you can use to decrease supplier power in your supply chain:
- Diversify: The more suppliers you have, the less of an impact individual delays will have.
- Transparency: Maintaining clear communications about what you expect from your suppliers will help foster a better relationship with your brand.
- Contract Renewal Policies: You can write performance-based contracts that only renew if the supplier meets certain thresholds. These inspire constant performance from your partners.
These best practices will help further decrease the potential for any one supplier to significantly impact your supply chain.
Final Thoughts: Supplier Risk Management for the Modern-Day
Despite the potential challenges of supplier risk management, it is a vital process that any business must contend with. A comprehensive knowledge of potential disruptions that a supplier may experience will allow your company to create effective mitigation strategies to overcome any risk and keep the supply chain flowing.
Armed with the various supplier risk assessment strategies, tools, and systems, your business will be able to step into modern-day risk management with ease. Leveraging tools like Tier-N Transparency monitoring helps to simplify supplier risk management and allows your business to carefully select the best possible vendors.
Build a more resistant supply chain, one reliable vendor at a time!
Book a demo with Prewave or reach out to the team today.
