What is Supplier Risk Management – and how do you benefit?

If you run a business„ you’ll know that it comes with a certain level of risk – and this concerns your supply chain, too. Supplier risks can present numerous challenges to your business, and the consequences of unawareness can be crippling. That’s why supplier risk management is essential.

Supplier risk management (SRM) helps you identify and assess potential risks in your supply chain, allowing you to better mitigate supplier risks and keep your business operations running smoothly.

In this article, we’ll cover what supplier risk management is, examples and key components of SRM and the benefits of effectively managing supplier risks.

Key takeaways:

• Your supply chain is only as strong as its weakest link. Supplier risk management is about ensuring hidden vulnerabilities don’t catch you off guard.
• Supplier risk isn’t just financial. Cyber threats, operational failures, geopolitical tensions and natural disasters can all grind your business to a halt.
• You can’t predict every disruption – but you can prepare for it. Identify, assess and proactively manage supplier risks before they become costly problems.
• Strong relationships matter. Open communication and regular performance reviews with suppliers help you catch issues early and resolve them faster.
• Good SRM is a competitive advantage. Businesses that manage supplier risk effectively don’t just survive disruption: they outperform the competition.

What is supplier risk management (SRM)?

Supplier risk management (SRM) is all about identifying, assessing and mitigating risks that come with working with third-party suppliers. The goal of SRM is to maintain supply chain continuity when things don’t go as planned.

From the COVID-19 pandemic to the war in Ukraine, there are countless events that can suddenly disrupt a company’s supply chain, and recovering from those disruptions can be tricky.

It’s not always possible to predict every event that can affect your supply chain. However, should the storm come, effective supplier risk management will help you ensure your company is prepared to weather it – and that can mean the difference between success and failure.

Examples: Supplier risks that can affect your business

We mentioned the COVID-19 pandemic and the war in Ukraine as events disrupting supply chains across the globe.

Here are some other examples of supplier risks that can impact your business:

• Financial risks: Late payments, cash flow issues or supplier bankruptcies can throw a serious spanner in the works of your supply chain, delaying deliveries and disrupting.
• Cyber and tech risks: A cyberattack on a supplier can expose your sensitive data and bring key systems grinding to a halt. System outages or tech failures can also disrupt production, orders and communication.
• Operational risks: Production delays, missed deadlines, poor-quality goods from suppliers – all can damage your reputation and force costly last-minute fixes.
• Compliance risk: Suppliers falling foul of laws, regulations or industry standards can land you in legal trouble and leave you scrambling for replacements.
• Geopolitical risks: Political unrest, conflict or sudden policy changes in a supplier’s region can cause unpredictable delays and force supply chain rerouting.
• Environmental risks and natural disasters: Earthquakes, floods and extreme weather events can halt supplier operations overnight. Long-term climate shifts can also threaten raw material availability and production stability.

And many, many more. In short, there’s a lot to keep an eye out for when it comes to working with third-party suppliers – and that only makes SRM more important.

Key components of supplier risk management

In simple terms, supplier risk management is made up of four key components: risk identification, risk assessment, risk mitigation and monitoring and overview.

Let’s take a closer look at them.

1. Risk identification

First, it’s essential to identify exactly which risks you’re most likely to face when working with third-party suppliers.

Based on the examples listed above, here are some questions you should be able to answer about your current or potential suppliers:

• Fiances: Are your suppliers financially stable? Is there a looming potential for financial failure in your supply chain?
• Cyber and tech: Are your suppliers’ systems secure, and can they withstand cyberattacks or tech failures without disrupting your operations?
• Operations: Are your suppliers able to meet production and delivery schedules?
• Compliance: Do your suppliers comply with relevant laws, regulations and standards?
• Geopolitics: Are your suppliers located in politically or economically unstable regions?
• Natural disasters: Are your suppliers located in regions where natural disasters or climate shifts could affect your supply chain? If yes, how badly could your suppliers be impacted?

2. Risk assessment

Once you’ve identified the risks associated with your supply chain, it’s time to assess how badly these risks might affect your business.

This includes:

• Impact analysis: Determine the potential impact of supplier risks on your business operations, finances and reputation.
• Probability assessment: Estimate the likelihood of various risks occurring within your supply chain.
• Risk prioritisation: Rank the risks based on their potential impact and likelihood of occurring – this’ll help you determine which risks to focus your mitigation efforts towards.

3. Risk mitigation

Next, it’s time to take measures to mitigate potential risks to lower the likelihood of disruptions within your supply chain.

Here are some examples of risk mitigation:

• Diversification: To avoid dependency on a single source, it’s a good idea to source from multiple suppliers. This way, your operations can continue even if issues arise with one supplier.
• Supplier audits: Conduct regular audits to make sure your suppliers stick to the standards and agreements you’ve made.
• Contractual safeguards: It’s a good idea to include clauses in your contracts that address risk management – e.g. penalties for non-compliance or delays.
• Inventory management: If an issue does arise, it’s important to maintain buffer stock or safety stock. This will cushion you against disruptions and help you keep your operations running until the issue is resolved.
• Collaboration and communication: Build strong relationships with your suppliers – this will enhance transparency and improve problem solving, helping you resolve disputes faster – or even prevent them from arising at all.

4. Monitoring and review

The final key component of supplier risk management is monitoring your suppliers and reviewing your risk management initiatives.

This includes:

• Continuous monitoring: Make sure you’re always up to date with your suppliers’ performance and risk indicators.
• Period reviews: Regularly review and update your risk management strategies based on the latest information and changes in your supply chain.
• Feedback loops: Use feedback from your monitoring and audits to refine and improve your risk management practices.

You might also be interested in: Supplier performance management (SPM) 101

The benefits: Why supplier risk management is worth the effort

Supplier risk management comes with a range of benefits that go beyond equipping your business for handling potential disruptions: they also help set you up for stability, growth and success.

Here’s a look at some of them:

• Improved resilience: Effective SRM reduces the likelihood of disruptions and ensures a steady flow of materials and products.
• Cost savings: SRM helps you avoid unexpected costs associated with supply chain disruptions – e.g. expedited shipping or finding last-minute alternatives to your usual suppliers.
• Enhanced reputation: By keeping your product quality and delivery consistent, SRM helps ensure your customers know they can always count on your business.
• Compliance assurance: SRM helps you stay on top of legal and regulatory requirements, allowing you to avoid fines and legal trouble.
• Strategic advantage: Effective SRM gives you a competitive edge by allowing you to proactively manage risks your competitors might overlook.

In short, supplier risk management helps you stay on top of what’s happening with your suppliers and keep your business running smoothly – regardless of the challenges you might face along the way.

Final thoughts

Your supply chain is only as strong as its weakest link. From pandemics to cyberattacks and political unrest, the risks businesses face are more varied and volatile than ever. That’s why supplier risk management is more than a nice-to-have: it’s a business essential.

Whilst you can’t foresee every crisis, you can control how prepared you are. A solid SRM strategy helps you spot vulnerabilities early, build resilience into your operations and respond with confidence when disruption strikes.

In the end, SRM isn’t just about protecting your supply chain – it’s about protecting your reputation, your customers and your future. A business that manages supplier risk well won’t just survive the next disruption: it’ll thrive in spite of it.