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.

For that reason, managing supplier risk is key to running a successful business. Luckily, that’s what Supplier Risk Management is all about.

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 (SRM) is, examples and key components of SRM, and the benefits of effectively managing supplier risks.

What is Supplier Risk Management (SRM)?

Supplier Risk Management (SRM) is the practice of identifying, assessing and mitigating risks associated with working with third-party suppliers.

The goal of Supplier Risk Management is to maintain supply chain continuity in the face of events that could negatively impact the company’s professional relationships, customer service and profitability.

For companies around the world, SRM means the difference between success and failure. Events such as the COVID-19 pandemic and the war in Ukraine can suddenly disrupt a company’s supply chain – and the consequences can be very difficult to recover from.

It’s not always possible to predict specific disruptions. However, effective Supplier Risk Management will help your company prepare for unexpected events and ensure that your company is better equipped to weather the storm, should your supply chain be disrupted.

Examples: Supplier risks that can impact your business

Above, we mentioned the COVID-19 pandemic and the war in Ukraine as examples of events disrupting supply chains across the globe.

Other examples of supplier risks that can impact your business include:

• Financial risks: Issues with timely payments to or from suppliers can impact cash flow. The financial instability or bankruptcy of a supplier can also disrupt the supply chain.
• Technological and cyber risks: Cyberattacks on suppliers can lead to data breaches, compromising sensitive information. Supplier system failures can also disrupt operations and communication.
• Operational risks: Manufacturing issues can lead to delays in production and delivery. Suppliers can also sometimes fail to meet quality standards, resulting in defective or substandard products.
• Compliance risks: Suppliers failing to adhere to relevant laws, regulations or industry standards can result in legal penalties and reputational damage, resulting in companies needing to find replacements for those suppliers.
• Geopolitical risks: Suppliers located in politically unstable regions may face disruptions due to conflict, war or government changes.
• Natural disasters: Earthquakes, floods, hurricanes, and other natural disasters can disrupt supplier operations. Long-term environmental changes can also affect the availability of raw materials, compromising supplier reliability.

And many, many more.

In short, there are many risks associated with working with third-party suppliers, making effective Supplier Risk Management a crucial aspect of running a successful business.

Key components of Supplier Risk Management

In simple terms, Supplier Risk Management is made up of four key components:

1. Risk identification
2. Risk assessment
3. Risk mitigation
4. Monitoring and review

Let’s take a closer look at what each component entails.

1. Risk identification

Above, we covered examples of supplier risks that can be associated with a company’s supply chain. A crucial element of Supplier Risk Management is identifying exactly which risks you might face when working with third-party suppliers.

Based on the examples listed above, you need to be able to answer the following questions about your current or potential suppliers:

• Financial health: Are your suppliers financially stable? Is there a looming potential for financial failure in your supply chain?
• Operational risks: Are your suppliers able to meet production and delivery schedules?
• Compliance risks: Do your suppliers comply with relevant laws, regulations and standards?
• Geopolitical risks: Are your suppliers located in politically or economically unstable regions?
• Natural disasters: Are your suppliers located in regions where natural disasters 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, you should assess the potential level of impact these risks may have on your business.

This includes:

• Impact analysis: Determine the potential impact of supplier risks on your company’s operations, financials 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. This’ll help you determine which risks you should focus your mitigation efforts towards.

3. Risk mitigation

Next up is risk mitigation. Once you’ve identified and assessed potential risks, it’s time to take measures to mitigate those 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 supplier, it’s a good idea to source from multiple suppliers. This enables you to continue your operations even if an issue arises with one supplier.
• Supplier audits: Conduct regular audits to make sure your suppliers adhere to standards and agreements.
• 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 supply 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 to resolve disputes faster or even prevent them from arising at all.

4. Monitoring and review

The final key component of Supplier Risk Management is to monitor your suppliers and review 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.

Benefits of effectively managing supplier risks in your business

Supplier Risk Management is essential for any company that relies on a network of suppliers. It also comes with numerous benefits, including:

• Improved resilience: Effective SRM reduces the likelihood of disruptions and ensures a steady flow of materials and products.
• Cost savings: SRM prevents costs associated with supply chain disruptions – e.g. expedited shipping or finding alternative suppliers at the last minute.
• Enhanced reputation: By ensuring consistent product quality and delivery, SRM helps you maintain trust and reliability with your customers.
• Compliance assurance: SRM helps you adhere to legal and regulatory requirements, allowing you to avoid fines and legal actions associated with non-compliance.
• Strategic advantage: Effective SRM provides a competitive advantage by allowing you to proactively manage risks that your competitors might overlook.

In short, Supplier Risk Management enhances your overall supply chain efficiency, allowing you to maintain your business continuity regardless of the challenges you might face along the way.