Supplier Risk Management

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Global supply chains have faced disruptions in the last decade such as trade wars, pandemics, and natural disasters. Although supply chain activity has normalized in operational terms in 2023, significant risks in the industry outlook for 2024 remain due to industrial policy, labor action, and environmental policy implementation spheres. To address these risks, supply chains need to be more resilient, but there are questions over corporations’ and investors’ willingness to make the necessary investments.

Only 6% of companies indicate they have complete supply chain visibility. Most businesses (69%) have little knowledge of their supply chain suppliers.

Many organizations believe that supplier risk management is too time-consuming and costly. They see their supply chain as overly complex, with hundreds of possible suppliers. Gaining access to supplier data on finances or operations can be challenging. Company executives often consider risk as inherent and factor it into their cost of doing business. 

However, a GEODIS Supply Chain Worldwide Survey found that 57% of businesses reported that supply chain disruptions caused significant losses.

  • 62% indicated that the losses were financial.
  • 54% found that they experienced logistical losses.
  • 54% stated that they suffered damage to their reputation.

Although companies may focus on major external disruptions, such as natural disasters, geopolitical changes, or cyberattacks, internal disruptions, such as slow delivery or declining quality from suppliers, also have a bottom-line impact. Establishing a supplier risk management process helps businesses build an agile and resilient supply chain.

A distressed supplier can cause top-line revenue impact, material disruption to business operations, and affect customer relationships.

Our supplier risk management framework begins with risk identification, followed by risk exposure analysis and evaluation. It is essential to look at how to mitigate risk and establish a process for ongoing monitoring. What is included in each phase depends on the business and its suppliers.

Risk Identification

The first step in building a supplier risk management framework is risk identification. Dividing supplier-related risks into categories can ensure that crucial areas are addressed. Inadequate supplier risk management can expose businesses to a range of losses.  Possible groupings could include the following:

Strategic

Strategic risk looks at how well a supplier’s objectives align. The supplier may be looking at launching a new product or is undergoing significant management changes. These have the possibility of changing a supplier’s priorities. Is the supplier looking to acquire or merge with another company? If so, they may decide to change direction or focus on other products or markets.

Operations

Operational risk covers a broad range of possibilities. Suppliers may have quality control issues or experience labor disputes. Their suppliers may have difficulty delivering raw materials or parts, creating delays up the supply chain. Understanding what may precipitate these issues can mitigate the associated risk.

Suppliers may need to address internal processes to ensure they meet expectations. Do employees receive sufficient training? Does a supplier have a higher-than-expected turnover rate? How efficient are their operations? Supplier weaknesses can quickly become a company’s risk.

Business Continuity

Business continuity is often viewed as a subcategory of operational risk. It concerns a supplier’s ability to meet obligations despite unforeseen disruptions. Suppliers should have contingency plans to mitigate the risk of failing to meet contract requirements.

Natural disasters or accidents are not the only threats to business continuity. Financial or regulatory difficulties can also impact a supplier’s ability to deliver contracted products or services.

Compliance and Regulatory

Most industries and governments have compliance standards and regulatory requirements that, if violated, can result in financial penalties or even criminal charges. Non-complying suppliers can have operations suspended or operating licenses revoked. In highly regulated industries, compliance and regulatory risks should be identified and monitored, as the consequences can be severe.

Information 

A company’s data is its most valuable asset. It provides a competitive edge that, if compromised, can have financial, reputational, and operational impacts. Information risk refers to any action that may breach the confidentiality or integrity of data or impact its availability. The risks include human error, cyberattacks, or system vulnerabilities.

Suppliers should be evaluated on their security measures, such as data encryption, access control, and system monitoring. One compromised supplier can result in the corruption of an entire supply chain with far-reaching consequences.

Finances

A supplier’s financial health is an essential part of risk management. If suppliers have financial difficulties, such as poor credit ratings or pending financial settlements, their ability to meet financial obligations may be reduced. They may default on debt or file for bankruptcy. Businesses need to understand the potential financial risks associated with each supplier.

Reputation

Businesses also need to look at their suppliers’ reputations. Major corporations have had their reputations tarnished by suppliers that had poor working conditions. As sustainability becomes a critical business component, organizations must ensure that their suppliers reflect sound environmental, social, and governance (ESG) guidance.

Risk Exposure Analysis

Once risks are identified, businesses need to examine their exposure. For example, what are the geopolitical risks that may impact suppliers? If a conflict exists or is likely to intensify, what safeguards are in place to ensure delivery? Answers to these questions allow decision-makers to identify mitigation strategies, develop contingency plans, and prioritize resources.

Aside from geopolitical concerns, risk exposure analysis may cover areas such as cybersecurity, financial, operational and environmental risks.

Risk exposure analysis allows businesses to determine the types of losses that may result based on risk categories. It provides decision-makers with data to decide if the exposure should be minimized and what mitigation approaches should be used. It quantifies the potential risk associated with a supplier.

Supplier Due Diligence

Supplier due diligence is an in-depth investigation of a supplier’s operations, finances, and technology. In order to understand and address supplier risk, it is important to take a holistic approach to supplier due diligence.

It begins with ensuring that suppliers are legitimate and credible organizations recognized by regulatory authorities. Due diligence means examining a supplier’s financial health and assessing its senior management and board of directors. It is based on confidential information provided by the supplier.

Technology plays an essential role in business operations. Evaluating a supplier’s technology and its implementation can identify potential risks arising from older technology, inadequately trained personnel, or underutilized resources.

Risk Evaluation

Prioritizing risks allows businesses to consider resource allocation, financial requirements, and remediation options. It lets organizations assign priorities to ensure critical risk exposure is addressed first. Risk-scoring methods may vary, but they generally fall into the following groupings:

  • No Risk. The level of exposure from a supplier is minimal. Ongoing monitoring would continue.
  • Low Risk. The potential impact of a supplier’s risk exposure is insignificant. Ongoing monitoring would be required.
  • Medium Risk. This ranking tells a company that they should adjust policies and processes with a supplier to mitigate potential risks. Regular performance reviews should be conducted.
  • High Risk. This category identifies those suppliers that present a high-level risk of exposure.  Mitigating risk becomes a priority. Whether it is finding another supplier or working with an existing one, addressing the risks becomes a critical business objective.
  • Liberty Advisor Group leverages our supplier risk methodology and proprietary analytics engine to identify early warning signs of a supplier’s distress.  We work with our clients to prioritize risks based on criticality, probability, and consequences and evaluate capital requirements. We provide options to remediate. The focus is to prepare short-term & long-term recommendations based on potential solutions.

Integration Planning and Execution

Supplier risk management may require that businesses cease to do business with a supplier or onboard a new supplier. The process may even result in acquiring a supplier’s assets. No matter the plan, the first step is reviewing an existing contract or writing a new one. If the decision is an acquisition, the process begins with defining the terms and conditions of the sale.

When terminating a supplier, understanding the contractual terms and conditions is the first step to a positive outcome. A well-written contract enables all parties to end a business relationship on a positive note. The onboarding process should be updated based on the experience and outcomes of previous relationships. 

Acquisitions require detailed planning with a dedicated team to oversee the process from beginning to end. Acquisition teams should be looking for ways to develop synergies that will benefit the business and the supplier.

Mitigation and Monitoring

Prioritize risks based on criticality, likelihood, and consequences. Evaluate capital requirements and provide options to remediate. Mitigation involves stop-gap measures, short-term solutions, and long-term corrections. It may require immediate resolution of supplier distress with longer-term solutions to reduce risk. Short-term improvements that support long-term corrections should be put in place.

Supplier risk management is a continuous improvement process where supplier risk assessments are ongoing. The risk landscape is continually changing, making monitoring essential to any risk management framework. Communication channels between organizations and their suppliers should be open and active to build an agile and resilient supply chain.

Case Study: Optimizing Supply Chain One Supplier at a Time

When a supplier for a construction equipment manufacturer struggled to deliver a key component, the manufacturer turned to Liberty Advisor Group for an in-depth analysis. The company needed an assessment of the risk associated with the supplier and recommendations on mitigating the risks.

The Problem

After conducting a supplier risk assessment, Liberty determined that the supplier was behind in order fulfillment because of a disconnect between demand and what the supplier was forecasting. Liberty’s team also found the supplier was hurting financially, which was contributing to production disruptions.

The Process

Using data from on-site interviews and a detailed analysis of the production process, Liberty found nine areas that were weakening the supplier’s production capabilities:

  • Funding
  • Components
  • Inventory Management
  • Labor
  • Operations
  • Equipment
  • Logistics
  • Relationship Management
  • Criticality

The analysis identified $4 million in excess inventory and 53% of products with changing lead times in fixed horizon.

The Outcomes

Liberty provided detailed remediation processes for identifying who was responsible for driving work and establishing a progress-tracking system. Liberty Advisor Group developed project workflows to correct and improve weaknesses in supplier relationships. They also conducted frequency and volume breakdowns for individual supplier-provided components for an effective demand-planning model.

How Liberty Advisor Group Can Help

Supplier risk management plays a crucial role in the success and competitiveness of organizations across various industries. To avoid disruption to a supply chain, supplier visibility, and performance monitoring play crucial roles in ensuring optimization and operational excellence. By working together, businesses and their suppliers can identify weaknesses that carry significant risk exposure. With the help of Liberty Advisor Group, companies can develop processes that mitigate supplier risks without damaging the supplier relationship. They can create a monitoring system that ensures early detection of potential risks. 

If your organization is one of the 94% that lack end-to-end supply-chain visibility, contact us for help with supplier risk management.

About Liberty Advisor Group

Liberty Advisor Group is a goal-oriented, client-focused business and technology consulting firm based in Chicago. Since its inception in 2008, the firm has been committed to helping clients solve their most complex business issues, delivering tangible results that drive growth and reduce risk. Year after year, Liberty has been recognized for its people, culture, and hard work. In 2023, Liberty was named to Best Place to Work in Chicago by Crains’ Chicago Business,  Best Workplaces in Chicago™ in 2023 by Great Place to Work and Fortune Magazine. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Learn more on LinkedIn and Twitter.

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