What is supplier risk management?
Any business you own is involved in a supply chain. A supply chain is a complete process of creating and delivering a good or service, starting with sourcing the raw materials and ending with providing the good or service to the end customers. It outlines every step of the manufacturing process.
Depending on the business and industry, supply networks may differ. Although they differ significantly in many ways, they share fundamental elements, such as engineering, planning, sourcing and procurement, inbound logistics, production, fulfillment and delivery, and service management.
Managing suppliers can be dangerous even if they are essential to your company. So, supplier risk management (SRM) is essential for your company.
What is supplier risk management?
The process of identifying, evaluating, and reducing supply chain disruption risks brought on by a supplier’s behavior is known as SRM. A significant issue will arise if your company does not manage its suppliers. Risks associated with suppliers are, most frequently,
- Cybersecurity
- Data privacy
- Compliance
- Legal
- Financial
- reputational
SRM’s primary goal is to protect your company’s interests by reducing the effects of supplier-related issues.
Why is SRM important?
When working with suppliers, some risks could lead to supply chain disruptions, including a lack of understanding of supplier risk, a poor assessment of third-party risk, promoting supply chain resilience, insufficient contingency plans, a lack of clarity regarding the effects of disruptions, and more.
Therefore, if your firm implements a sound SRM process, you may shield it from the effects of disruptions. You can better comprehend the significance of SRM by reading the key justifications provided below.
- By having a plan in place to handle disruptions, you can shield your business from financial losses when you better manage the risks associated with the supplier.
- Specific rules and regulations are established by the government and industry organizations. There is a chance of non-compliance if your company’s suppliers do not adhere to them. Following a supply chain plan can guarantee that the providers abide by the established rules.
- Disruptions can occasionally result in a total suspension of operations. In that situation, SRM will guarantee business continuity.
- Your company’s reputation will suffer greatly if the supplier is linked to unethical or other problems. If you manage the supplier chain risk appropriately, you may take the necessary safeguards before the issue arises.
- Typically, disruptions have a negative impact on your organization, leading to delays, material shortages, and more. However, if you have a supply management strategy, you may reduce the likelihood of disruptions in advance.
How can you manage supplier risk?
Supplier risk management is similar to managing other company risks. SRM can be approached in a variety of ways. The most typical framework includes the three crucial identification, evaluation, and mitigation components.
Identification
Before beginning the management process, you must determine which suppliers pose the greatest hazards to the company. This can help identify the risks linked to each provider.
You can inquire about the goods and services offered by the suppliers, the overall cost of the transaction, reliance, the supplier’s financial situation, reputation, and more. These questions will help identify the specific supplier risks.
Assessment
You must evaluate the probable impact of the risks you have identified. If the provider doesn’t uphold its end of the bargain, you can see how this step will affect things. The assessment will also enable you to determine if the impact will be minimal or significant.
Mitigation
Following these first two phases, you can create mitigation techniques to lessen the effects of interruptions. Diversification, redundancy, and contracts are just a few examples of mitigating strategies that you might employ.
Summary
The management of supplier risk is essential to your company. You can safeguard suppliers’ interests and boost supply chain resilience by identifying and evaluating the risks associated with supplier relationships.
