How to manage supplier risk: Identification, assessment, relationships

Within a supply chain, your company will always have to consider risk because being part of a supply chain means being reliant on other companies in order to function. Understanding this risk, as well as knowing how to manage it, is critical for any business.

What is supplier risk?

Supplier risk management is a major issue for procurement. In the event of a supplier failure (such as late delivery, poor product quality or insolvency), operations of the buying company can be severely affected.

Supplier risk cannot, unfortunately, be eliminated. Therefore, it is all the more important that the necessary steps are taken to manage it.

It is vital to do your due diligence, evaluating the risk of any key suppliers to determine whether they pose a threat to your operation, how easily they could be replaced if needed and how much it could affect you if things go wrong.

The first step in this process is risk identification. In order to manage it, you must know the level of risk that is present. A good place to start is to ask the question: “Which suppliers are most critical to the operation of my business?”

Knowing which suppliers are critical and which suppliers are vulnerable allows you to ensure that your business isn’t overdependent on any single supplier. Those most essential can be prioritized for enrollment into an early payment program.

Once that has been answered, it is important to consider what are the mostly likely risks to those key suppliers. Risk assessment requires putting together a formal checklist to understand the potential for risks, including the financial stability of your suppliers. This stage can also include assessing what the potential fallout of the risk may be and how it would be managed.

Unfortunately risk is ever-present, so regular analysis is imperative. Consistent monitoring is required during a supplier partnership and keeping an eye on potential signs that may suggest your supplier is struggling will allow for a far more measured response if the supplier is unable to continue making efficient deliveries. Watch out for cutting salaries, layoffs, cutting budgets or changing to lower-cost products.

Outside of the quantitative risk assessment process, understanding your suppliers and building strong relationships can also help you prepare for unknown risks. This includes the potential for an environmental, social and corporate governance impact.

The importance of a sustainable supply chain has become increasingly prevalent in recent times and choosing and managing the right suppliers is a key element of developing a sustainable business.

To that end, supplier relationship management solutions such as those that Taulia offers are available to be utilized. Taulia’s supplier portal provides a timely and transparent flow of information between you and your suppliers, and allows you to quickly and easily manage data while also enforcing compliance requirements, making it far easier to reduce the potential for risk.