Top supplier risks and disruptions that Procurement must manage in 2023

Since the early days of Covid and the immediate blow to global supply chains, the frequency and impact of supply chain disruptions has only increased. During the pandemic, procurement organizations were often the unsung heroes that scrambled to respond to unexpected supply shortages, faltering suppliers and bottlenecked supply chains. Post-pandemic, procurement is once again showing its agile approach to add value by becoming the first line of defense in identifying, assessing and mitigating risks across the supply chain.

Operational resilience in the supply chain

Leaders across all industries are recognizing that tomorrow’s winners will be those organizations that can identify potential risks and get ahead of negative events before the impact is felt. For Procurement, this is exemplified by a new approach to supplier risk management at a scope and scale that looks nothing like previous installations.

Recent supply chain disruptions have manifested from a wide variety of events and risk factors that were, quite frankly, often overlooked during due diligence and cyclical supplier reviews. But, with strained supply chains, a constant barrage of disruptions and increasing visibility amongst executives, investors, regulators and customers, leading Procurement organizations are approaching risk with an “eyes wide open” attitude towards potential risks and mitigation strategies. In 2023, everything is on the table.

Which supplier risks top the list for Procurement in 2023?

So, what types of supplier risk are these organizations looking for to shore up their resilience? Interos’ customers span industries from financial services to aerospace and defense, from Fortune 100 to mid-sized organizations. Below are the top risks they are focusing on in 2023:

Financial:

Supplier financial health is a risk factor that rarely goes unaccounted for. SVB and banking industry challenges aside (but not unrelated) — inflation, rising interest rates and recessionary pressure are deeply concerning for all businesses. Procurement must assess new suppliers for their financial strength and need to ensure that they have advance warning of financial risks (e.g., corporate credit downgrades) to mitigate disruptions in their supply chain operations.

Restrictions:

Another prerequisite risk factor is whether a supplier is included on any number of government sanctions or restrictions lists. In almost all cases, it’s a binary factor — am I legally restricted from doing business with this supplier? The challenge with restrictions is that is a moving target. The US has added more than 1,000 entities to various restricted lists since 2018 (December 2022 alone saw over 125 additions), and we are seeing the creation of new regulatory trade programs such as UFLPA with its own set of restricted entities.

Geopolitical:

Similar to restrictions, but not assessed as consistently, extended supply chains that reach into certain countries and regions can pose a significant risk, particularly due to ripple effects leading to unexpected geopolitical disruptions. The Russian invasion of Ukraine is an excellent example of geopolitical risk affecting suppliers in unrelated places, such as constrained energy supply to European companies and the financial difficulties that have followed.

Cyber:

Often reserved for critical IT services, such as data hosting or systems accessing sensitive data, assessments of suppliers’ cyber risk posture should extend far beyond the usual suspects. Digital systems are everywhere and run everything. This year, 2023, a ransomware infiltration within a major semiconductor industry supplier caused a 20% hit to that supplier’s quarterly revenue — but the ripple effect from that event caused a $250 million hit to one of its customers. And it wasn’t due to data leakage, but rather the supplier’s inability to process orders and ship products.

Environmental, social and governance:

Customers, regulators and, increasingly, investors are scrutinizing how businesses are managing ESG policies across their extended supply chains. Regulatory landscapes are changing (see the SEC’s proposed climate-related disclosures) and placing more burden on Procurement and third-party risk management teams to conduct expansive due diligence and monitoring of suppliers regarding environmental issues, ethical labor practices, and transparency and governance of those practices.

Operational:

China’s Zero Tolerance Covid policy resulted in significant disruptions as the pandemic continued to shut down operations in entire regions, causing a bullwhip effect to global supply and logistics operations and corresponding financial challenges. Beyond Covid, weather-related disruptions to manufacturing (e.g., hurricane Ian), energy production and logistics continue to cause concerns about where and who will be affected by the next storm system or weather event.

Identifying, mitigating and managing these risks is paramount to Procurement’s ability to add value across the supplier lifecycle and drive resilience into their supply chains. Companies like Interos are helping Procurement gain a more comprehensive, continuously updated view of the risks that lie hidden within their extended supply networks by identifying these and other unexpected risks that are quickly becoming top of mind issues within the C-suite and executive board rooms.

We believe the winners will be those organizations that place risk at the top of the priority list and create consistent, comprehensive programs and processes that centers on having the most up-to-date indicators of risk across their extended supply chains and third parties.