Many organisations have fallen victim to unforeseen supply-chain disruptions and vulnerabilities in the last decade. If a business can identify and mitigate Vendor risks effectively, it can ensure a smooth supply-chain management system and evade substantial losses that such events may trigger. This article will debate how a business can identify Vendor risks and alleviate their effects before any damage is done.
What is Vendor Risk Management?
Vendor risk management is a methodical approach to identifying, assessing, and mitigating any risk to supply chain management that may arise from the actions of the Vendor.
How to identify Vendor Risks
If an organisation wants to quantify risks, the ideal way to do so is by classifying them into two groups:
Known and Unknown Risks.
Unknown risks are the ones that are almost impossible to foresee. For example, a tornado destroying your Vendor’s warehouse can negatively impact your supply chain, and it’s hard to predict the intensity of a natural calamity until after it has occurred. In the same way, a cybersecurity vulnerability buried deep inside a critical electronic component of the Vendor’s system can shut down its operations without warning.
When handling unknown risks, the best strategy is to reduce their probability and increase your response time to maintain a competitive advantage.
Known risks can be recognized and measured- this means they can be managed over time. For example, Vendor bankruptcy is a known risk that can disrupt the supply chain. A business can assess its likelihood by analyzing the Vendor’s financial history and credit rating.
Similarly, cybersecurity breaches are newer risks that can be quantified by analyzing a Vendor’s IT system.
How can you manage unknown vendor risks?
Alleviating unknown risks is achievable by setting up robust defenses and building a risk-aware organisational culture. A strong culture ensures that defensive layers are in place to respond quickly when an unknown risk materializes and threatens to disrupt operations.
How can you manage known vendor risks?
Organisations can use a structured problem-solving procedure to manage their known risks effectively.
⦁ The first step is to map out and evaluate the supply chain of your products. Each Vendor in the supply chain should be identified, along with the risks to which they expose your business.
⦁ Regular monitoring of the framework is a critical success factor in Vendor risk management. An early warning system should be set in place to track top risks.
⦁ Constantly improve the agility and resilience of the supply chain.
⦁ Build a Vendor risk management framework where each risk is scored according to its impact, likelihood, and the organisation’s preparedness to handle it.
Finally…
As supply chains become more global, the risk associated with Vendors multiplies.
Organisations must map out a systematic approach for Vendor risk management to avoid losses and ensure smooth operations.
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