How Supplier Risk Management needs to evolve in 2021
The pandemic has taught us supply chain professionals a precious lesson in supply chain risk management. The pandemic has put to the test, flexibility, adaptability, and resilience of supply chains. Very few were able to stand their ground.
The supply disruption triggered in China sent shock waves all around and shut down the global economy. It exposed weak links in production strategies and supply chains of organizations. Trade restrictions, stopping the production of goods, and shutting down normal functions put tremendous strain on companies.
Now that the situation is slowly moving towards normalcy, supply chain and procurement teams are under insurmountable pressure to monitor and mitigate supplier risks and compromise competitiveness closely.
The challenge will be to make the supply chain resilient, better manage supplier risks without lowering profitability, and competitive advantage.
When your supplier relations and supply chain grow globally, the complexity and the variables companies would need to monitor increase multifold. To accommodate the global sourcing activities and suppliers, as well as the risks that accompany, your supply risk management framework has to evolve to account for unexpected threats and reap benefits wherever the opportunity arises.
The increased complexity of supply chains and global nature has expanded the scope of supply chain risk management.
The expanded scope of risks
1. Catastrophic risks: The first one that comes to mind is a catastrophic risk like the pandemic we’ve lived through. Even before it hit other countries, the cascading effect on the global economy, due to major companies dealing with Chinese suppliers, was huge.
The 2011 Tohoku earthquake and tsunami caused a $210 billion in cost for Japan. Unable to receive the required parts Toyota, Nissan, and G.M. had to shut down temporarily.
2. Operational and Resilience risks: A supplier failure like an IT system failure resulting in an interruption or disruption to your supply chain.
A prime example of this would be in the 1980s, CEO of General Motors, Roger Smith, decided to drive to increase the number of robots in GM factories from 300 to 14,000 by 1990. He set up a joint venture with Japan’s robot designer Fujitsu-Fanuc to make his dream a reality, spending billions of dollars in the process.
Unfortunately, the robots didn’t work. Instead, they spent most of their time painting themselves and dropping windshields. Productivity dropped, costs increased, and market share shrunk. Smith was let go.
Events like labor strikes, plant shutdowns with supplier companies may also cause hindrance to the regular functioning of the business.
3. Information security risk: The risk of sensitive data, including yours, being compromised due to a cyber-security breach, hacking, phishing, etc.
4. Legal, Regulatory, or compliance risk: The risk of non-compliance or non-adherence to the regulatory requirements like wages, product, or quality compliance by suppliers you’re dealing with.
5. Financial Risk: The risk of commercial losses, bankruptcy, layoffs on the supplier end may not always be prominently visible to the customer, but in case of these events happening, the production line will suffer from the resulting delays
6. Geo-Political Risks: Any socio-political events such as wars, social unrest, etc., in the supplier’s jurisdiction, will have an impact on your supply chain.
A recent example of this could be the US-China trade war. The setting of tariffs and trade barriers on Chinese imports was meant to reduce the trade deficit between the two countries and reduce US reliance on Chinese suppliers. This told US companies looking for viable substitute suppliers.
Since global suppliers today are crucial to business success, the risk is also higher. To manage and mitigate these supplier risks that come with a global and diverse supplier network, our supplier risk management frameworks need to evolve to become all-encompassing, so companies are safeguarded, and business continuity isn’t threatened
Pitfalls of Legacy Supplier Risk Management Tools
Until now, supplier risk management has been a time-consuming, error-prone, data-intensive task comprised of collating data for supplier performance management from spreadsheets, emails, third party entities, legacy vendor risk tools, etc. But the current environment has discredited this approach.
The pandemic has made being proactive a survival requirement. Therefore, a holistic approach to risk has become a pre-requisite for ensuring business continuity. The shortfalls these systems bring with them are proving to be too heavy to cope with.
1. Lack of visibility into supplier performance and risks:
- Manual / Excel driven supplier performance assessment
- Ad-Hoc risk assessment with reactionary mitigation tactics
2. Geographical risk due to socio-political conditions, economic crisis, regional disturbances, etc.:
- No global visibility into supplier performance
- Lack of alternatives present for unforeseen risk and situations
3. Supply-Chain risk due to silo-based vendor risk assessment, lack of centralized risk assessment capabilities:
- Isolated vendor compliance chamber
- Lack of centralization of risk data across regions
4. Non-compliance to company, region, or obligatory policies:
- Lack of visibility into compliance policies across borders
- Tactical work-intensive on-boarding certification and verification processes
What to look for when deciding on a Supplier Risk Management Tool – A.I, Features
An intuitive supplier risk management tool that increases accuracy, transparency, and uses the available data to build comprehensive reports. Therefore, it provides a continuous and consistent assessment of risks is what organizations need now.
And these results need to be delivered fast so organizations can plan their supply chain strategies around this. So what features should you be looking at if you’re looking at a supplier risk management tool?
1. Artificial Intelligence: Supply chains have grown more complex. We now have to look at Tier1 suppliers and Tier 2 and 3 suppliers so any possible disturbances and disruptions can be forecasted accurately and the company safeguarded against them.
AI systems will scan through past data, geographical and political unrest, and predict potential risks. For instance, the Zycus Merlin Insta Review Bot identifies external risks (geographical and political) across your entire supplier base in an easy and consumable format.
It scans the internet for news articles on bankruptcy, plant shutdowns, government watch lists, natural calamities in supplier geography, etc.
2. 360 Degree Dashboard: A complete dashboard that shows a user status on the risk evaluation process, information about how suppliers have performed on scorecards, and set KPIs as well as past performance trends. The tool also suggests corrective measures and mitigation programs.
3. Internal + Third-Party Risk Evaluation: The iRisk module takes data from internal evaluation modules and third-party risk assessment entities like D&B to present a complete report. This can be made a part of internal evaluation and scoring
4. Assessment Management: A platform should allow users to customize the risk assessment process according to the organization’s needs. Once the assessment is launched, the Zycus iRisk module allows the required stakeholders to review and ask for additional evaluation through questionnaires.
5. Supplier Segmentation: Segmentation should be made possible based on various parameters like supplier score, criticality for the organization, geography, financial risk, reputational risk, etc.
6. Vendor Portfolio: If you want to see a complete supplier profile, the supplier risk tool should give you a comprehensive report in a one-view format. The iRisk module shows you information about the risk evaluation, ongoing development programs, claims and external risks assessments, ongoing business transactions, etc.
7. Risk intel available throughout the S2P cycle: The risk information should be readily available to users throughout the Source to Pay process to make an informed decision while choosing suppliers. Hence, the iRisk module allows users to overview the supplier risk profile while creating a sourcing event or contract.
Global suppliers, pandemics, natural calamities, political unrest, economic fluctuations, complexities, and risks have only increased this year. This, coupled with a renewed vigor of doing business with socially and environmentally conscious suppliers, have only increased the variables supply chain professionals have to deal with.
To build a more resilient and agile supply chain, technology can come to your aid. Artificial Intelligence in supplier risk management has produced tools capable of tracking, measuring, and forecasting supplier risks. Therefore, companies can adjust and build sourcing strategies to maximize savings and reduce risks.
A supply chain practitioner’s work is complex enough as is; intuitive supplier risk tools provide you with actionable insights post comprehensive research through different sources, so your supply chain strategies yield better results
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