Supply chain disruption can have serious financial and reputational repercussions for businesses.
This disruption started to ease in 2022. However, it’s still important for companies to have a structured plan of action. All organizations should consider developing an enterprise supplier risk management approach.
Enterprise supplier risk management refers to an organization’s plan to identify, assess, and mitigate supplier risk. Each plan will look different, to meet each company’s different needs, but there are some common components that contribute to success.
Supplier risk can be divided into the following key areas:
- Financial and supplier performance risk
- Ownership risk
- Regulatory and compliance risk (supplier due diligence)
- Reputational risk
- ESG and sustainability risk
- Cyber risk
- Resiliency and operational risk
A successful supplier risk management program will take an integrated approach to address all of these areas. Various departments and roles need to cooperate to successfully manage supplier risk.
Taking a structured, whole-company approach will not only help you get essential high-level buy-in, it will also give your organization a competitive advantage. Successfully monitoring and mitigating supplier risk means you can develop a reliable supplier ecosystem. This will be more resilient to disruption, and also makes it less likely you’ll experience reputational damage because of the actions of your suppliers.
An essential component: the risk map
“Supply chain teams currently face more than a dozen serious risks. Prioritizing them is key, given that financial and human resources for risk management are always limited,” says Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody’s Analytics.
A successful enterprise supplier risk management plan should include the following steps:
- Assessing risks
- Creating a risk map
- Deciding on a risk tolerance level
- Focusing mitigation efforts on risks your business can’t accept
“Our clients usually start with a map based on the financial impact and probability of risks and then add their risk tolerance line,” explains Quinn-Barabanov. “This analysis separates risks that need to be mitigated from those that don’t require expensive treatment and those that can be accepted.”
Taking action to minimize your risk exposure could involve changing or diversifying suppliers, or working with existing supply partners to improve their practices. It could also mean investing in data and analysis that allows you to see supplier weak points from onboarding and throughout the relationship.
Enterprise supplier risk management is essential for any organization. Find out more about how Moody’s Analytics can help you.