The term supplier risk defines the possibility of supplier failures to meet commitments regarding quality, safety, or maintaining the consistent flow of the supply chain. A supplier risk can directly impact your company’s reputation, business, and growth.
In this global era, most businesses are part of the global supply chains to survive in the business-competitive environment. Whether you’re running a manufacturing company or a multinational/national stores chain, suppliers’ risk assessment is vital to taste success. And Covid-19 has hardly taught us the importance of supplier risk assessment to survive in the business.
In the name of effective cost, we have expanded our supply chains across the globe. Today, one product manufacturing needs multiple countries’ suppliers’ contributions. And, in 2019, covid exposed the weakness of in global supply chains. We are unable to meet spiked demands in any crises like covid-19.
Covid teaches that supplier risk probability is higher for long, complex, and more dependable supply chains.
Why suppliers’ risk assessment is essential?
Doing suppliers’ risk assessment is a proactive approach that lets you prevent the upcoming possible business risks. A few potential risks’ while working with third-party suppliers are listed below,
- Reputation Damaging Risks – The negative public views about your chosen supplier will ultimately impact your business. A supplier with any environmental, social, ethical, or legal breaches will damage your company’s reputation.
- Inferior Quality Risk – If your supplier fails to meet the decided quality standards, it will ultimately break the whole supply chain and causes devastating financial losses.
- Regulatory Failure Risks- There is a risk that suppliers may not meet legal compliances for labor, safety, or quality. Suppliers’ regulatory compliances failure will make your company responsible, and you may get heavy fines for that.
- Operational Risks – Disruptions in third-party suppliers’ operation because of any natural disaster, political instability, or any other issue will break your company’s supply chain.
- Strategic Risks – Freelancing the core functions of any business or depending on a single supplier for most critical products can expose your company to strategic failure. In that case, suppliers’ failure to make clever business decisions will ultimately be your company’s adverse failure.
- Covid Lockdown Risk- Many metropolitan cities & countries are under severe lockdown because of covid. There is a risk of covid lockdown in supplier’s city that can disturb your company supply chain.
That’s why suppliers’ risk assessment is essential to mitigate the above-discussed potential issues. Your company can’t survive too long in this competitive business era without assessing & mitigating the suppliers’ risks. In the severe time of covid suppliers’ risk assessment becomes more important than ever before to assure steady supplies.
How to access the risk my supplier encountered during COVID-19?
Risk assessment is the most critical & complex job because of the complicated supply chain nexus. You may find tens of global suppliers involved in a single product manufacturing. Keeping multiple transnational suppliers aligned to meet specific legal commitments, quality standards, and the most significantly timely deliveries is not an easy task.
Although automating software, audit software & technology helped us assess suppliers’ risks. But it is still a complex task to perform for tens of suppliers simultaneously to mitigate potential losses. Especially in the uncertain times of covid, we have witnessed unbelievable suppliers’ inconsistency to meet their deadlines. It causes a nightmare for many companies that can’t bear losses & have shut down their operations.
In a broader view, you may meet the following two types of suppliers’ risks,
- Supplier risks with which you are familiar. You can assess such risks & set some triggers & take standard measures to mitigate potential losses.
- Supplier risks unknown to you. The unfamiliarity factor for such risks makes them more critical as you can’t prepare your company to avoid them.
You don’t have to be left your company hostage to destiny anymore. We’re here to let you know how to assess & avoid both kinds of suppliers’ risks.
Follow the enlisted steps to create a compelling framework for suppliers’ risks assessment for the known risks,
1. Supply chain Map
Creating a supply chain map can be a clever move to initiate suppliers’ risk assessment process. Prepare a supply chain map that describes all the suppliers’ roles in manufacturing a single product.
2. Maintain Suppliers’ Risk Registers
Maintain a separate supplier risk register for every supplier for the identification & documentation of known risks. This approach will help you to prepare a risk checklist & its respective mitigation options for every node of your supply chain.
3. Create risk assessment criteria
After preparing the risk register, you may create risk assessment criteria for each node of your supply chain. You can’t impose standard risk assessment criteria for all the suppliers. Risk assessment criteria are like questionnaires that help you to collect & analyze essential data to determine the probability of any risk. Risk management software & online sources can be helpful tools to create risk assessment criteria. But you can also create risk assessment criteria by yourself.
Typical risk assessment criteria deal with the following areas,
· Quality working
Ask questions to determine the quality & potential of a supplier. A few of the example questions that might help you determine the supplier quality & potential are listed below,
- What is your objective for the next 12 months?
- What have you achieved in the last 12 months?
- How consistent is your program is & how can you further improve it?
Ask questions to look at the flexibility in suppliers’ frameworks to align with your company. A few sample questions are listed below,
- Do you have any risk management policies?
- Does your companies’ structure & working framework comply with our regulations?
- Are your company flexible enough to change regulatory policies to align our requirement?
· Efficiency Rate
What is the efficiency rate of your company? How efficient your company is to maximize the output in minimal resources.
Ask questions regarding essential testing to know about standard procedures to control & execute the operation. The following questions may help you in this regard,
- Which tests do you do for the smooth working?
- Is testing impacts your resources?
- Do you test control risk strategies?
Design the questionnaire with a core purpose to know about the vendors’ policies, processes, and procedures as much as possible. It will reveal the probability of their residual risks. Don’t hesitate to ask for proof if you have an inch of doubt regarding a specific area. asking for the following documents can be helpful to verify suppliers’ details,
- Professional licenses & certifications
- Data centers reports
- External audit reports
However, try to keep things simple by designing a short & straightforward questionnaire. We suggest not making the questionnaire complex by adding too many items & checklists as a lengthy questionnaire generally gets you incomplete & erroneous answers. Design a customized questionnaire for every supplier to ask about the area of concern.
When vendors & suppliers submit the questionnaires, take your time to examine & analyze the answers of each supplier to determine the potential risks posed by them to your business. Assign risk probability score to each supplier by looking at their submitted answers.
Risk probability scores will let you choose the best available option with minimal risk. After that, you need to work on your risk management framework to find mitigation solutions for suppliers-imposed known risks to your business. It will ultimately prepare you to avoid potential risks.
A typical risk management framework revolves around the following questions,
- What will be the impact of recognized risk on your business if it occurs?
- What is the probability of risk occurrence?
- A risk can transpire at which frequency?
- Do you have a plan to deal with risk if it happens?
These questions will not only help you to assess suppliers. But, also let you prepare to tackle any potential issues.
5. Risk assessment – A continuous ongoing process
Supplier risk assessment is not a one-time task but a continuous ongoing activity. A proactive approach demands you to continuously track the suppliers’ risks to stay a step ahead. You may keep assessing the risks for every node of your supply chain. If you keep risk assessment documentation aside & ignore the regular tracking of supplier compliance, you will fail to avoid losses & risks.
It seems a complex & time taking process to do a supplier risk assessment. It feels impossible for smaller companies with smaller budgets to precisely perform regular suppliers’ risk assessments. But, prestigious companies like Verifyfull come here to do these hectic activities on your behalf. Verifyfull is known to do Chinese suppliers’ verification on your behalf at minimal costs.
A robust suppliers’ risk assessment & risk management framework will mitigate potential risks and causes the ideal results for sourcing & procurement operations.
In addition, a professional risk assessment report with a mitigation plan will keep your business a step ahead of those companies that do not perform regular assessments & plan for risks mitigation.