Supply chains have become increasingly complex and global in recent years. Components and raw materials often originate from one continent, get assembled or processed in another, and finally reach the end consumer half a world away. This interconnectedness has enabled companies to reduce costs and access resources from around the world. However, it has also increased exposure to disruptions arising from third parties like suppliers, vendors, and other entities that are part of the supply chain. Supply chain disruptions can be very costly and managing third party risks has become critical for business resilience. In this post, we will discuss some solutions that can help organizations effectively manage third party risks to deal with supply chain disruptions.
The Impact of Supply Chain Disruptions
Recent events like the COVID-19 pandemic, trade wars, and geopolitical tensions have highlighted the vulnerability of global supply chains. Disruptions to third party entities can quickly spiral out of control and bring operations to a halt. The economic and business impact of supply chain disruptions includes:
- Lost sales and revenue due to inability to meet customer demand
- Increased costs due to production delays, expediting shipments, etc.
- Reputational damage with customers due to order delays or defaults
- Write-downs due to excess and obsolete inventory
In fact, supply chain disruptions are estimated to cost businesses over $4 trillion in lost revenue every year. The risks arising from third parties have become the top concern for risk managers today. Managing third party risks proactively has become critical for protecting shareholder value.
The Need for TPRM in Supply Chain Issues
Third party risk management (TPRM) is focused on identifying, assessing, and mitigating risks arising from vendors, suppliers, distributors, partners, and other entities across the supply chain. Some examples of third party risks are operational risks like capacity constraints, inability to deliver, lack of business continuity planning, etc. at third party locations. Financial risks like the insolvency of suppliers/partners and geopolitical risks like trade wars, changes in regulation, etc are also risks that need attention. Moreover, cybersecurity risks due to a lack of data protection controls at vendors and ESG-related risks like human violations, environmental breaches sum up the total risk exposure and the eventual need for third party risk management.
If not managed effectively, these risks can directly disrupt the supply chain and normal business operations. Organizations need solutions to gain visibility into third party risks proactively. A robust TPRM program can help organizations avoid revenue losses from supply chain disruptions through proactive risk monitoring and mitigation. It further reduces the probability of reputation-damaging incidents by requiring third parties to follow minimum standards. It also protects intellectual property, customer data and business critical information by assessing cybersecurity practices at third parties. You can achieve compliance with regulations and contract requirements around data security, privacy governance etc
What to Expect From Third Party Risk Management
An effective TPRM solution needs to have the following core capabilities:
The first step is identifying all third parties that have a criticality for business operations. Organizations need a centralized repository containing details of all suppliers, vendors, partners, and other external entities. This inventory enables identifying high risk third parties for further assessment.
With thousands of third parties, it is important to prioritize based on risk criticality. Risk assessment includes evaluating factors like spend, location, business impact, compliance requirements etc. Assessment can be through questionnaires, document review, audits, and process reviews.
With the dynamic nature of supply chains, it is not sufficient to just conduct periodic assessments. Continuous monitoring mechanisms are required to track risk factors like financial health, cyber incidents, and changes in geographic exposure. This enables proactive identification of emerging risks.
Once risk areas have been identified, mitigation strategies need to be implemented. These could include corrective actions like mandatory training, policy implementation, relocation etc. at the third party. It could also involve changes from the organization like diversifying supply base, bringing operations in-house etc.
Reporting and Analysis
TPRM produces a range of data like third party inventories, risk scores, audit findings, mitigation status, etc. Centralized reporting and analytics around this data enable identifying trends, taking corrective actions, and continuously improving risk management.
Benefits of TPRM in Countering Supply Chain Disruptions
Here are some ways organizations can benefit from implementing a formal third party risk management program:
Avoid Supply Chain Disruptions and Reduce Compliance Gaps
Proactive monitoring and risk-based assessment of third parties enables predicting potential failures in advance. Organizations can take risk mitigation steps or find alternative vendors. This improves supply chain planning and resilience. Assessing vendor compliance to regulations around data privacy, environment, ethics etc. reduces organizational exposure to non-compliance penalties and lawsuits.
Protect Critical Data, Enhance Reputation, Lower Insurance Premiums
Evaluating information security and cyber risk management practices at vendors reduces risks of data breach incidents that could be costly for the organization. Insurers may lower premiums if organizations can demonstrate robust supply chain risk management through third party assessments. Thorough vetting and requiring vendors/partners to follow sustainable business practices enhances reputation with customers, regulators, and business partners.
As global supply chains become increasingly interconnected, investing in third party risk management is essential for organizational resilience and sustained performance. Third party risk management not only provides a robust platform for closer scrutiny of vendors but also acts as a guard against any type of disruption. The solutions discussed here can help companies reap the benefits of effective TPRM.