Supplier risk management and compliance are two critical functions of procurement. These processes ensure that vendors meet certain standards before they’re allowed to work with your organization and that they continue to do so over time. These functions also help you identify any risks posed by suppliers as well as the consequences of a breach. In this blog, we share best practices for creating an effective supplier risk management program and strategies for managing supplier compliance. Read on to learn how these strategies will help reduce the potential costs of liable suppliers and preventative measures that could keep you from being liable in the first place.
What is supplier risk management?
Supplier risk management is an approach to supplier management that focuses on pre-qualifying suppliers and mitigating the risk of partnering with them. There are a couple things you can do to mitigate the risk of partnering with a supplier. One is pre-qualifying suppliers: making sure they have the right capacity, capability, and financial stability to meet your requirements. Another is having a plan in place in case there’s a problem with the supplier’s performance so it doesn’t impact your operations. Supplier risk management is about taking a proactive approach to your suppliers. It’s about managing risks related to your suppliers so that the failure of one supplier doesn’t bring down the rest of your supply chain.
Creating an effective supplier risk management program
Since, as we mentioned, supplier risk management is about preventing supplier issues from impacting your business, it’s important to prioritize. Your first step is to do a risk assessment of your suppliers and the relationship you have with them. This will help you prioritize areas where you need to focus your efforts. The best way to start is by creating a list of your suppliers and the types of relationships you have with them. Once you have this list, you can assess what risks each of these relationships poses to your business. You can create a risk matrix to help you determine how much risk each relationship poses to your organization. Once you’ve identified the risks, you’ll be able to prioritize your efforts and create an effective supplier risk management program.
Strategies for managing supplier compliance
The first step in managing supplier compliance is identifying the areas you want to focus on. You can do this by creating a compliance strategy based on the following areas of risk. - Financial risk - This is the risk that the supplier won’t be able to meet its financial obligations to you. This can include things like payment terms and collections issues. - Commercial risk - Commercial risk is the risk that the supplier won’t meet the terms of the contract. This could include things like quality issues, delivery issues, or intellectual property issues. - Legal risk - Legal risk encompasses things like regulatory and legal compliance, anti-corruption efforts, and managing the risk of litigation with the supplier. - Reputational risk - Reputational risk is the risk that the supplier’s actions and decisions will negatively impact the company’s reputation and brand.
Maintain a blacklist of non-compliant suppliers
One of the most effective ways to manage compliance issues with suppliers is to blacklist non-compliant vendors. When you blacklist a vendor, you’re removing them from the list of potential suppliers for a certain period of time (often 6 months or a year). When you blacklist a vendor, you’re taking a stand against their non-compliance and letting them know that you’re not happy with their performance. You’re also putting other decision makers in your organization on notice that they need to take the same stand. If you’re blacklisting a vendor, there’s no way around it. You need to do it. It shows that you’re not willing to look the other way when vendors aren’t following the rules. It shows that you’re willing to make hard choices and stand behind those choices.
Maintain a master list of compliant suppliers
Keeping a master list of suppliers that have proven they can meet your requirements is another effective way to manage compliance issues. This might be a formal list kept in a spreadsheet or database or a more informal list kept on a whiteboard. Whichever format you choose, make sure you keep it up to date to make it worthwhile. As you onboard new suppliers and add them to your list, you’ll want to make sure you do so for the right reasons. You don’t want to add a supplier to your list just because they’re the cheapest option. When you’re adding new suppliers, make sure you’ve verified that they can meet your requirements before you add them to your list.
Establish and maintain metrics to evaluate quality and performance
One of the most effective ways to manage compliance is to evaluate your suppliers’ quality and performance. You can do this by setting metrics that tie to your business goals and monitoring them over time. For example, if you’re looking to optimize supplier costs, you can establish a metric that measures the average cost per unit with each supplier. Then, each time you receive a shipment, you can record the supplier and their cost per unit. Over time, you’ll be able to see where costs are higher than average and take steps to reduce them.
There are plenty of reasons to invest in supplier risk management and supplier compliance. It helps you to build better relationships with your suppliers, protect your company from supplier issues, and reduce costs associated with managing suppliers. It can also help you to improve your supply chain and reduce waste. All of these things can lead to a more profitable business. It’s important to remember that supplier risk management is an ongoing process. You don’t want to implement these strategies once and then assume everything’s taken care of. Make sure you revisit your supplier risk management plan, identify areas where you need to see improvement and hold your suppliers accountable.