Lack of visibility to the business’s exposure to external risks can adversely affect the company’s revenue, brand value, and reputation. Dispersed and noncontextual risk signals don’t provide a cohesive and integrated approach across best-of-breed systems. More critically, they lack clear and concise insight into business exposure for risk managers to be proactive. This gap results in restricted and limited value given its disconnection to the company’s supplier base and environment dynamics.
Supplier risk management is one of the top priorities of chief procurement officers (CPOs), particularly in the consumer-packaged goods (CPG) and retail industries. In 2022, financial and geopolitical events, such as the Russian war against Ukraine and inflation around the world, exacerbated an already disrupted global supply chain. For example, the situation in Ukraine and its position as one the biggest exporters of commodities such as sunflower oil, corn, honey, and wheat will have tremendous negative impact on global food production. Likewise, tensions between China and Taiwan, which possesses 63% of the semiconductor market share, added dependence on neon gas supply from Ukraine where 50% of the volume required by semiconductor manufacturers is produced. These present a significant challenge to global digital infrastructures while the risks on human capital drastically increased. Moreover, environmental, social, and governance (ESG) goals as well as clear expectations from global markets and regulatory entities are becoming stricter in establishing processes for monitoring and assessing risks.
Enabling the following pillars of an efficient risk management process — which needs to be led by procurement — will facilitate data and insights to be used in a more timely and effective manner:
Cross-functional governance and collaboration with suppliers
Risk management embedded within a robust strategic sourcing framework
Consistent risk monitoring and regular preventive mitigation
Multitier risk visibility at the right depth in the supplier ecosystem
Using data and analytics, such as enabling data warehouses, data modeling, AI and insight visualizations, can help more easily distribute, communicate, and update these complex processes even as needs change yearly. The integration of the appropriate data elements that are constantly enhanced and properly maintained can transform sourcing strategies. Every step in this process, as they become equipped with current and accurate information, is more effective and easily adapts to changes in the market.
7 steps for avoiding supplier risks
There is an established and industry-recognized seven-step framework that organizations can adapt to their strategic sourcing. Companies can identify and address key risk elements at each step:
1. Identify business needs and profile the category. Access to data about the category and the revenue and business criticality it represents to the business provides the information necessary for an accurate stratification of all categories of materials. In turn, it drives the appropriate assignment of risk profiles. A proper segmentation of a supplier with the appropriate risk profile defines the basis to appropriately derive the scope and the kind of suppliers required. By understanding and evaluating the business impact (e.g., core brands, customer markets and financial consequences (i.e., key brand net revenue), a solid ground can be established for evaluating the supply market.
2. Assess the supply market. Insights into the supply market to satisfy company demands need to be systematic. This enables available suppliers to be evaluated not only based on their price, quality, and other commercial terms, but also on their performance against the segment and risk profile they fall under. Analytics can put this evaluation in context, enabling decision-makers to better identify suppliers that might represent levels of risk beyond company thresholds.
3. Develop a sourcing strategy. When preparing for supplier invitations, these plans and strategies need to be clarified internally and communicated clearly across teams, especially when they are, in many cases, geographically dispersed. These strategies include accounting for disruptions in logistics, cybersecurity threats, and geopolitical turmoil that can happen without apparent warning When consolidating all risk factors and developing a strategy, these major risks should be included and monitored closely throughout the sourcing process.
4. Apply due diligence to requests for information and proposals. At this point in the process, all risk elements need to be considered, including:
Sanctioned countries to be avoided.
Legal entities of suppliers.
Compliance with regulations, including antibribery and anticorruption policies.
Respect for human rights and inclusion of ESG processes and policies.
Compliance with the EU General Data Protection Regulation (GDPR)
Inclusion of restricted party screening (RPS) and other validation processes.
This will enable companies to evaluate suppliers across all these criteria and expedite the tendering process as well as narrow down the suppliers to be invited and evaluated.
5. Negotiate with selected suppliers. Shortlisted suppliers can be further evaluated through well-defined, analytics-supported model that automatically compares and ranks them. Buyers can also adopt preestablished and suggested areas for negotiations that use simulations and sensitivity analysis in factors, which could be easily improved and negotiated with a precalculated level of impact. Those levers must include ways where specific risks are identified and eliminated directly by the supplier or through collaboration. For instance, financial stability could be assessed through credit levels that suppliers are able to access by analyzing the company’s credit ratings.
6. Execute contracts with diligence. Contracts need to include terms and conditions that were discussed and considered. Ultimately, they serve as the legal basis that suppliers must abide with, and as the reference for creating linkages between the metadata and mechanisms of control and compliance. This linkage between main/primary and transactional data is critical and fundamental in ensuring seamless flow and integration across different software that support various segments of the source-to-pay process.
7. Review and continuously improve. If upstream processes embed risk avoidance elements, monitoring compliance and adherence to contracts are easier to do. It will also limit, if not simply eliminate, issues as they can be caught and addressed before they become one. Companies can also have smoother cross-functional collaboration that complements their risk management program by setting up a control center where risk teams use and manage their portfolios effectively.
Tailored and holistic approach to risk management
The combination of supplier stratification, category priority, and resulting risk profiles must distinctly fall within thresholds relevant to the risks that materials and services represent. Systematically measuring the level of business impact against the probability of a disruption is fundamental in risk management programs, yet procurement organizations commonly overlook this. Fortunately, it’s now more affordable and easier to implement robust frameworks supported by the right analytics and insights. Information and insights related to financial stability, risk of bankruptcy, human rights, antibribery, anticorruption, cybersecurity, ESG and other areas to control can be modeled, customized, and embedded within risk profiles. Rules and conditions that model these areas of risks generate accurate insights and robust sourcing strategies.
Indeed, including risk mitigation requirements as part of the tender process ensures proper evaluation. Capabilities in analytics that cover all these risk areas as well as embed risk profiles and the dynamic nature of different risk factors provide a significant advantage to companies by providing timely insights that fit their needs, realities, and priorities.
Effective supplier risk management through data and analytics
Data and analytics can help organizations develop meaningful ways to foster transparency and accountability, clearly define supplier risk management insights, and protect their business and mitigate supply disruptions. Lingaro’s procurement analytics practice provides analytics solutions that enable organizations to identify, measure, and track supplier risk data, KPIs, and metrics for calculating and reducing the company’s exposure to supply disruptions. Among these solutions are interactive risk management capabilities as well as visual reporting solutions for assessing the supplier’s risks, spend category’s risk profile, and potential net revenue impact.
Lingaro’s procurement analytics practice also builds turnkey and personalized spend management, supplier performance management, and supplier diversity analytics solutions that use reliable, actionable data to streamline global spend management, supplier’s quality, and delivery as well as economic impact of diverse suppliers. Lingaro creates data and analytics solutions and uses modern cloud platforms, AI, and machine learning to build solutions that improve efficiencies, maximize values, unlock new opportunities, and enact transformative change.
Download our white paper, “Procurement Analytics: Forging Business Resilience Through Supplier Risk Management and Revenue Protection,” to get an in-depth look at how an end-to-end approach to risk management — complemented by advanced analytics — can help organizations forge resilience in today’s volatile business environment. Our white paper also shares a real-life case study on how a Fortune 500 company used procurement analytics to digitally transform their business processes and workflows while tracking, analyzing, and minimizing their business risks.