What Is Supply Chain Risk and How Can It Affect Your Business?

2 Mins read

Running a successful business requires more than a great plan, proper financial management, and a customer service strategy. You need to implement supply chain oversight and risk management strategies to insulate your organization from unexpected supply chain or vendor issues. Building an optimized vendor base and assessing supplier risk is key to continued success in any venture. But what is it, exactly? And why is it important? Here’s a quick look at supply chain risk and how to protect your business in these uncertain times.

A quick primer on supply chain risk

Supply chain risk can present itself in several ways. At its core, supply-chain risk is essentially anything that can negatively affect the supply chain for your operation. This can come in the form of internal or external risks and be related to suppliers/vendors. Sometimes risk manifests as something major such as natural disasters, safety recalls, and material shortages. While these can create significant pain points along the supply chain, they aren’t the only potential problems facing businesses today. More immediate concerns such as vendor management and spend risk are more common, often requiring careful management of supplier relationships.

How it affects your business

Waste, fraud, and spend risk can adversely affect any operation. Unfortunately, a single supplier issue can create a domino effect of supplier and supply chain problems. Your operation may experience costly outages, longer wait times, missing products, or poor service. Sometimes part of the risk comes in rogue spend – any unauthorized or unknown spending – on the part of the supplier or someone within the organization. Other times, if a supplier in the top-tier has an issue or obtains supplies from a third-party supplier, issues with that third-party can trickle down to your business. This is why understanding and paying close attention to potential risks is so vital to continued success.

Understanding supplier risk

There are a few specific risk categories to consider when performing your risk assessment/analysis: financial risk, customer issues, legal problems, and operational challenges. Financial risk is related to risky behavior from a supplier/vendor that will somehow adversely affect or impact reputation. It can also come in the form of affecting profits or generating unforeseen losses. Financial risk is probably one of the most significant related specifically to vendors. Your business may also experience customer service issues if a supplier fails to properly perform a service. While these are significant, they aren’t the only two supplier risks worth considering. suppliers need to operate within established laws and not attempt to circumvent any local or state regulations. Compliance standards exist to help prevent such issues. Carelessness or other risky behavior on the part of a supplier can also put your operation in jeopardy or negatively impact your customers.

Methods for risk management

While third party risk is an inherent part of doing business, there are a variety of ways to mitigate and manage it yourself. It all begins with due diligence. Due diligence is an effective risk management method that clearly defines problems, collects data about them, and provides a comprehensive assessment of the risks. Combined with key performance indicators that help assess a supplier’s performance and rogue spend analysis, managers have a set of tools for mitigating risk. Using constantly changing risk scores and suggestions from supplier management software renders third party risk management simple and effective.

Using supply chain management software

The simplest, most effective method for controlling spend risk, third party supplier concerns, and potential supplier issues is through the use of a software system that manages everything for you. With a dashboard setup and up-to-date risk scores specific to your organization, Vendor management/supply-chain management software often caters to your unique business needs. Using software not only provides an array of features for the business, it also goes a long way to fostering better relationships with suppliers over time. Good software solutions effectively removes concerns over supplier risk and sets up your operation for continued success.

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Annie is a passionate writer and serial entrepreneur. She embraces ecommerce opportunities that go beyond profit, giving back to non-profits with a portion of the revenue she generates. She is significantly more productive when she has a cause that reaches beyond her pocketbook.
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