In today’s business environment, risk management continues to gain widespread recognition as a critical factor in protecting your business’ performance and ultimately your bottom line. Building a strong risk management program is a necessity to maintain continuity of quality, product, and supply while increasing revenue and growing margins.
That’s why a robust risk management program has become a mandate from many boards and executive management teams. Supply chain and procurement management need increasing visibility and transparency into key suppliers for insight into potential issues or disruptions, which could cause significant impact to the company. However, risk management doesn’t start and stop with supply chain and procurement functions. All business areas - credit, finance, operations, compliance and IT - are incorporating risk management principles.
As risk management is increasingly viewed as a strategic and competitive advantage, companies are beginning to make risk programs a guiding principle in developing their relationships with their suppliers. While risk comes in all shapes and sizes, the strongest risk management programs across our clients share the same following key characteristics.
Best-in-class risk management programs include the following characteristics:
- Program is enterprise-wide
An enterprise-wide approach to risk-management policy, process, and culture provides the necessary foundation and enables information to be shared company-wide. Often enterprise-wide risk initiatives are mandated from senior management to make sure risk is prioritized and embedded into daily processes. To support this type of initiative, you need a centralized process and database for the most efficient and cost-effective way to mitigate risks and make the best business decisions. It is also important to define responsibilities and identify who owns or manages specific areas of the program.
- Suppliers are triaged by criticality
Managing risk requires many resources and time, so you should consider where the highest impact risks lay within your organization. The most common method to define critical suppliers is using spend, but a more accurate method is to measure impact. Which suppliers will have the most impact on revenue, such as single or sole source suppliers? Which pose the highest threat or risks - quality and fulfillment, environmental, macroeconomic, geographic, cyber risks, or all the above?
- Risk is measured by standardized holistic metrics
Focusing on Key Risk Indicators (KRI) helps quantify risk amongst different tiers of suppliers. Our clients typically find financial risk, quality and delivery performance metrics, and country factors to be strong indicators. More specifically, they use standardized data for companies, industries, and geographies to create the most consistent metrics throughout their risk management programs.
- Processes are defined to mitigate and monitor risk
Mitigate: Nurture the relationship by having a productive dialogue. Does the supplier agree that there is an issue? Financial health is a strong conversation guide since you can point to specific areas of concern in the financial statements. What are they planning to do? What are the actions you plan to take?
Monitor: Check in on the steps identified in the mitigation action plan – are the mutually agreed upon actions progressing? Have the risk metrics improved?
- Risk is managed end-to-end
The strongest risk management program focuses on evaluating risk throughout the lifecycle of suppliers. It begins at sourcing when evaluating new suppliers or a new supply category by performing due diligence, choosing the strongest suppliers and setting the tone of the relationship by highlighting transparency and communication. Risk management should also be monitored on a continuous basis throughout the relationship for early warning into signals of deterioration. Not only is it important to look at your Tier 1 suppliers, but Tier 2 and beyond should also be evaluated for a complete picture of risk.
- Technology is used for efficiency
Risk is too vast and complex to be managed using spreadsheet and manual processes. To create sustainable processes, risk management should be as automated as possible. Investing in software, data, and analytics will ensure possible risks are not slipping through the cracks. Many clients implement a Governance Risk Platform to provide quick and easy access to the most current data to identify and mitigate ongoing risk. Additionally, using accurate data to map risk across the entire supply chain and implementing alerts to stay abreast of changes in risk eliminates missing important signals.
Want to read more about best practices in risk management? Read our eBook for an in-depth guide to optimizing your supplier risk management program.