Companies need suppliers to provide key functions, goods, and services to thrive. When the supply chain is diverse, organizations benefit even more.
Yet, every vendor you contract, every component you buy for your production line, and every operational necessity you outsource carries added risk. Unless you plan on not using a single supplier at all—which is, of course, virtually impossible—that risk is unavoidable.
And make no mistake, suppliers that don’t live up to expectations can cause a world of hurt. For example, a report by Soha Systems says that 63 percent of data breaches are directly or indirectly the fault of a third party.
IT functions tend to draw most of attention when talking about supplier risk, but a faulty component or a missed shipment can be just as costly.
To counter these threats, companies may perform supplier risk assessments on their key vendors. Risk departments know all about these important audits, but supplier diversity teams may be less familiar.
Here is a brief overview of supplier risk assessments and how they can be instrumental to your diversity efforts.
Supplier Risk Defined
Supplier risk is the risk inherent to any third-party relationship, potentially threatening the contracting company’s assets or profits. Granted, anything a company does carries risk, but at least internally, you can keep close tabs and institute governance measures to greatly mitigate that risk.
With suppliers, that level of oversight is not possible, and you ultimately may be held responsible, both legally and reputationally, for the mistakes your vendors make.
Obviously, some supplier risk is greater than others. If the vendor that handles your landscaping doesn’t show up, the worst you might be dealing with are some weeds until you hire someone else.
If the vendor who maintains your computer servers goes out of business the day your systems crash, you have a much bigger problem.
Why Risk Can’t Be Eliminated, Only Managed
Because supplier risk is inherent, you accept some every time you hire a new vendor. No matter what you do, that risk cannot be eliminated—but it can be managed.
Some suppliers present more risk than others, depending on a variety of factors including how essential they are to your business, how much their risk can burn you if something does go wrong, and how easily they can be replaced by another supplier.
The key is identifying and mitigating vendor risk before threats turn into crises, which is where supplier risk assessments come into play.
The Supplier Risk Assessment Process
A supplier risk assessment is basically an audit of a vendor’s processes, policies, and financial health to determine how much risk it poses to the contracting organization.
What follows are simplified steps of what the process entails:
- You, the contracting company, identify which vendors are most important to your success and/or present the most risk and should be subject to a supplier risk assessment. This is an important step because the average midsize-to-large company contracts hundreds, if not thousands, of suppliers—at best, you will only be able to assess a small percentage of your portfolio, so you must make your choices count.
- You build an assessment—usually in questionnaire form—either on your own, with a resource you find online, or with supplier risk management software.
- The supplier completes the assessment, possibly with your help. The vendor may need multiple employees to answer questions, and documentation might be required.
- You examine and analyze the results.
- You take action based on the results, often in a request to the supplier for remediation of major concerns. With this step, you may need to pick your battles—what level of risk that a supplier poses you can live with, and what absolutely must be addressed.
- Depending on the supplier and its risk profile, more assessments may be ordered on a periodic basis, anywhere from a few times annually to once every couple of years.
The results of a risk assessment (or the supplier’s response to it) could also lead to a nuclear option of jettisoning the supplier from your portfolio. This is far from ideal for both parties, but to protect your organization, it’s sometimes necessary.
Why Are Assessments Critical to Supplier Diversity Programs?
Supplier diversity programs need diverse vendors, but they also must be confident those vendors will boost the company, not damage it.
Right or wrong, some diverse suppliers are held up to higher standards by executives—standards that can be better upheld with the results of a supplier risk assessment. Some vendors might not realize risk that is present in their operations, and an assessment offers a path to mitigating that risk, ultimately benefiting them and your company.
Supplier diversity programs want the contractors they hire to succeed. Besides offering additional protection for your company, supplier risk assessments can contribute to that success.