Supplier risk refers to any potential financial, operational, or ethical risks a supplier can impose on a client company. As companies in today’s global world have a complex and interconnected business web with many suppliers, supplier risk can be seriously damaging for a company if not monitored. Especially during the Covid-19 pandemic, we witnessed a very typical example of how supplier risks can damage, and even paralyze, the operation of companies worldwide.
There are related yet different types of supplier risk. In this article, we are going to analyze the most plausible types of supplier risks that are observed in the business world and list some possible tech solutions to mitigate the effects of some.
5 Types of Supplier Risk
We can divide supplier risks into five groups:
In the digitalized business world, data security means everything. It can be one of the most important factors among business risks because a failure in ensuring cybersecurity can have snowball effects that will potentially harm any other business and customer you work with. One reason can be a breach in the pile of daily transactions between the diversity of your suppliers and your business. So, a must of doing business in today’s world is to ensure you protect your data from any unwanted third and fourth parties.
This group contains risks that are linked to the quality of the products (goods or services) a supplier ensures, or the health of the delivery processes of these to the client company. As an example, during the pandemic, businesses are highly affected by operational risks caused by delivery disruptions and delays due to border restrictions.
Financial risks cover any kind of risks that are related to the financial health of the supplier. These can be the market value of the supplier, credit or default risks it may harbor, and unluckily the danger of bankruptcy. If not monitored properly, the financial risks of suppliers can be very damaging for the sake of your business in the long run.
ESG (Ethical, Social and Environmental) Risks
Business is not only about the success of sales and profits. It is also about the ethical standards that accompany the whole process. These standards can be having environment-friendly policies, having strict regulations against any kind of discrimination, etc. Although your business may cautiously follow such standards, you cannot guarantee that every potential supplier will as well. And this will affect the reputation of your company because of the discrepancy between you and your partners’ ESG standards.
Legal and industrial regulations are the musts of trust in market relations. For any two party to securely engage in and continue doing business, each party must ensure the other that it is doing nothing illegal or against the industry regulations. Every business naturally avoids fraud, so it expects its partners to comply with legal and industrial procedures correctly.
Also, sanctions compliance is an important element of doing business with suppliers. If your potential suppliers are not compliant with sanctions against certain companies, entities, or individuals, engaging in such a partnership can have severe legal consequences on your business. Sanctions screening with up-to-date data is a must for supplier onboarding.
Which Tech Solutions Your Company Can Use to Monitor and Mitigate Potential Supplier Risks?
Although some of the mentioned potential supplier risks require a close inspection of supply chain departments, such as financial, compliance, or ESG risks, dealing with some others can be alleviated by the use of emerging technologies. Here we can offer some tech solutions to mitigate supplier risk effectively.
Leverage Blockchain Technology in Supply Chain
Blockchain technology is an emerging revolutionary method that is applicable to most multi-user data-sharing networks. Thus, its areas of application are ever-increasing. Supply chain optimization is one of them.
The use of blockchain-based information and transaction networks provides a supply chain with better visibility and data-sharing. It provides a transparent platform for supplier transactions and better collaboration with suppliers. Also, speaking of transactions, blockchain-based transaction gives the advantage of removing the intermediaries in cross-border transactions, which makes it highly efficient for global working supply chains.
For more detailed information about the use of blockchain in supply chain optimization, check out this article.
Use AI-Based Supplier Relationship Management (SRM) to Better Cope with Multi-Suppliers
AI-based technologies are also one of the leading innovations in most sectors. AI-based SRM can ease the selection of suppliers on the basis of pricing, sustainability, etc. AI also enables the automation of supply chains and more accurate predictive analytics for potential future demand/supply. Therefore, it implements a healthier relationship between multiple suppliers and the client business, despite the complexity of this interconnected network. For use cases of AI in supply chain optimization, take a look at this article.
If you have other questions about supplier risk, feel free to reach out:
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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