Managing suppliers and their associated risk is a vital component of running any business. Your organization’s profits, performance, reputation, and dependability can all be adversely affected by unchecked supplier risk. To prevent the problem at its source requires dedication and a risk assessment handling system (typically software or a database). To that end, paying close attention to third-party suppliers and how they interact with your operation is useful to save money and prevent issues in the long run. Understanding the full breadth of third-party risk and how to effectively manage it is a useful tool for any manager. Here’s a quick primer on the subject, along with a few suggestions to get started managing third-party risks, spend risk, and spend visibility at your business.
What is third party risk?
Simply put, third party risk is any kind of risk caused by businesses relying on outside parties for products and services. Suppliers perform or provide these in accordance with established business protocols. It can come in the form of risky behavior, consistently missed deliveries or poorly rendered services. A series of issues could potentially arise from a third-party, including financial, reputational, and operational problems. Extensive oversight is required to reduce risk and manage third parties.
Understand the risks to your organization
When using a third party supplier, it’s important to fully comprehend their potential risk to your company. In addition to creating potentially risky relationships, third-party suppliers can be responsible for a number of other issues. These include (but are not limited to) the following:
- Financial – losses related to profit, expenditures, rogue spend, or other risky behavior that may impact your company’s finances.
- Missed deliveries – vital, sometimes irreplaceable inventory can be lost along the supply chain through accidents or carelessness.
- Legal issues – suppliers have their own liability and compliance standards to follow. Compliance is especially important. Every supplier has to abide by a series of strict regulations to provide their services. If a supplier isn’t abiding by these standards, that will significantly increase their risk.
- Performance/reputation – poor supplier performance negatively affects your organization’s reputation and by extension, disappoint your customers.
Understanding how these factors work together to impact an organization can become an important step in designing a plan to reduce risk across the board.
Utilize risk ratings
One way to help mitigate potential risk is through the use of dynamic risk ratings and risk scores. A risk score is simply a specific value assigned to a particular supplier based on a number of factors including past performance, financial risk, and restricted party screening. Once a rating gets applied to a supplier, you receive more insight into a supplier’s risk level and are better equipped to make decisions about your own third-party vendors. One of the better third party risk management solutions comes with automated, dynamic risk scoring through a software system or database. Doing so can help attenuate supplier issues while creating better relationships for everyone along the way.
Manage supplier performance vectors
So, how do you measure and determine a supplier’s performance? By applying various performance vectors to rank supplier performance. Using supplier management software, you can continually assess risk in real-time. You can easily compile a ranking of a supplier’s performance based on past financial info, judicial history, news regarding the supplier, and any other useful information that can help inform decisions. In this manner, you can monitor/manage supplier performance and obtain clear visibility into your spend risk.
Handle transactions in real-time
Spend risk visibility can be a tough nut to crack. That’s why you need a solution that can help you assess every aspect of any transaction in real-time. Preventing an invoice payout or putting it on hold as you assess supplier risk gives you the flexibility you need to optimize appropriate spending and reduce potential problems. You can also gain valuable insight into a supplier’s entire transaction history. Putting these tools into action can help improve your overall operation and reduce risk where it counts the most.