The globalization of supply chains offers substantial advantages for businesses, including cost savings, increased innovation through collaboration, and better access to specialized resources. However, this interconnectedness has led to a greater reliance on a limited number of suppliers, especially as companies streamline their supply chains.
Since the late 1990s, import dependencies have risen, particularly for strategic products. This trend reflects a higher level of specialization in global supply chains that emerged and highlights the growing risks of unexpected disruptions in international trade and supply chains.
The COVID-19 pandemic exposed this vulnerability when major companies, including Ford and General Motors, experienced significant production delays due to semiconductor shortages that were worsened by their dependence on a few suppliers.
To safegaurd against supply-chain disruptions that can significantly hamper operations, companies can take steps now to manage risk more effectively in an evolving landscape.
Supplier risk management is key to avoiding compliance penalties
As the business environment evolves, governments and regulators have begun to impose stricter expectations regarding supplier risk management. Legislation such as the Security of Critical Infrastructure Act and CPS 230 Operational Resilience in Australia reflect a growing recognition of the importance of effective risk management across industries.
Historically, the financial services sector has led the way in regulatory compliance by developing advanced risk management frameworks. However, as regulatory expectations expand beyond financial services, many organizations in other sectors may find themselves unprepared. Industries that have already invested in strong risk governance practices may navigate these changes more effectively. In contrast, organizations lacking foundational risk management practices may struggle to meet these new demands, exposing them to significant penalties and reputational damage.
The consequences of ineffective supplier risk management can be severe. Regulatory bodies are increasingly holding executives and board members accountable for lapses in oversight and imposing fines and penalties on organizations that fail to meet compliance standards. This underscores the need for organizations to evolve their approach to proactive supplier risk management.
Exploring the common challenges of supplier risk management
A study by the Institute for Supply Management found that 75% of organizations did not have full visibility of their supply chains, leading to increased risk of disruptions. This lack of visibility can lead to mismanagement of sanction risks and an inability to identify actual supplier risks. To address this, organizations should consider implementing a supplier chain risk management platform that integrates seamlessly with existing contracts and procurement systems, enabling a holistic view of supplier relationships.
Despite the clear need for effective supplier risk management, organizations often encounter several common challenges. One of the most significant issues is the inadequate transparency of end-to-end supply chains, which hampers the ability to fully understand supplier dependencies.
Another challenge is the failure to differentiate suppliers based on their risk profiles. Our experience shows that many organizations allocate a significant portion of their supplier management resources to low-risk suppliers, which can detract from the focus needed on higher-risk suppliers.
Furthermore, inadequate risk governance frameworks can undermine efforts to uplift supplier risk management. Without a well-defined “three lines of defense (3LOD)” model — including operational management, risk management functions, and independent assurance — and a comprehensive risk management strategy, organizations may struggle to implement effective oversight and ensure risks are managed effectively. Establishing a clear taxonomy for risk and defining risk appetite are essential steps in creating a robust governance framework.
Lastly, many organizations grapple with manual or poorly integrated technology infrastructures, which hinder effective risk monitoring, reporting, and decision-making. This is supported by an NTT DATA report, which found that 80% of organizations agree that inadequate or outdated technology is holding back organizational progress and innovation efforts. In fact, 94% of C-suite executives believe legacy infrastructure is greatly hindering their business agility. Implementing a Governance, Risk, and Compliance (GRC) system that supports an integrated supplier risk lifecycle, from due diligence to contract renewal, can significantly enhance an organization’s ability to manage supplier risks effectively.
By investing in effective risk management strategies, organizations can safeguard their operations and enhance their resilience in an increasingly interconnected world.
