Supplier disruptions have caused over $4 trillion in lost revenue for global companies since 2011, according to estimates from Resilience360. With supply chain complexity only intensifying, organizations must make managing third party risks an absolute priority going into 2023.
This in-depth guide examines the key types of supplier risk and how leading companies are leveraging emerging technologies to gain visibility, implement controls, and build resilience.
Why Supplier Risk Has Become a Major Pain Point
Global supply chains have never been more vulnerable. A series of shock events like COVID-19, climate disasters, and cyber attacks have collided with structural shifts in sourcing models to create a perfect storm of supplier risk.
Supplier-related disruptions increased 83% between 2020-2021 according to Resilience360, with the automotive industry seeing a massive 470% spike. Their impacts have been severe, with 51% of executives reporting losses over $50 million from a single supplier incident in KPMG‘s 2022 survey.
Driving this growing risk are powerful mega-trends:
Globalization – Overseas sourcing from unfamiliar suppliers with little visibility
Consolidation – Reliance on fewer, large suppliers versus diversification
Just-in-Time Models – Lean inventories that maximize disruption impacts
Outsourcing – Dependence on third parties for critical business functions
Digitization – Interlinked systems increasing cyber exposure
Sustainability – Scrutiny of suppliers‘ environmental and social practices
With suppliers now representing over 60% of input costs for manufacturers, according to Kearney, the business imperative for supply chain leaders is clear: implement transformative new approaches to identifying and controlling supplier risk to match today‘s challenges.
The 5 Most Critical Types of Supplier Risk
While suppliers can expose organizations to a myriad of risks, these 5 categories present the most frequent and damaging threats:
1. Cybersecurity Risks
With the rise of interconnectivity through APIs, cloud platforms and shared data, cyber incidents at suppliers now pose severe downstream risks for their customers.
In Ponemon Institute‘s 2021 study, 63% of companies surveyed had experienced a data breach originating from a third-party vendor in the past 2 years. The average cost was $2.8 million, a 10% uptick versus 2020. Healthcare, tech, and financial services firms faced the steepest costs from supplier cyber threats.
These incidents take many forms:
- Ransomware attacks that block access to critical systems
- Phishing schemes that steal credentials
- Malware that exfiltrates sensitive IP and customer data
- DDoS attacks that disrupt operations
- Vulnerable cloud apps and tools used by suppliers
And they originate from various weak points:
- Poor supplier credential management and access oversight
- Lack of supplier security controls and monitoring
- Suppliers with outdated systems and unpatched vulnerabilities
- Intentional cyber espionage by nation-state threat actors
The risks are pervasive, with 63% of suppliers reported as having medium to high data security gaps in a recent SAP Ariba survey.
2. Operational Risks
Disruptions to a supplier‘s physical production and service delivery pose huge availability and continuity risks for buyers.
Natural disasters like Japan‘s 2011 tsunami and Thailand‘s 2011 floods shuttered supplier facilities in those countries for months, severely impacting automotive, electronics, and other sectors globally. Climate change is increasing the frequency and severity of such events.
Plant fires, equipment malfunctions, capacity bottlenecks, and logistics network failures can also constrain supplier output. Such incidents surged during the pandemic. In 2022, 57% of manufacturers reported supplier-driven operational disruptions per Resilience360 data.
Upstream quality problems at parts and raw material providers also create significant operational risks, leading to delays, recalls, and scrapping of finished goods. These issues are estimated to cost automakers alone over $15 billion annually.
3. Financial Risks
A supplier‘s financial instability or distress presents both immediate and slowly-emerging dangers for their customers. Risks include:
- Bankruptcy – Lost capacity, long-term disruptions
- Demand fluctuations – Inability to adapt, forcing cutbacks
- Margin erosion – Cutting corners on quality and service
- Credit risks – Payment defaults disrupting orders
- Market volatility – Constraints on capital access
Modeling by Dun & Bradstreet suggests over 17,000 suppliers went bankrupt globally during the pandemic. Their customers absorbed heavy losses. Financial risks remain elevated today amid economic uncertainty, with 82% of procurement leaders citing suppliers‘ financial health as a top concern in Ardent‘s 2022 survey.
Early warning signs can come in the form of lower Altman Z credit scores, rising working capital cycles, or tightened lending terms. But buyers often miss these signals without proactive monitoring.
4. ESG Risks
With stakeholders paying close attention, ethical and sustainability-related incidents at suppliers can damage customer reputations, violate consumer trust, and conflict with corporate values.
Areas of rising ESG risk include:
- Human rights controversies – Forced labor, unequal treatment
- Environmental violations – Pollution, emissions, waste
- Corruption scandals – Bribery, accounting fraud
- Lack of diversity – Discrimination, lack of inclusion
In Deloitte‘s 2021 Chief Procurement Officer survey, 52% of leaders cited ESG as one of their top supplier risks. However, only 19% stated they engage robustly with suppliers on ESG concerns. Mandatory emissions disclosures and expanding social responsibility regulations will force companies to take greater control of ESG across their supply network.
5. Compliance Risks
Suppliers who lack adequate controls around regulations, prohibited parties, export laws, and more can lead to sizable compliance and legal risks for their customers. Failure to screen suppliers for sanctions or debarment lists can result in large fines or blacklisting.
Areas of supplier compliance risk include:
- Export controls – Restricted data/technology access or transfer
- Sanctioned regions – Doing business in prohibited countries
- Prohibited parties – Ties to denied vendors or persons
- Counterfeit parts – Trafficking knock-off components
- Conflict minerals -Using materials from risky sources
- Product safety – Non-compliant materials or ingredients
With global supply chains spanning up to 5,000+ suppliers today, manually keeping track of compliance is impossible. This necessitates modern technology solutions.
Managing Supplier Risk with Emerging Technologies
Advancements in digital supply chain management tools have enabled more proactive approaches to identifying, assessing, and mitigating third party risks.
Here we explore 5 technologies procurement teams should leverage:
1. Blockchain for Enhanced Supply Chain Transparency
Blockchain establishes a decentralized, immutable ledger for tracking transactions and data exchanges between parties. It brings new levels of visibility across fragmented supplier networks.
Participants share details on orders, shipments, certifications, payments and more over a trusted network. Activity logs and transparency are vastly improved versus siloed ERP systems.
Smart contracts can encode compliance rules and automate processes between customers and suppliers based on data inputs. IoT also expands the amount of supply chain data that can be monitored on blockchain-based ledgers.
Benefits for supplier risk management:
- Real-time insights into supplier operations and documentation
- Quickly pinpoint sources of delays, quality issues, etc.
- Improved regulatory compliance through shared ledger
- Immutable record of supplier transactions and actions
- Dispute resolution through shared data history
Walmart‘s food safety blockchain significantly improved responsiveness in tracing sources of contamination, reducing resolution time from days to seconds.
2. AI-Based Supplier Risk Monitoring
AI-driven supplier risk management platforms ingest thousands of data points from news, databases, financial filings, regulations, and more to continuously evaluate third party risks across compliance, cybersecurity, operations, and financials.
Sophisticated machine learning algorithms spot anomalies and patterns to predict emerging risks – from bankruptcies, sanctions violations, and cyber incidents to reputational threats – enabling preventive action. Natural language processing extracts key details from unstructured text and content.
Risk analytics dashboards centralize insights for procurement teams while configurable risk scoring models quantify exposures. Automated risk-based questionnaires also deeply assess supplier strengths and vulnerabilities.
Benefits for supplier risk management:
- Holistic 24/7 monitoring of risk signals
- Early detection of financial volatility, cyber threats, ESG issues
- Quantified risk profiles identifying priority suppliers
- Automated questionnaires for deep supplier assessment
- Models predicting disruption likelihood and severity
Unilever leverages AI-based supplier risk management across 24 risk factors to gain enterprise-wide visibility and control.
3. Operational Supplier Audits and Site Inspections
While technology delivers powerful risk insights, on-the-ground operational assessments of suppliers remain essential. Audits examine factors such as:
- Production/service capacity
- Business continuity plans
- Quality systems and performance
- Compliance to specifications
- Cybersecurity and data privacy
- Financial stability and controls
- Safety standards
- Sustainability and ethics practices
Increasingly, these are conducted through virtual audits combining IoT-connected on-site sensors, drones, live video inspection, and big data analysis for efficiency at scale.
Risk-based scheduling optimized by analytics reduces audit costs by focusing on the most critical suppliers. Collaborative online platforms also centralize audit scheduling, findings, and corrective actions.
Benefits for supplier risk management:
- Directly inspect supplier facilities, processes, and systems
- Assess conformance to regulations, contracts, codes of conduct
- Identify vulnerabilities and performance gaps
- Verify sustainability and social responsibility practices
- Continuous versus periodic insight into suppliers
Nestlé performed over 3,300 supplier audits in 2021 covering ethics, quality, and food safety standards, mandating 100% compliance.
4. Supply Chain Risk Modeling and Simulation
Powerful analytics tools allow businesses to model various disruption scenarios and simulate impacts across their supply networks. Risk quantification methodologies score supplier criticality.
Inputs like supplier lead times, inventory buffers, substitute options, and continuity plans feed complex models that calculate expected delays, shortages, costs, and revenue at risk if failures occur.
This intelligence allows buyers to pinpoint high priority suppliers for mitigation focus based on potential disruption severity. Quantified insights also help design redundancy strategies.
Benefits for supplier risk management:
- Quantify and prioritize risks by supplier tier and category
- Simulate best and worst case impact scenarios
- Optimize spare parts inventory at suppliers based on risk
- Inform insurance, stockpiling, and segmenting decisions
- Gauge revenue, cost and service level risk exposure
Ericsson uses supply chain risk modeling and simulations to reduce the potential impact of IT system outages at suppliers by 10-15%.
5. Automating Supplier Compliance Standards
Automated, continual screening solutions that run suppliers against restricted party lists, sanctioned entities, export control rules and more provide efficient, scalable compliance oversight.
Daily checks across official denial lists, legal and regulatory databases, PEP lists, and 100+ sanctions programs including OFAC, UN, HMT, DFAT identify prohibited business partners in the supply base before engagements begin.
Automated systems also conduct background checks, document AML procedures, and ensure adherence to regulations around conflict minerals, hazardous materials, and product quality.
Benefits for supplier risk management:
- Avoid fines, lawsuits, and lost business from non-compliance
- Ongoing monitoring versus manual periodic checks
- Consistent enforcement of regulations across suppliers
- Free up compliance team resources through automation
- Ensure policies keep pace with frequently updated rules
Leading aerospace company Rolls Royce automated compliance screening for 25,000 suppliers to meet regulations on restricted data and controlled technology access.
Key Takeaways for Managing Supplier Risk
With suppliers now linked inextricably to the success of modern enterprises, procurement teams must embrace supplier risk as a top priority if they hope to build resilient supply chains.
Technology is providing the visibility and control needed to navigate today‘s environment of heightened vulnerabilities. Leaders should focus investments on solutions delivering continuous monitoring, predictive risk signals, performance transparency, and automated compliance across their supplier network.
By taking a proactive stance, they can address critical risk areas like cyber threats, operational disruptions, financial instability, ethics scandals, and non-compliance before they become enterprise emergencies.
In the years ahead, honing world-class competence in preventing and mitigating supplier risk will separate the organizations that achieve supply chain resilience from those paralyzed by disruptions.