What Your Procurement Team Is Missing in Supplier Risk Management

How does your procurement team identify supplier risks? Does it have a standardized process in place to understand the risks associated with different suppliers? Does it look beyond tier 1 suppliers in this process?

In many ways, the success of a business today depends on how effectively it can identify (and mitigate) supplier risks. Geopolitical conflicts, trade and tariff wars, extreme weather and growing uncertainty have led businesses and their procurement teams to shift their focus toward supplier risk management.

Recent studies validate this shift in focus, with Procurement Leaders ranking third-party risk management as the number two priority for procurement consecutively for three years.

Poor Visibility Continues to Hamper Risk Management

A key concern in supplier risk management is less visibility into lower-tiered operations. 

Even today, sub-tiers remain largely opaque, with 70% of Procurement Leaders’ respondents stating they aren’t confident of risk visibility into tier 3 suppliers.

Around 40% of respondents say the same thing about their tier 2 suppliers.

To get this aspect of their operations right, procurement must have end-to-end visibility of the supply chain. This continues to be a big challenge, as most teams struggle to gain visibility beyond their primary suppliers for varied reasons.

How can they overcome this challenge and enhance transparency in their supply chain? Let’s find out. 

How Procurement Can Improve Visibility into Sub-Tier Risks

1. Send RFIs

Firstly, procurement can send requests for information (RFI) to their tier 1 suppliers and ask them directly to share information about their suppliers, says Harry John of Procurement Leaders in this GEP webcast. These RFIs are a cost-effective way to secure accurate information. However, they can be time-consuming and therefore not a viable option for a large supply base. At times, tier 1 suppliers may not be willing to share information about their suppliers and ignore these RFIs, adds John.

2. Use supply chain mapping tools

The second method of gaining sub-tier visibility that is becoming more popular now is via supply chain mapping technology tools. Powered with AI-powered features such as risk monitoring, these tools allow buyers to establish connections between tier 1 and lower-tiered suppliers and monitor risks in near real time.

Unlike RFIs, these tools are scalable and can easily map large volumes of data across multiple suppliers. They proactively monitor risks to reduce the time-to-awareness of potential disruptions. Thus, a business can act early and take preventive steps. Today, businesses use a wide range of supply chain mapping tools including flow charts, histograms, check sheets, cause-and-effect diagrams and pareto charts.

3. Foster regular communication

Communicate frequently with your suppliers. Engage in open dialogue to understand their operations, sourcing strategy and key challenges. Regular communication can help identify issues early and deal with them. You can also offer incentives for suppliers who are willing to share information about their suppliers.

4. Make it a part of the contract

Expand source-to-contract procedures to include clauses in your contracts with tier 1 suppliers that require them to disclose information about their key suppliers and encourage similar transparency down the line. You can also mention specific information needed such as supplier names, locations and certifications.

Identify the Key Sub-Tier Suppliers

At the outset, procurement teams must engage in supply chain mapping. In this exercise, they need to collect information about suppliers and details of all the people involved in the supply chain. Supply chain mapping provides a visual representation of all the stakeholders and their dependencies within the supply chain. This can help understand stakeholder relationships and determine what each stakeholder sells to whom or buys from where.

While listing stakeholders and their dependencies, procurement must assess where most money and time are spent to identify priority areas of the supply chain. They should also understand how data and information flow through the supply chain. Smooth flow of data on orders, shipment details and returns are key to streamlining operations as well as identifying and managing risks.

Get End-to-End Visibility

To effectively manage risks, procurement must have a 360-degree view of suppliers and the supply chain network. In addition to supplier risk management, end-to-end supply chain visibility can help increase transparency and promote collaboration. It can also provide momentum to ongoing sustainability initiatives.

Learn how GEP’s AI-powered supply chain software can help you succeed at supplier risk management.