A Guide to Third-Party Risk Management in Supply Chains
Most companies work with vendors and suppliers to streamline their supply chain operations, but those relationships introduce several risks. As such, management needs to take certain steps to minimize their exposure to third-party incidents, including assessing the potential risks and developing the right third-party risk management program.
That said, performing the correct assessments and designing the best program can prove challenging, and not everyone knows where to start. To help those organizations kickstart the process, we’ve created this guide for applying third-party risk management practices to the supply chain.
What is Third-Party Risk Management?
Different vendors and suppliers (third parties) offer distinct expertise and services and combining them to form the perfect team often results in smoother supply chain operations. On the flip side, more partners can lead to increased risk, and the company is also more likely to experience an incident or disruption.
That’s where third-party risk management (TPRM) comes in. It involves finding, assessing, and controlling the risks associated with external partnerships to ensure they don’t cause more harm than good.
The Importance of Managing Third-Party Risks
Staying on top of third-party risks is critical, and not doing so can lead to severe financial losses, reputational damage, operational disruptions, and even severe injuries and fatalities (SIFs).
By implementing a solid TPRM program, companies ensure that their third-party relationships align with their risk tolerance and compliance requirements to avoid these potentially catastrophic repercussions.
Assessing and Identifying Third-Party Risks
Organizations can’t manage risks if they don’t know what they are or how serious they might become. As such, they should consider the following three steps to help them identify and assess all possible risks as they prepare to develop a TPRM program:
1. Conducting a Thorough Risk Assessment
All successful TPRM programs include a solid risk assessment, in which organizations evaluate every distinct risk associated with each of their external partners. Management should consider the type of service the third parties provide, the sensitivity of the data they share with them, and how vital that relationship is to the overall business.
2. Identifying Potential Risks and Vulnerabilities
To understand the potential risks and vulnerabilities associated with third parties, organizations must also understand several aspects of their new partner inside and out, including their:
- Security posture
- Compliance status
- General business practices
Gathering this much information might require sending third-party questionnaires, reviewing on-site assessments, and any other data source that can be used to paint a comprehensive picture of the potential risks.
3. Prioritizing Critical Risks
Once a company finds the risks, it must prioritize each based on how likely they are to happen (and how significant an impact they could have). This helps them figure out where to focus their resources.
Some risks are more potentially harmful than others, so it’s essential to focus on the most critical ones. That way, companies tackle the significant threats first and then address the secondary ones.
Managing Supply Chain-Specific Risks
Supply chains can be highly complex and interconnected, sometimes including suppliers worldwide with their own third-party relationships. A disruption anywhere in this network could have far-reaching consequences for any business.
To avoid mishaps, companies should consider taking the following actions:
1. Find the Supply Chain Risks
To assess these risks, companies should map out their entire supply chain, from raw materials to finished products, and pinpoint where bottlenecks or weaknesses could occur.
This process might include reviewing factors like:
- Geopolitical stability
- Natural disaster risk
- Supplier financial health
- Supplier performance history
2. Know the Critical Suppliers
Not all suppliers are created equal; some are more critical to operations than others. To prioritize supply chain risk management efforts, organizations might categorize suppliers based on their importance and the potential impact of a disruption.
The company might also set up contingency plans, such as backup suppliers or increased inventory, in case of disruption with a critical supplier.
3. Implement Strategies for Strengthening the Supply Chain
Strengthening the supply chain is always a critical and ongoing effort. One successful strategy is collaborating with suppliers to improve their risk management capabilities, which might include the following steps:
- Sharing best practices
- Providing training
- Conducting joint risk assessments
4. Identify the Right Tools for the Job
Management should also invest in the right technology to increase visibility and agility across the supply chain. The best software includes features that help safety teams predict and respond to disruptions more quickly, which should include the following:
- Tracking
- Predictive analytics
- Risk monitoring
Best Practices for Effective Third-Party Risk Management
Lastly and maybe most importantly, the most effective third-party risk management uses the right strategy and follows the proper best practices, including the following:
1. Establishing the Key Components
A robust TPRM program has several key components, including but not limited to the following:
- Risk assessment processes
- Due diligence procedures
- Contract management
- Ongoing monitoring
- Incident response plans
2. Developing a Comprehensive TPRM Strategy
A successful TPRM program starts with a solid strategy. This means aligning with your overall risk management framework and business goals. It involves:
- Defining clear roles and responsibilities
- Establishing risk appetite and tolerance levels
- Implementing consistent assessment and monitoring processes
A comprehensive strategy ensures everyone is on the same page and working towards the same goals. It’s the foundation for effective third-party risk management.
3. Engaging Stakeholders
TPRM isn’t just the responsibility of one team or department. It requires collaboration across the organization – from procurement to legal to IT.
Regular communication and training help foster a culture of risk awareness. It ensures everyone understands their role in managing vendor risk and is equipped to do so effectively. Silos are the enemy of good TPRM.
4. Communicating Expectations to Third Parties
Clear communication with your vendors is essential. They need to understand your risk management expectations from the outset. This means:
- Defining security and compliance requirements in contracts
- Establishing SLAs and performance metrics
- Outlining consequences for non-compliance or breach
Transparency and accountability are essential. Your vendors should know precisely what is needed from them and the stakes involved.
5. Ranking and Prioritizing Third Parties
Not all vendors pose the same level of risk. That’s why ranking and prioritizing them based on inherent risk is crucial. Factors to consider include:
- The criticality of the service or data involved
- The vendor’s access to sensitive information
- The potential impact of a breach or disruption
This allows management to distribute resources and focus your efforts where it matters most. A risk-based approach is much more effective than a one-size-fits-all approach.
6. Setting up Processes for Reporting and Escalation
Management should supply a means for workers at every level to escalate possible risks to supervising personnel. Prompt reporting is critical for addressing dangers before they become serious issues.
A properly structured feedback loop will help safety teams quickly identify and manage potential risks at all levels of the business.
7. Reviewing Policies and Procedures
To ensure the newly formed TPRM program is working correctly, companies should also review and update their policies, procedures, and risk assessment methods. This requires taking the following steps:
- Conducting periodic audits
- Benchmarking against industry standards
- Learning from past incidents or close calls
It’s an ongoing process but an effective means to ensure the program remains practical despite evolving risks and business needs.
Protecting Your Supply Chain Requires the Best Risk Management Solutions
Effective third-party risk management in supply chains is an ongoing and sometimes challenging process, but also a necessary one. You can stay ahead of incidents, promote business continuity, and protect your organization from harm in an ever-evolving risk landscape by implementing these best practices.
However, following a series of best practices is not enough, and truly getting the most out of your supply chain operations requires partnering with an industry expert to integrate the best management program for your business.
Consider working with our team to configure a solution that meets your specific needs, fosters the necessary culture of safety among all supply chain participants, and manages third-party risks.
Contact us today to learn more.
