The Benefits of Vendor Risk Management Software

There are several ways that a vendor can expose you to risk. For example, if a vendor doesn't implement robust cyber-security and your computer network links to theirs, your system could become exposed to hackers or spyware.

If a vendor encounters operational problems, it can cause serious disruptions to your supply chain, since you won't get access to the goods and services you need to effectively run your business.

When a vendor runs afoul of the public sentiment in some way, it can cause serious problems to your reputation. All out business boycotts are common these days, and you don't want to have a public relations disaster on your hands.

In a recent survey conducted by Deloitte, it was found that 9 out of 10 organisations had to deal with a serious disruptive incident involving an outside vendor in the last three years.

So how do you choose vendors who will provide goods and services that will benefit not harm your business? How do you avoid the setbacks that come from vendor failure?

In this article, we will look at vendor risk management from a number of different angles. Principally, we will consider the following factors:

• We will look at vendor risk management software, and what the main benefits are of implementing these tools in your daily operations.
• What features you need to consider when choosing the right vendor risk management software for your company.
• We will also look at the different vendor risk management tools available.
  

What is Vendor Risk Management (VRM)?

Vendor risk management is the subset of vendor management specifically focused on minimising the amount of risk your organisation is exposed to through your vendor relationships.

In any business, the relationship you have with vendors will be a big indicator of future success. The stronger the relationship you can foster with your vendors, the more successful those relationships will be. You have a better chance of receiving the goods and services from your vendors at the right times, and avoid unnecessary disruptions to your supply chain.

All businesses are exposed to regulatory and financial risk through their vendor relationships. Vendor risk management (VRM) are all the systems you put in place to evaluate vendor risk, minimise that risk, and then finally mitigate the risk.

This would include the analysis of risk factors and then managing that risk in such a way that it causes the least amount of disruption to your reputation, security and overall business efficiency.

The benefit of proper risk management is that you can catch potential vendor risk vectors during the initial screening stage of evaluating potential vendors. In this way, you can avoid doing business with vendors that can end up causing serious disruption and difficulty in your organisation.

Creating a VRM strategy

Vendors deliver the goods and services that allow your business to function. Which is why maintaining healthy relationships with vendors is crucial to your success.

Unfortunately, there is always the chance that things can go sour with a vendor, or that vendors expose your company to unnecessary risk.

How do you evaluate the current state of your vendor relationships? When should you change the parameters of a vendor relationship—and when does a particular vendor relationship become too risky?

When it comes to vendor risk, it's best to adopt a proactive approach. Besides the obvious benefit to your vendor relationships, it will also safeguard the operations of your business. It will also protect your brand reputation in the market—which is essential to the survival of your company.

Which means you need a proper vendor risk management (VRM) strategy.

With the right VRM strategy in place, you will be able to evaluate each vendor and determine if their services won't hurt your business in any way. You don't want your business operations to be impeded through the mistake of any particular vendor.

This is why you have to gauge the risk profile of each supplier. You will also need to evaluate their importance in the running of your business, and determine how any slip ups on their part will negatively impact your business.

This is inherently a complex task, but fortunately there is  technology available that can help you create a more efficient vendor management setup as well as manage vendor risk.

The technology provides automated tools that are able to assess each vendor's role in the overall running of your company, and also how  any mistakes on their end  might negatively impact your business.

This will help your decision-making process. You will be able to evaluate each vendor to determine whether each is worthwhile doing business with them when their risk profile is taken into account—or decide on how much you want them to be involved in the core operations of your business.

Here are a couple of key features that any vendor risk management (VRM) system should have to help you manage vendor risk:

• The VRM should give you visibility into vendor data, with records that are accurate and continuously kept current and up-to-date.
• The VRM will be able to automatically detect risk vectors, flag important compliance dates ahead of time, as well as potential bottlenecks and operational disruption.
• The VRM will be able to  streamline your risk management, standardising all the risk-related processes company wide, as well as the entire vendor relationship management process.
• The VRM should open effective and seamless channels of communication with all your vendors.
• The VRM should include risk mitigation plans that kick into gear when risk vectors are identified. These plans need to be discussed, shared, and cleared with all relevant departments.

As you can see from this list of features, a VRM allows you to manage vendor risk much more effectively than relying on manual methods.

All vendor relationships carry a degree of risk. If you take a more proactive approach to managing vendor risk, you have a much better chance of avoiding unnecessary complications and disruptions to your business operations.

The benefits of VRM software

There are many benefits to using a proper tool to automate and streamline your vendor risk management processes.

The main benefit would be that it allows you to properly assess the risk profile of a particular vendor before engaging their services.

Furthermore, the software simplifies this process significantly and is scalable so that you will be able to assess different vendors differently based on their size and importance to your organisation.

Here are a couple of the risk factors that a VRM will allow your business to control and mitigate:

1. Minimise financial risk

When you engage with a vendor, your business relationship goes much further than just signing a contract—and then giving them an order now and then.

In actual fact, the vendor relationship binds your two organisations together in a business relationship that can either be beneficial or harmful to both of you. If any of your vendors suffers a loss or goes through difficulty, your business will also be impacted in some way. If they get hurt, so will you.

Here is a good example. Say you work with a vendor where both of your IT networks share information—a common scenario for effective supply chain management. If they suffer a security breach, some of your customer data could easily become exposed. Instantly, you are faced with a major problem. This problem won't just impact the vendor, since your own customers have been affected. You will have to go into damage control, firstly securing your customers' data, but then also patching up public relations to salvage your reputation and warding off potential lawsuits.

Here, a risk management system will allow you to vet vendor cybersecurity before you commit vulnerable data to their network. The VRM can also evaluate a vendor's impact on your business. If there is a serious possibility of a vendor inflicting damage to your bottom line, you will be able to alter your vendor relationship—or avoid doing business with that vendor altogether. In this way, you will avoid entering into disaster-prone vendor relationships.

2. Minimise strategic risk

When something goes wrong in your supply chain, it can have serious financial consequences. But more than that, it may result in you being unable to meet customer demand, since you know that the next shipment you need to run your business won't arrive in time to meet demand.

The result is that you won't be able to meet your strategic business goals as a company. You will also hurt your reputation with customers and force them to go elsewhere with their business.

This problem became especially prominent in the time of Covid when international shipping routes came under unprecedented strain. Many large businesses and factories were forced to shut down due to government intervention. Which means that the business operations of countless businesses worldwide were thrown into disarray.

Only businesses which already had a proper risk management  strategy in place, were able to effectively mitigate the effects of this global disruption to the supply chain.

A VRM measures specific data points to evaluate vendor risk profiles. This provides valuable information to choose vendors that will ensure the stability and security of your supply chain—so that your business will be able to function sustainably in the foreseeable future.

3. Minimise risk to your brand

When you provide quality products and services, you build up a good reputation in the market with your customers, which burnishes your brand.

You want customers to expect a good deal from you if they do business with you. This will result in repeat business, which means you don't have to spend as much money in marketing to retain existing customers.

This creates a virtuous cycle of repeat business, higher sales and revenue, and business growth.

Unfortunately, that's not always how things work out. Often a vendor that you rely on to provide crucial products and services, starts off giving the high quality products and services that your customers have come to rely on when they do business with you. But then after a while, you notice a drop in quality. This might not happen all at once, but gradually over a period of time.

If the vendor provides goods at prices that boost your bottom line, you might be tempted to continue to sell their goods. But in the long run, customers will also start to notice this drop in quality, which means your sales numbers will also start to drop off.

With proper risk management, this steady decline in sales could have been avoided. The VRM will help you evaluate the effect that a single supplier asserts on your supply chain. It can also evaluate the potential effect that a slight drop in quality of a particular vendor's goods and services will have on your business operations.

In this way, you will be able to avoid vendors that could possibly do damage to your business and the reputation of your brand.

4. Minimise supply chain risk

Without a properly run supply chain, your business will properly struggle to survive in the current marketplace.

In order for your supply chain to function properly, you need a good set of vendors to supply you with the goods and services you need to keep your business running. Good vendors are the lifeblood of your organisation. They provide the inputs you need to provide completed goods and services to your customers.

With good vendors behind you, you can be sure of getting the supplies you need, delivered at the appropriate times, so that you can keep your supply chain running properly. You need vendors who can guarantee their products and can stick to predetermined timelines, to ensure that your supply chain won't be disrupted.

This is another reason why proper vendor risk management is essential. With the right strategy in place, you can avoid and mitigate the pain points that will ensure the resilience of your supply chain.

The VMR will help you evaluate the risk profile of each vendor, to identify vendors which are more likely to default on their agreements. You will also be able to single out those vendors who are more likely to keep running in the face of adversity.

When you continually pick vendors that are more likely to help you to succeed in the market, it will help you to secure your supply in the long run. You will get the inputs you need to keep your business running, no matter what the circumstance, or in the face of any setback.

Conclusion

When you manage your vendor risk effectively, you have a much better chance of making  a success of your vendor relationships. In fact, most businesses can benefit from improving their vendor relationships—and managing vendor risk more efficiently.

To do that, you have to take a proactive approach to risk management—and the only way to do that effectively is if you have the right software tools.

There are several software tools on the market that are geared towards managing vendor risk. With a proper VRM solution in place, you can improve your overall compliance and avoid unnecessary disruption to your business operations.

When you run an effective risk management strategy, you will be able to shield your business from operational and legal vulnerability.

This is also a way to improve the ROI of doing business with vendors, since you will be able to improve revenue, decrease cost, and run more effective vendor relationships that end up benefiting rather than harming your business.

It allows you to mitigate vendor related risk in a meaningful manner. This makes it a lot simpler to ensure compliance across your organisation and to ensure that your data is always secure across your entire platform.