Using Automation to Mitigate Vendor Risk

It's staggering how much the global supply chains have grown both in size and complexity over the last decade. Although it opens up a plethora of business opportunities, it also increases the difficulty of effectively managing a global coterie of vendors.

The Covid epidemic has shown more than anything in living memory how vulnerable the global supply chains are to disruption. Businesses were forced to manage vendor risk to a much higher degree of sophistication—and proactiveness—if they wished to survive.

This is especially true for businesses that rely on vendors to maintain a constant flow of goods and services to keep afloat. When vendors are tightly integrated into your daily operations, you have to keep your exposure to vendor risk at a bare minimum.

If a single vendor fails to comply with the necessary business regulations and best practices, it can have serious consequences for your company, both in terms of legal responsibility and reputation. And with the prevalence of social media and consumer information sharing, a misstep on the part of a vendor has the potential to seriously damage your brand image.

Which means that it's no longer sufficient to choose a vendor based on the quality of their service or goods. Procurement teams have to carefully manage the vendor relationship through the entire length of their contract.

In this article, we will  look at effective risk management strategies. We will also consider the use of procurement automation to manage and mitigate vendor risk.

Develop a risk profile for each vendor

Before doing business with a vendor, it's crucial that you identify the risk vectors that each vendor introduces into your company.

Every vendor can potentially damage your company—either  organisationally, legally or reputationally. So before engaging the services of a vendor, you need to evaluate the likelihood of something going wrong. You will also need to form an estimation of the amount of effort and resources it would require to mitigate that risk.

In short, you have to evaluate each potential and existing vendor and create a risk profile for them. Then you have to classify each vendor based on the level of risk they pose to your daily operations.

In this way, risk management is no longer a reactionary process, but a proactive, strategic activity. No longer will your risk management be confined to minimising damage, but will be focused on preventing something going wrong in the first place.

When evaluating vendor risk, you should take the strategic importance of each vendor within your organisation into account. Some vendors are more critical to your daily operations than others.

If one of your most important and biggest vendors fails to comply with legislation or business rules, what effect will it have on your business? What will be the legal ramifications—not to mention the knock to your reputation?

If one of your vendors allows critical and confidential information about your business to leak out, what effect will it have on your company? What is the level of disruption that you can expect from their negligence?

These types of questions will give you a clearer picture of the level of risk you face from each of your vendors. It will also give you the opportunity to proactively mitigate risk before it metastasizes into a full-blown catastrophe.

Create a vendor risk management policy

At this point, you should have a clearer picture of the amount of risk you face from each vendor. You should also have grouped your vendors based on their risk profile.

Now comes the time to devise a risk management policy for each of these risk divisions.  Obviously, vendors that pose little risk or are not as critical to your daily operations, need not to be managed as carefully as the more risky or strategic vendors.

Risk management policies describe risk factors that have to be monitored. It will then describe the steps that will be taken when something goes wrong so that the risk can be mitigated.

In order to devise your risk management policies for each of your vendor risk divisions, follow these steps:

• Firstly, you need to gather a good team to write the risk management policies and procedures. This would be a group of people drawn from different business functions such as Procurement, Legal, and Finance.
• The team should then draw up a list of all your vendors. This is followed by the arduous process of gathering risk-related data on each vendor to evaluate the risk-level of each. There are several software tools and business intelligence services available in the market to assist with this process.
• The team needs to identify all the relevant legislation and regulations that apply to each vendor.
• The compliance status of each vendor is then evaluated. This would include going over the necessary documentation and certifications to check their validity and if all paperwork is up to date. This step has to be conducted on a regular basis and can benefit tremendously from procurement automation technology.
• The team should then brainstorm the various ways any vendor in a specific risk group could fail to comply with company policy, as well as the steps that need to be taken when that happens.
• This information needs to be shared with all relevant stakeholders. It's important to get buy-in from all your vendors, so that they clearly understand your risk management policy and all the relevant regulations with which they have to comply.
• At this point, the policy is ready to be put into practice. All vendors have to be notified of the policy change.
• Finally, the team has to monitor the execution of their strategy to ensure that it is effective and stays relevant in the market. Does the policy actually minimise your exposure to risk? Does it enable or hinder your vendors to stay compliant?

It is important that your risk management policy must be communicated with your entire organisation. Everyone must know what is required of them, as well as the consequences for failing to comply with your policy. This will allow you to take consistent action, treating all vendors fairly while still mitigating risk effectively.

Risk mitigation requires vigilance

For a vendor risk management strategy to be effective, your vendors have to be monitored on a continuing basis. When you actively monitor your vendors, you will be able to pick up if anything goes wrong in time to do something to mitigate the situation.

At the same time, you will need to put contingency plans in place with clearly defined actions that must be followed when the plan is triggered. You will also need to assign the persons responsible for each action. A contingency plan needs to be formulated for each risk type your company faces—including risks related to strategy, the implementation of that strategy, as well as vendor performance risk.

The end-goal is to monitor and evaluate ongoing risks to give you enough time to make alternative arrangements when necessary. This proactive approach will ensure the continuous, smooth operation of your supply chain. It builds a level of resilience into your supply chain which is crucial to your survival as a business.

Obviously, this becomes more difficult to achieve as you have to deal with more and more vendors on a regular basis and as your supply chain grows more complex.

As you work with more vendors, keeping track of their compliance status and performance becomes more cumbersome. This is where  procurement automation comes in. The system will be able to keep track of vendor risk factors while you focus on the important task of running your business.

The system will then be able to flag risky vendor activity and compliance issues when they arise. This will allow you to take swift corrective action and steer the ship back on course. This is critical to your vendor management success.

Create risk mitigation workflows

An important part of any risk management strategy should be putting together plans and workflows to minimise and mitigate vendor risk.

When it comes to effective risk management, a proactive approach is much superior to simply reacting to risk when it occurs. The problem is, that it's not always possible to solve a problem once it progresses too far.

When it comes to risk, having the ability to identify risk vectors early enough to take corrective action is crucial. Which means that good visibility into vendor activity and performance is crucial to maintaining smooth business operations.

Change is intrinsic to any business activity. Risk vectors will shift and evolve. Which means that your vendor management strategy has to adapt as market conditions change. You cannot rely on managing risk once something goes wrong anymore. You need a proactive approach.

This is where you need effective risk management software and procurement automation. The system will be able to keep tabs of vendor activity and evaluate how the risk profile of each shifts. The software will be able to perform these functions from a centralised platform; where vendor risk is monitored, measured and analysed on a continuous basis.

The system will be able to evaluate each vendor and give it a risk score, based on the probability of a risk occurring, as well as the potential impact it will have on your business. As the risk score of a vendor changes, it will automatically trigger predetermined corrective action.

These risk management activities can then be monitored and managed from an easily configurable dashboard. The system will also be able to issue regular reports and risk warnings to ensure the continuity of your supply chain.

Get real-time market intelligence

The risk status of a vendor can change without warning. A vendor that performed exceptionally well in the initial stages of the contract, could display unacceptable levels of risk down the line.

Which means that you have to know the ins and outs of your vendors' business at all times. This is crucial for effective risk management and is the only way to keep external threats at bay around the clock.

This is also where procurement automation can be of tremendous help. Many systems will be able to provide you with market intelligence information which is crucial for a proactive vendor risk management approach.

The software will also allow you to evaluate the risk profile of potential vendors before signing any contract. In this way, you will be able to build a solid network of dependable, high-quality vendors.

The system will be able to aggregate data sourced from several sources, including business financials and news agencies and present it in an easily digestible format. In this way, you will be able to assess and select vendors based on solid information and be confident in your choice down the line.

The benefits of vendor risk management software

There are several competent vendor management packages available on the market. Some of these offerings are more proficient at management vendor risk than others.

Some software packages have better built-in risk management features than others. Here are some of the feature-sets to look for when selecting software to manage vendor risk:

1. Evaluate the internal policies of the vendor

The software will be able to evaluate the policies of a vendor based on industry standards. This will give you an indication whether the vendor will be able to comply with your own risk management policies and procedures.

2. Evaluate vendor staffing

The software will be able to evaluate the people working for your vendor based on established risk management principles. In this way, you will be able to evaluate whether the vendors' staff have the necessary skills to do the work without posing unnecessary risk to your operations.

3. Evaluate a vendor’s internal operations

The software will be able to evaluate your vendor's internal operations as well as the systems and processes they have in place to mitigate risk. This is valuable information when putting together a risk profile for a particular vendor.

The program will be able to process business data with regards to the vendor and make a good estimation on how effectively the vendor will be able to provide the goods and services you expect of them without exposing your business to unnecessary risk.

4. Evaluate the security status of the vendor

When it comes to evaluating vendor risk, your focus shouldn't be limited to measuring vendor performance. You should also consider a vendor's ability to keep sensitive business and customer data secure.

In surveys, almost two-thirds of companies acknowledge that they don't have the capacity to ensure that vendors keep their data secure.

Once again, the right vendor management software will be able to improve this situation. The software will be able to monitor the cybersecurity abilities of all vendors and give updated visibility into the online security status of those vendors.

Conclusion

A great way to deal with vendor risk is to automate your procurement process. The software will be able to provide you with market intelligence feeds that will aid in the monitoring and assessment of vendors. In this way, the system will be able to automatically generate a risk profile score for each vendor.

When any vendor's score changes, the system will be able to issue automated notifications. The system will also be able to send these alerts to the correct members of your management team. Which means that the right people will know when a vendor's credit scores fall, or when their credit limits or other financial indicators change.

The system will also be able to evaluate a vendor's cybersecurity ratings.

In this way you will be able to reach the right balance between trusting your vendors to perform adequately, holding them accountable for their actions, and mitigating vendor-related risk.

All this can be done while keeping your data secure and verifying the compliance status of all your vendors to local and international regulations.

The system will also be able to monitor vendors' status and performance automatically. This will make the right information available to the decision-makers in your company, while saving you time and money in the process.