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What Is Vendor Risk Management?

What Is Vendor Risk Management

Your supply chain is the lifeblood of your business. No matter the industry, companies rely on vendors and service providers for the goods and services they need to keep thriving and growing. Because a company’s supply chain is so important to its success, however, it’s crucial to have a system in place to monitor, evaluate, and adjust your stable of vendors in order to minimize risk exposure. A vendor risk management (VRM) program is designed to help companies build a safe, reliable, and strategic supply chain that reduces risk while remaining flexible enough to meet their needs.

Creating a vendor risk management program begins with understanding the challenges that come with vendor management and implementing best practices that help your company meet and overcome those challenges.

Common Vendor Risk Management Issues

Traditionally, VRM programs have been very limited in scope; new vendors were vetted during the selection and onboarding processes, but those that passed muster and were added to the company’s supply chain—whether for a single project or under the terms of a contract—were not subject to ongoing monitoring for compliance and quality.

Under a “third-party risk management” model like this one, underperforming or noncompliant suppliers only became apparent when they created a crisis for the company, whether in the form of production delays, workplace safety issues (e.g., OSHA violations), or penalties and fees for industry or governmental noncompliance. It’s not so much risk management as it is risk reaction.

A modern version of an effective vendor risk management program is built to reduce risk and maintain industry and regulatory compliance while still obtaining the best possible price, terms, and customer service level. It is designed to address the challenges that often led to disastrous, and expensive, outcomes created by opaque and unmonitored vendor management, often as part of a larger enterprise risk management program designed to address risk exposure across the organization as a whole.

For maximum performance and accountability with minimal risk, companies need a VRM program designed to address:

  • Lack of a Formal Vendor Risk Management Program: If there’s no cohesive solution implemented to ensure consistent monitoring of vendors—including key performance indicators (KPIs) used to measure vendor performance, compliance, and strategic value—then every step of VRM will be costly, time-consuming, and inaccurate.
  • Outdated VRM Methodologies: It’s hard to tackle a modern supply chain of any size with pen and paper and manual data entry. These technologies are static, largely opaque, and don’t provide any kind of real-time vendor assessments that can be used to make strategic decisions or nip looming disasters in the bud.
  • Lack of Education and Buy-In for VRM: Even the best vendor risk management program won’t be effective if management and staff aren’t educated about their role within the system, or the policies and procedures that support it. In addition, developing a VRM without engaging your vendors in the process can lead to miscommunication, mistakes, and damaged vendor relationships.
  • Increased Regulatory Requirements: Following the law, and ensuring your vendors do the same, is essential to avoiding fines, penalties, and public opprobrium. In addition to industry regulation, many companies find themselves dealing with increased scrutiny with regard to environmental sustainability, information security, and social responsibility, and need to ensure their vendors meet not just the buyer’s expectations, but those of their consumers as well.
  • Complex Global Vendor Networks: As more and more companies embrace digital transformation and build complex supply chains that draw goods and services from vendors (and sub-contractors) around the world, it’s crucial to have total supply chain visibility. Negotiating the intricacies of international compliance standards and labor laws is challenging enough, but add in global disasters, war, and trade issues, and it becomes clear just how important VRM is to minimizing risk exposure.

Companies relying on traditional vendor management paradigms in today’s crowded and cutthroat market may find themselves dealing with costly delays, reputational damage, and paying hefty fines—not to mention playing catch-up with their competition.

Effective due diligence is both comprehensive and ongoing, and reveals potentially dangerous levels of vendor risk exposure while there’s still time to do something about them.

Best Practices for Effective Vendor Risk Management

Now you know the pain points that can create costly problems within your supply chain and, by extension, your company’s overall performance in the marketplace. The next step is to develop a vendor risk management program that identifies and eliminates high-risk suppliers while simultaneously providing valuable insights into top-performing vendors who could potentially become partners in shared strategic growth.

Implementing a few essential best practices can help you achieve your VRM goals more quickly.

1. Research and Implement a Software Solution

All of the obstacles to successful vendor management—from outdated tech to process inefficiencies to a total lack of transparency with regard to vendor performance—are handled more swiftly, accurately, and completely with a centralized, cloud-based VRM solution (or a procurement solution that contains a vendor risk management module). Digital tools can help you create an optimized VRM framework supported by artificial intelligence, data analysis, process automation, and centralized, real-time data management.

Making an implementation the first step in your VRM plan allows all the other steps to fall into place with much less effort and frustration.

Consider these benefits:

  • Continuous Process Improvement: Automation enables transparent workflows with full visibility at every stage, from vendor evaluation to onboarding to risk assessment and review. Being able to track vendor performance and compliance in real time supports strategic planning initiatives and allows you to spot and address potential problems before they become serious.
  • Optimized Risk Mitigation: Full transparency, paired with advanced data analytics, makes it possible to look beyond vendor performance management and reduce risk through industry, legal, and regulatory compliance through strategic use of select vendors. Doing so helps your business, and the vendors in its supply chain, stay in line with requirements set by the Gramm-Leach-Bliley Act (GLBA), Health Insurance Portability and Accountability Act (HIPAA), Health Information Technology for Economic and Clinical Health (HITECH) Act, etc.
  • Improved Data Management: Cloud-based, centralized data and contract management means your vendor information is always up to date, and contract information is easy to access, share, and update as circumstances warrant. It also reduces paper waste and storage expenses while giving team members access to templates and legal-approved verbiage they can use to build accurate, compliance-friendly contracts quickly and easily.
  • Improved Vendor Engagement: Connecting the vendors in your supply chain through a vendor portal in your procurement system has a number of benefits for risk mitigation. In addition to connecting vendor workflows with your system (simplifying vendor performance and compliance monitoring), a VRM platform ensures easy communication with vendors and access to training and information on KPIs you use to measure and evaluate their performance. Fewer miscommunications and less confusion streamline vendor relationship management and ensure your entire supply chain is working to support your company’s short- and long-term goals.
  • Real-Time Strategic Insights Via Data Analytics: In addition to vendor performance, data analytics can identify important strategic information such as seasonal demand, opportunities to diversify the supply chain to meet changing market ambitions, and industry trends that hold potential for innovation and expansion.
  • Greater Organizational Flexibility: With total visibility, enhanced communication, and centralized data management, along with enhanced cybersecurity features, you can develop detailed and versatile contingency plans for your supply chain. Contingencies allow you to ensure business continuity if disaster strikes, and cloud-based, secure data management ensures vendor data, customer information, intellectual property, and company secrets are all better protected against cyberattacks, natural disasters, and other catastrophes.

2. Formalize and Optimize Vendor Selection, Monitoring, and Review

Vendor relationship management and vendor performance management are two sides of the same coin, and both benefit from specific and formalized policies and workflows detailing vendor selection, onboarding, and evaluation. Establish and share with your suppliers the KPIs and risk management processes your company will be using to evaluate vendor performance and compliance, and ensure your expectations are clearly and consistently communicated.

3. Make Due Diligence Your Sword and Shield

Effective due diligence is both comprehensive and ongoing, and reveals potentially dangerous levels of risk exposure while there’s still time to do something about them. Due diligence consists of two parts: vendor risk assessment and vendor performance monitoring.

  • Vendor risk assessment uses criteria you establish to identify and classify the risk posed by a given vendor in your supply chain. Within this risk management framework, vendors are assigned (in order of increasing severity) low, moderate, high, or critical risk, and flagged for action accordingly.
  • Vendor performance monitoring uses KPIs such as delivery times, regulatory compliance, capacity, etc. to determine a vendor’s compliance with their contractual and regulatory obligations, as well as industry standards and buyer expectations. Service Level Agreements (SLAs) provide a convenient checklist for vendor compliance, and integrate well with centralized contract management to ensure all parties have the same information during evaluations or negotiations.

All parts of due diligence are simplified and streamlined with support from a software solution, since real-time monitoring and full, leveled, and context-sensitive data is available on demand for all stakeholders. Vendors know what’s expected of them, buyers can easily and consistently monitor vendor performance, and both parties gain stronger relationships through reduced labor, wasted time and resources, and miscommunication

Taming Supply Chain Risk Begins with VRM

Is your supply chain strong against excessive risk, or is it hanging on by a thread? Every vendor is a potential source of both value and risk. But by using the right tech tools, developing a clear and ongoing approach to due diligence, and engaging your vendors in a transparent and comprehensive VRM program, you can ensure your company’s supplied by vendors who meet not just their obligations, but your expectations for quality, compliance, and performance.

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