Building A Foundation With Robust Supply Chain Risk Management Systems
Key to enabling this transformation is the adoption of a more strategic and robust supplier risk management system, powered by high quality and timely data that can feed into automated workflows and risk decision analytical models. In such a system, trusted third-party data complements and enhances the organization’s proprietary data and allows users to get a much clearer understanding of the myriad risks embedded within the supplier portfolio.
A critical component of supplier risk management systems is a fully integrated onboarding process that delivers a 360° risk review of each supplier, allowing companies to make more informed decisions about the suppliers they’re adding to their portfolio. By following the principle of “responsible sourcing,” companies can identify structural vulnerabilities and anticipate disruptions across their supply chains. They can also assess the sustainability strategy of suppliers and increase their visibility into how entities across the supply chain are building resiliency. This is particularly important for building strength and flexibility within the supplier portfolio.
Organizations also need to be able to identify, measure, monitor, and report on the risk profiles of their individual suppliers. At the same time, they also need to perform an aggregated risk assessment at the portfolio level to manage their overall exposure and dependency on a particular industry, geography, or a few strategic suppliers. Closer alignment between the credit and procurement functions is key to a holistic strategy for mitigating risk across the organization. Third-party data providers can make this connection possible with the use of unique identifiers that can be used to provide a consistent view of suppliers across a company's internal databases.
Three areas Supply Chain Managers should focus on when building, or enhancing their supplier risk management system are:
Digitalization and automation. One of the primary ways to make a company more efficient and flexible is to combine their existing data with externally sourced data and automate the decision approval process and workflows. By using analytical tools and predictive modeling to increase the speed and confidence of decision making, managers can reduce time spent on low-value tasks, freeing their team members to focus on strategic concerns.
Resilience. Organizations should create collaboration within their ecosystem of suppliers and external partners, with the objective of increasing visibility across the supply chain. This will help them to be better prepared to anticipate potential disruptions and respond quickly to unexpected events.
Sustainability. Companies understand the importance of minimizing the environmental, social and governance impact of producing goods and services across their lifecycles. This is an area where working with a third-party data provider is key. Putting in place strong sustainability practices can unlock new opportunities by improving the reputation of a company, increasing efficiency, reducing costs, and helping differentiate from competitors.
The Importance Of Third-Party Data In Your Supplier Risk Management Process
The goal for most organizations is to develop a 360° risk review of their suppliers. However, it can be difficult, time consuming, and cost prohibitive to source and maintain supplier information internally. Most companies need to contract with a third-party data provider to access the breadth and depth of firmographic, ownership, financial, ESG, regulatory and related information, and independent ratings or scores they need to understand risk exposures associated with their existing and potential suppliers.
By incorporating trusted third-party data and analytical tools into their onboarding process, firms can develop a centralized, digital data repository for third-party risk management. They can operationalize their third-party data, by blending it with proprietary data, to ensure it supports their supplier risk management workflows. As organizations search for ways to optimize their data management strategies, master data rises to the top as an effective, secure, and scalable solution. But there are three key questions that all organizations will need to address to begin their master data management journey.
Putting it all Together into an Effective Data Management System (DMS)
An effective DMS works as the single source of truth across firmographic, ownership, industry, economic, financial, credit, ESG, regulatory and other essential data. This system should be able to combine third-party data with data gathered from suppliers, and provide real-time red flags via notifications and alerts, to help managers make more informed risk assessment decisions quickly.
The key capabilities required to perform effective risk management are:
» Automated risk assessment models and workflows.
» Onboarding, monitoring and reporting capabilities.
» Accounts payable, invoice and payment management systems.
» Third-party system/CRM connection.
It’s typical for companies to focus on cost efficiencies by mitigating myriad risks that can potentially materialize with an existing, or future supplier. But the last few years have shown that for businesses to be successful they must understand the critical role suppliers play in their business operations and society at large. Third-party data providers can help companies achieve that by providing the right data and tools they can use to vet and add suppliers that strengthen their operations, allowing them to turn crises into opportunities, by making supply chains more reliable and resilient.
To build resiliency into your supply chain, you would ideally understand different factors that affect a supplier's risk exposure, including:
» Firmographic information.
» Geospatial and environmental real-time data, including natural disasters.
» Global incidence of terrorism, political conflict, border security issues, disease outbreaks, etc.
» Compliance information, including legal and regulatory risks.
» Relationship-specific information, such as internal ratings, spend volume, and strategic, primary or direct supplier status.
Supplier examination is possible thanks to the collection, analysis and sharing of data, which can add value by creating greater visibility and agility within the supply chain. Data can be used to develop specific disruption scenarios and test supply chain resilience models, enabling companies to respond rapidly to unexpected events and make quick decisions that have a direct impact on overall supply chain performance. This will allow companies to minimize the risk of a complete network shutdown, by switching from primary to alternative suppliers, or rebalancing the supply exposure around the world.
Case Study: A Transportation Company Supply Chain
A large multinational company in the transportation sector was looking to centralize all supply chain risk management processes onto one shared, corporate platform. The firm had internal and external platforms and connectors with which the third-party data provider was required to integrate. Sustainability risk analysis was needed and future integration with cyber risk management had to be considered. The main challenge the company faced was that their procurement team was not specialized in supplier risk management, but nevertheless they had to understand the impact financial risk, ESG risk, compliance risk, and other risk exposures would have on their supplier decision making. They needed an easy-to-use and understand system that would help them quickly assess the strength of new suppliers, understand the viability of their existing supplier portfolio, and uncover potential risks in their global supply chain.
The company selected Moody’s Analytics for several reasons, including:
» Our global counterparty database is one of the world’s largest, and meets the company’s needs.
» We were able to integrate different risk factors into their modeling and analytics.
» We were able to integrate with their 3rd party systems and platforms.
» We consulted with them to help automate and enhance their internal supplier risk management processes.
» We provided robust, ongoing training programs.
It’s typical for companies to focus on cost efficiencies by mitigating myriad risks that can potentially materialize with an existing, or future supplier. But the last few years have shown that for businesses to be successful they must understand the critical role suppliers play in their business operations and society at large. Third-party data providers can help companies achieve that by providing the right data and tools they can use to vet and add suppliers that strengthen their operations, allowing them to turn crises into opportunities, by making supply chains more reliable and resilient.
Integration with the firm’s existing processes and systems took a few weeks. Once the implementation was complete and the processes were up-and-running, the firm began realizing the following benefits:
» Reduced costs and increased capacity across the team due to time saved in onboarding new suppliers, performing global risk assessment analysis, and making data updates. This allowed the team to focus on more strategic needs.
» Better communication across the team when deeper risk analysis was needed, thanks to standardized data and automated workflow solutions. The right information was getting to the right people, at the right time, which instilled a sense of confidence in the decision-making process.
» The ability to quickly produce a global risk assessment throughout their supplier portfolio, organized by type of supplier, or geographically.
Conclusion
A robust approach to supplier risk management is critical to ensuring the viability and success of your business operations. To reach a high level of operational supplier risk management it’s recommended you work with a third-party data provider. They can help you realize the benefits of building a strategic framework for supplier risk management that will allow you to understand both the vulnerabilities and the opportunities throughout your supplier portfolio, and then work with you to implement a cohesive process across your organization. If you’d like to learn how Moody’s can help you manage supplier risk, please contact us today.
