Any change brings new risks that must be managed, and this is particularly true when operating in new global supply markets. How will businesses leverage these new supply markets while protecting the brand from new, complicated risks? And how can businesses handle heightened and reinforced regulatory expectations in third-party risk management?
Procurement and supply chain teams are uniquely placed to leverage leading technologies to engage the various internal and external stakeholders in safeguarding businesses while exploiting opportunities. In addition, risk sharing can drive successful partnerships.
Vendor or partner?
Author and speaker Simon Sinek discussed what it means to have a business partnership. He explained that having “skin in the game” is to have incurred risk by being involved in achieving a goal. An airline no longer needs a plane with a jet engine, rather it needs flying hours. Or a lamp manufacturer no longer sells lamps, it sells light. You no longer buy just a product – you buy a package that consists of the product and all kinds of add-on services such as design, maintenance, and replacement. Due to this increasing complexity, our relationship with suppliers is changing.
So, when suppliers or people don’t put skin in the game, they aren’t taking risks. If they are not willing to take any risks, but they still want a reward, that’s not a partnership, that’s a vendor.
When somebody says, “we want to be your partner, now pay us,” that’s fine, but this is a vendor relationship, not a partnership. Partnerships require shared risk; that is what a partnership means. It could be a personal relationship, a marriage or, more importantly, a business relationship. Marriage is all about love but it does include multiple, let’s call them, risk-sharing components! Business relationships require similar risks.
Risk is the investing proverb
Risk is the investing proverb: never invest more money than you can afford to lose, but if you’re going to start something entirely new, you want everybody to invest something that they can’t afford to lose.
Whether it’s money, time, energy, belief, or the problem you’re trying to solve, the more people willing to share that risk, the greater potential in the endeavor. The same thing applies to business relationships. In my view, risk-sharing is all about commitment.
When your company and a vendor share a project’s risks, it may be more likely to succeed than one where your company bears all risk. In addition, multiple teams in a partnership can provide opportunities to share resources and reduce risks.
A successful partnership starts with a good conversation. Document these discussions and validate whether you’ve applied all of your company controls, whether regulatory or company-specific. You will want to do this for all of your suppliers in a structured, auditable fashion.
This assessment process can start with any user in your organization. To initiate the process, the user completes risk-engagement screening questionnaires, which define the inherent risk in an engagement. Based on the user inputs, the system applies control assessments and generates a list of tasks and approvals that must be completed (internally or externally). Each questionnaire is scored and weighted (the questions in these control assessments can be pre-scored). In addition to the individual questionnaires (e.g., finance, sustainability, etc.), the overall assessment receives a score to identify the inherent risk of engaging with this supplier.
It is important to have capabilities available to continuously monitor and manage third-party risk and performance. There are multiple domains to consider when it comes to risk monitoring; for example, forced labor, compliance, financial, and sustainability. Multiple third parties can provide information on one or more of these risk domains, but it would be better if it were all visible from a single supplier profile. Even better would be a system that automatically sends automatic alerts to you if a risk domain changes negatively and triggers mitigation activities.
There’s growing evidence that environmental and social governance factors drive long-term advantages for companies. “It’s not just about cost savings or impact on process efficiencies,” said Tony Harris, vice president and general manager of supplier management solutions at SAP Ariba, in an interview during a Las Vegas event.
Although we can expect more regulations to come our way, procurement can drive a company’s higher purpose. For many organizations, the goal is not just to expose supplier risk, although this has inherent benefits for business, but to use supplier risk assessment as the means for the business to have a higher purpose.
Good ethics make good business.
Ready to explore what this means for you? Register to our webinar “Transform Uncertainty in International Trade into Creating Shared Value in Your Supply Chain.”