Key Trends in Supplier Risk Management

Key Emerging Risks in Supplier Risk Management

Some 5-10 years ago the requirements for supplier risk management were fundamentally different from what they are today. The focus was mainly on cost efficiency and understanding the financial risk associated with suppliers. However, accelerated globalisation as well as increased regulatory complexity have placed new demands on companies and managing risk associated with supplier portfolios. In fact, based on research by Dun & Bradstreet, 69% of CPOs are concerned about the scale and complexity of globalisation.

These changes mean that both compliance and procurement teams are under pressure to deal with an increasing variety of risks and the pace of change in the market. To help keep up with these rapid changes our Dun & Bradstreet subject matter expert, Christian Elkjaer, shared the top three key emerging supplier risk management trends for this year:

1. Cyber security risk
   
   

   Just like pandemics and geopolitical conflicts, the increasing number of cyber security breaches can wreak havoc on supply chains as well as the reputation of a company. For example, in the past few years we have seen the volume of AI-driven cyber-attacks increase significantly. For businesses, this development is alarming because traditional means of combatting cyber security threats are barely keeping up with the evolving nature of attacks generated by AI.

   As many businesses share data with their third parties, a business depends on another company’s cybersecurity risk management to secure their own data and steer clear of cyber threats. To strengthen protection against cyber threats, the European Union has established the EU Cyber Resilience Act. This piece of legislation recently received formal approval by the European Parliament. Companies will be expected to comply with the new rules within 36 months.

   However, there are best practices that companies can adopt to shield themselves from cyber-attacks. One tip is to research potential vendors and existing business partners. For example, companies can use business information databases and media reports to uncover past incidents that have impacted business partners. In addition, companies need to be vigilant about continuously training their staff to identify cyber threats and understand the processes for handling attacks if they occur.

2. Climate risk
   
   

   The past years have shown us just how susceptible global supply chains are to weather conditions. For example, United Nations Conference on Trade and Development’s Review of Maritime Transport states that the weight of transported cargo has nearly tripled since the 1980’s. Within the same time period, the volume of container transport has escalated from 0.1 billion tons to 1.85 billion tons.

   This development means that global trade is increasingly dependent on water. In fact, the World Economic Forum states that approximately 90 % of products today are moving through waterways. The recent hot summers have, however, caused severe draughts. When water levels in certain areas are too low, this means that container ships are not able to utilise their common trade routes causing disruption in the supply chain.

   As the number of natural disasters has increased in the past years companies need to start evaluating how these disasters are impacting their supply chains. Some questions that companies should be asking themselves are:

   
   
   • Are any of my suppliers located in an area with an increased risk of draught or wildfire, for example?
   • Are any suppliers dependent on another supplier in an area with increased climate risk?
   
   

   To safe-guard supply chains from various disruptions, European companies have increasingly started looking into nearshoring. During the Covid-19 pandemic we saw, for example, shifts in import patterns from Asian countries to Europe indicating that European companies were starting to bring supply chains closer to gain better control of supply chains and proactively manage risk. With increasing climate risks the nearshoring trend is expected to continue.

3. ESG risk
   
   

   Monitoring and managing environmental, social and governance (ESG) risk has become increasingly important in today’s business landscape. Supply chains with low ESG risk can reduce a company’s carbon footprint and reputational risk and positively impact business performance.

   For example, research by Dun & Bradstreet highlights that 79% of business leaders are using ESG data to identify growth opportunities earlier. 75%, on the other hand, see that an ESG risk strategy has helped to reduce costs and 72% see improved investment portfolio performance.

   In addition, ESG performance is increasingly defining the competitiveness of a company. Consumers are becoming more and more conscious about the environmental impacts of companies and people in the job market are looking to join companies that have a positive impact on the environment. ESG performance can also impact a company’s ability to procure capital. For example, financial institutions typically view lack of commitment to ESG topics as a risk factor.

   With increasing regulation in the ESG space, companies are looking to better manage their ESG risk with the help of technology, data and analytics. This is not an easy task. In fact, 7 out of 10 respondents in our survey said their companies currently rely on spreadsheets and email when managing ESG data.

   Finding reliable ESG data resources that can be automatically integrated with your proprietary data can vastly help increase visibility into ESG risk management. Firms that invest in automated, advanced ESG data and analytics reap well-earned rewards.

How to navigate increasing risks - three top tips

1. Embedded data-driven strategy: fully embedding supplier risk management into your data-driven strategy helps turn managing your vendor portfolio into a natural part of daily work.
   
2. Education: educating your staff and all stakeholders is a key part of risk management. Crystallising why risk management is important, where to turn to for help and how to pinpoint risks helps boost engagement from staff.
   
3. Audits: when you have clear processes in place for managing risk, audits are necessary to determine if your processes are working. Audits also help you understand if circumstances have shifted and whether a change of strategy is needed.