Understanding Supplier Risk Management

Supplier risk management is the process of identifying, assessing, and managing risks associated with external suppliers. Companies undertake supplier risk management to protect their operations, profitability, and reputation. 

The vast majority of manufacturers depend on third-party suppliers. These vendors provide the materials and components used in finished products. Supplier risk management is thus a part of both your company’s overall risk management efforts and a part of your supply chain risk management strategy.  

The most important objectives of supplier risk management are as follows: 

• Identify risks 
• Impact assessment 
• Mitigate risk 
• Monitor risk 

In Part 1 of our Supplier Risk Management series, we look at identifying risks and assessing the impact of a supplier failure. 

Identifying Risks 

As Gartner notes in the 2026 Gartner® Critical Capabilities for Supplier Risk Management Solutions, companies are operating in a world of increasing complexity. Disruptive events abound, and regulatory requirements are becoming more stringent. As a result, assessing vendors periodically is no longer sufficient. 

This is because all suppliers introduce a certain amount of risk into your business. These include geopolitical and socio-political issues, financial instability, potential of disruption due to weather or natural disasters, regulatory non-compliance, and so forth. 

You should think about identifying risk in two ways: strategic and tactical risk. 

Strategic Risk Identification 

Strategic risk identification involves evaluating the broad vulnerabilities built into your supply chain. You must reduce these exposures where necessary.  

Many of these risks pertain to your supplier’s location. External risks such as extreme weather, earthquakes, political violence, corruption, child labor, infrastructure failures, strikes, and protests are specific to where your supplier is geographically located.  

External risk can be assessed using automated, location-based strategic risk scoring. The score aggregates different types of risk. The risks are weighted according to their priority for your organization.  

For example, if you source semiconductors from a supplier in Taiwan, earthquakes would be given significant weighting. Taiwan has frequent earthquakes. However, if you source semiconductors from Ireland, earthquakes would be given a lower weighting, since Ireland rarely experiences them. Nonetheless, you would still want to track this since small tremors can impact the manufacturing process. 

Tactical Risk Identification 

Tactical risk identification means keeping a close eye on everyday threats. You can leverage predictive analytics to spot potential supply chain disruptions early.  

You can also use scenario planning to create mitigation strategies for upcoming risks or events that are more likely to occur. 

To continue or semiconductor example, you could create a mitigation plan for when your supplier in Taiwan experiences an earthquake. This could be as simple as deciding you need to carry more inventory. If your supplier has manufacturing facilities in other countries, you could have an agreement that they will continue to supply your organization in the event of an earthquake. 

Impact Assessment 

Once you have risk scored your suppliers, you will have a clear picture of potential disruption to your supply chain. Next, it is important to monitor your supplier and know what the impact of a disruption would be.  

Depending on your industry and the products you make, a traditional spend-based analysis may not be enough. While this is generally a good place to start, you should also consider smaller spend suppliers that deliver critical components that could halt production or final delivery to customers. 

Determining Criticality in Discrete Manufacturing 

Let’s say that you manufacture cars. Your flagship model comes with a state-of-the-art infotainment system. It is expensive, but it is a huge draw for customers.  

The car, of course, contains all of the other parts that you would expect. Your most critical suppliers by spend might include those that supply the engine control unit, the catalytic convertor, the transmission assembly, as well as the infotainment system, and other necessary parts. 

That makes sense. You cannot sell a car without a transmission. But equally, you cannot sell a car if it does not have wiper blade connectors.  

Comparatively, you spend significantly less money on wiper blade connectors than infotainment systems. Despite that, your customers may be willing to wait a few months for you to install the infotainment system if you give them enough inducements.  

If your car uses widely available wiper blade connectors, using alternative suppliers during a disruption may be easily done. Therefore, the impact is minimal, and the supplier is not critical. 

However, if you use proprietary connectors, you cannot sell your flagship model until the disruption is resolved. As a result, this supplier is critical. 

Determining Criticality in Process Manufacturing 

In discrete manufacturing, you may be able to continue assembling goods even if certain components are missing. In process manufacturing, that is not always the case. 

In certain circumstances, food and beverage manufacturers may be able to swap out ingredients. But this would depend on a number of factors, including food regulations, and the final taste, texture, and smell of the product. Furthermore, if you have not carried out tests with alternate ingredients beforehand, this may not be an easy workaround. 

Similarly, it may be possible to change a formula by tweaking the quantities of ingredients. However, this needs to be done in advance of a supply disruption. Ideally, you would have done consumer testing to ensure that alternate formations do not materially impact the product’s quality.  

Adjusting your product’s formulation can be a strategic move when dealing with ingredient shortages. This might involve tweaking the quantities of existing ingredients or incorporating new ones that can fill the gap without altering the overall product experience. It’s important to conduct sensory evaluations and possibly consumer testing to ensure that any changes do not negatively affect the product’s quality. 

In addition, depending on the length of the disruption it may be more costly to source alternative raw materials.  

For example, if you do not have barley, you cannot make beer. Similarly, you cannot make ice cream without milk. But if you do not have strawberries, you can still make ice cream, just not strawberry ice cream. 

Therefore, any raw materials that cannot be easily substituted should be seen as critical if they are required for your flagship products. 

From Reactive Firefighting to Proactive Supplier Risk Management 

Supplier risk management helps companies safeguard production, customer service levels, and profitability.  

It can also be a differentiator for your own customers. By actively identifying and managing supplier risk, you become a less risky supplier to them. This can help you gain or retain customers in a competitive marketplace. 

If you would like to see how supplier risk management could work for your organization, contact Everstream Analytics for a demonstration.