Why a Supply Chain Risk Management Framework is Needed
A supply chain risk management framework is critical for risk identification and effective management of the inherent and imposed risks in today’s business environment.
A proven supply chain risk management framework, like Exiger’s TPRM and SCRM framework, enables compliance teams, corporations and governments to identify, assess and respond to third-party service providers, supplier risks and other involved procurement risks throughout their supply chain lifecycle.
In this article, we will review why a supply chain risk management framework is needed. We’ll see how the risk landscape has transformed and present our findings on how to leverage Exiger’s proprietary TPRM and SCRM framework to ensure fast, data-driven decision-making and business continuity in the event of an incident.
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The White House’s Landmark Executive Order
In February 2021, the White House issued a landmark executive order on America’s supply chains, triggering a 100-day supply chain review and broader one-year critical infrastructure sector reviews. This called on stakeholders across industries, academia, the nonprofit community, labor, and state and local government to reinvent the country’s supply chains as resilient, diverse and secure engines of economic prosperity and national security.
The metrics of the Executive Order deem the need for a strong supply chain risk management framework in business ecosystems. Compliance teams, corporations and governments must all work together and conduct risk assessments to patch the vulnerabilities and mitigate the risks posed by supply chains.
Risk of Supply Chain Shortages
Supply chain shortages can happen for a variety of reasons, such as natural disasters, sabotage or political instability. When these supply chain disruptions occur, they can have a devastating impact on businesses and economies.
A recent example of supply chain shortages includes semiconductors in the information systems and communication technologies industries. This was projected to result in a revenue miss of more than $500 billion for suppliers and customers.
These shortages are a clear sign that for managing supply chain risks, we require a robust risk management framework and mitigation strategies to protect ourselves from the risks posed by dependencies on global supply chains.
Geopolitical tensions create an uncertain climate that can cause damage to a well-laid supply chain plan and cause unanticipated disruption. Examples include the US-China conflict, increased global competition for cutting-edge technology, political disruption and the rise of mercenaries leading cyberattacks between states. The National Institute of Standards and Technology (NIST) has proposed a cybersecurity framework so organizations can tighten information security and mitigate the cyber supply chain risk due to heightened risks.
With such a framework in place, companies can minimize the potential risk posed by regional conflicts or military infrastructure disruptions, identify challenges or shortages caused by shipping restrictions and trade wars, and build robust contingency plans in case of emergency.
Supply Chain Compliance and ESG Concerns
The German Federal Parliament has passed the Supply Chain Due Diligence Act that increases the protection of human rights and the environment, while the Uyghur Forced Labor Prevention Act (UFLPA) sets out numerous due diligence obligations to prevent the procurement of raw materials and services through forced labor in the Xinjiang Uyghur Autonomous Region (XUAR) of China.
Similarly, the UK Modern Slavery Act requires firms to report on what they are doing to ensure their supply chains are free from slavery or child labor. Furthermore, ESG also needs to be managed throughout the entire operation—from supplier selection to product development and delivery.
All of this points to a need for a stronger supply chain risk management program.
The Modern Risk Landscape
The modern risk landscape is an amalgamation of both imposed and inherent factors that amplify risk management challenges—to effectively secure their vendor and supply ecosystem in real-time.
This type of risk in the supply chain can include financial health risks like insolvency, reputational and criminal risks, and regulatory risks. Furthermore, companies are also exposed to foreign ownership, control, and influence (FOCI) when doing business internationally. It’s also important to consider operational risks such as supply disruptions and disruptions posed by political events. All of these risks can have a major impact on a company’s bottom line and reputation if not managed properly.
Imposed risks are external risks that can originate from macroenvironmental threats, such as natural disasters, financial market conditions and geopolitical tensions. In addition, there are operational challenges that can arise due to asymmetric information, overcapacity and inadequate supplier selection. The ramifications of these imposed risks include economic loss or reputational damage due to disruption of the supply chain or breakdown of trust between key stakeholders. With the complex nature of these externally imposed risks, it is essential for companies to have effective supply chain risk management frameworks in place.
Solution: The TRADES Framework
Organizations of all maturity levels can benefit from Exiger’s proprietary TPRM and SCRM framework, which optimizes risk management across the supply chain. There are six critical pillars to constructing the TRADES framework, each representing a different implementation view at the tactical, program, and strategic levels. You can baseline your organization’s current state through our complimentary online TPRM and SCRM Maturity Assessment.
1. Transparency of the Current State
Many supply chain vulnerabilities arise through a lack of transparency within the third, fourth, or nth party in an organization’s network. To mitigate this risk, organizations must establish a clear baseline and starting point, from which they gain a complete picture of their supply chain and vendor ecosystem. From there, organizations can build a risk management framework from the ground up.
Tactical: Establish internal, third-party, and supply chain transparency by gaining insights into spending, product demand, dependencies, business unit provider engagement, availability, resources, product supply and inventory.
Program: Develop and maintain policies and procedures with actionable guidance on how to measure and track indicators of transparency over time.
Strategic: Set forth a document with a mission statement and purpose explanation for the organization’s third-party and supply chain risk management program.
2. Risk Methodology Design
With a clearer picture of the organization’s vendor ecosystem and supply chain and the risks each presents, organizations can then go about designing and implementing an appropriate risk methodology.
Tactical: Address macro risks (disruption, scarcity, security and the availability of alternatives) and micro risks (operational risks, such as cybersecurity, industry safety and facility certification, as well as FOCI risks).
Program: Track and monitor all the sub-risks aligned to the organization’s industry and third-party types.
Strategic: Inform the supply chain optimization strategy through risk definition and insights into the business, third-party, resource threat and opportunity landscape.
3. Assess and Prioritize Current Risks
With an accurate representation of the program’s maturity and a thoughtfully designed risk methodology, organizations can proceed to assess their current risk landscape.
Tactical: Assess risks through application, visualization and vulnerability evaluation. In addition, include individual third-party risk assessments, critical supplier assessments and supply chain assessments.
Program: Define and determine the frequency of the risk assessment application and prioritization process.
Strategic: Agree to and document a broad risk appetite statement.
4. Determine Mitigation
It’s not enough to merely identify and monitor risks. Organizations must also have a plan to quickly address and resolve risks in real-time as they’re uncovered in the supply chain and vendor ecosystem.
Tactical: Identify alternative vendors, engage with suppliers directly to avoid disruption, and maintain reviews of risk acceptance and appropriate tolerance.
Program: Provide clear guidance on escalation paths of unmitigated risks and create governance to document risks and mitigation paths, and track milestones and timelines throughout remediation.
Strategic: Minimize undue risk and avoid costly attacks, operational disruptions and regulatory or legal violations.
5. Evaluate Framework
Once tolerable risk acceptance and appropriate mitigation measures have been defined, organizations need to quantify the uplift necessary for implementation.
Tactical: Deploy third-party questionnaire enhancements, increase third-party engagement, reassess new entity-level risks and associated risk indications, and conduct audits.
Program: Uplift supply chain management requirements such as governance, data, resources, risks and training.
Strategic: Consider an independent review with a best-in-class provider or an internal audit team.
6. Supplier Monitoring
Oversight and monitoring of suppliers within the vendor ecosystem is the final pillar of a modern third-party and supply chain risk management framework and one that upholds long-term adherence to the other elements of the framework and ensures the evolution of the program over time as the threat landscape similarly evolves and changes.
Tactical: Monitor risk indicators continuously.
Program: Carve out standards, document third-party and supply chain monitoring, and refresh policies and procedures.
Strategic: Ensure that the view of the threat and opportunity landscape is monitored and dynamically addressed.
[Baseline your program current state with Exiger’s TPRM and SCRM Maturity Assessment]
Implementation of the TRADES Framework
Every element of the framework should work in sync with one another and be updated and reevaluated on a regular basis. A strong third-party and supply chain risk management framework depends on a supportive operational methodology that allows for continuous, real-time amendments that align with an evolving business strategy and changes in the risk landscape.
The TRADES implementation methodology has six key touchpoints:
- Framework evaluation
- Stakeholder engagement
- Governance principles
- Compliance management
- Data and information technology
Illuminate Risks in Your Supply Chain with Exiger
TRADES is a framework for organizations (public and private sector) hoping to achieve a long-term proactive or predictive posture and stay ahead of threats and vulnerabilities, all while minimizing third-party and supply-chain risk management gaps.
Exiger’s DDIQ can help in your supply chain security efforts. This due diligence solution powered by AI technology helps your team make critical decisions with confidence and speed, and implement the TRADES framework effectively.
Ready to implement our maturity framework and kickstart your SCRM and TPRM efforts? Connect with Exiger and get a free demo.