Get Proactive: Managing Third-Party Vendor and Supply Chain Risk in a Digital World
As supply chains have steadily grown in sophistication and complexity, the accompanying risks have also increased – and as we've seen in recent years, disruptions can have far-reaching consequences. Effective third party vendor risk management and harnessing technology are both crucial in streamlining and strengthening global supply chains. But where should leaders start?
Supply chains play a crucial role both in maintaining business resilience and helping ensure business processes are running smoothly and efficiently. Third parties are also essential in this system of operation, partnering with businesses to establish trust, reliance and better outcomes. For example, global third-party logistics companies may offer air and freight forwarding, transportation management, warehousing and distribution, customs brokerage and consulting services to enable client distribution. Without effective supply chain and third-party relationships, businesses would see a much slower and smaller scope of influence.
In recent years, supply chains have become increasingly sophisticated, global and complex. As a result, they have enabled phenomenal growth in businesses and across industries, while also introducing increasing risks – especially in the area of third-party vendor management.
The global pandemic provided real-world visibility into the potential impact of supply chain disruptions, and businesses are continuing to adjust to the new landscape. Among the businesses that are shipping products to customers, 80% have taken, or are planning to take, action to rebalance inventory levels; and 69% have already executed, or are in the process of executing, changes in their sources of supply, according to the 2023 27th Annual Third-Party Logistics Study.
How technology is transforming global supply chains
Among businesses that provide shipping services (known as third-party logistics providers, or 3PLs), 87% say that shippers are now placing a greater emphasis on the technology solutions 3PLs provide. For example, transportation management solutions for planning and scheduling lead the list. This trend reflects efforts to strengthen supply chain resilience in the face of potential future pandemics, geopolitical issues and other real-world concerns.
More broadly, the growing focus on technology to connect disparate parts of the supply chain provides opportunities to improve the quantity and quality of data moving through it. Of course, this focus also creates new attack surfaces for bad actors to target. This is not a new phenomenon; businesses in every industry are increasingly digitizing and expanding their attack surface, but supply chain technologies can be designed explicitly for end-to-end connectivity between multiple businesses. Despite current efforts, there will inevitably be new attack vectors in the process.
Threats are increasing – but so is digital protection
Threat actors have caught on to the implications of supply chain cybercrimes. The NTT 2022 Global Threat Intelligence Report forecasts five significant trends across the global threat landscape, with attacks shifting to critical infrastructure and supply chains. In fact, attacks on transport and distribution doubled, moving transport and distribution into the top five most targeted industries for the first time – a bold but undesirable leap from eleventh place the previous year.
The report also recommends steps that businesses throughout the supply chain can take to mitigate risk. For example, a best practice with any third-party software or hardware is to adopt a Zero Trust approach. Implementing a Zero Trust approach allows leaders to prioritize security early in the design stages of a product, and continue to prioritize security throughout the product's lifecycle.
Three steps to de-risk your supply chain
Earlier we noted that the majority (69%) of businesses that ship goods to their customers are looking for new sources for materials. Having multiple sources offers breathing room, should the first source fail to deliver. If those supply chain partners happen to be geographically distributed, they cannot all be affected by a single weather event or changes prompted by geopolitical events. However, organizations must determine whether a partner can deliver the needed materials in the correct volume.
Additionally, there is an entirely separate level of third-party vendor management and risk to undertake before including a partner in the supply chain.
There are three key steps for proactive third-party vendor risk management:
- Monitoring your partners: Performing due diligence on each potential partner is critical. The goal is to document verification that a partner abides by any applicable governmental regulations, to identify who the partner says they are, and ensure that they are not leveraging the financial ecosystem to aid in financial crimes. Having a strong governance model or an ESG program to understand the social impacts is beneficial in monitoring and identification.
- Measuring impact proactively: Businesses need to have the ability to predict supply chain impact, instead of being reactionary. Understanding the issues and risks (such as delivery delays) beforehand can help businesses mitigate these risks.
- Having a remediation strategy: Businesses must be able to quickly develop a remediation strategy to fix supply chain issues, and to proactively switch to alternative channels should a partner issue arise. For example, businesses should be able to terminate partner relationships and quickly replace them.
These steps can help businesses address compliance issues and third-party vendor risks to proactively strengthen their supply chain.
Building the digitally-driven supply chain of the future
With emerging technologies, geopolitical instability, and increased bad actors posing new threats, organizational leaders need their de-risking process to keep up with their digital transformation efforts. The future will see more digitally-driven supply chains, backed by intelligent data usage, AI, and automation.
Although building a risk management strategy and investing in digital tools requires an upfront financial and time investment for leaders, it's a worthy investment that pays off long term. Best of all, monitoring, measuring and remediation does not need to be a struggle. Planning proactively will help leaders build business resilience and avoid back-peddling mistakes after they happen. Overall, a proactive risk management strategy will simplify your supply chain processes.
Where can leaders start? In the early stages, leaders who oversee supply chains will benefit from a supply chain risk assessment, or audit. In a supply chain audit, experts examine current supply chain operations and help identify potential risks. After identification, the audit also helps leaders implement smart, digitally-enabled practices to help eliminate risks. Leaders can use insights from the audit to determine the top technologies that would solve their unique business needs. Gaining a clearer understanding of the opportunities and threats that influence the supply chain can help businesses measure the effectiveness of current providers or third parties, and enhance their ability to fulfill existing and future orders.
Finally, leaders must consider the impact of their supply chain processes on the wider community and the environment at large. An audit may inspire supply chain leaders to prioritize and carefully measure ESG and sustainability efforts. Incorporating sustainability goals into the strategy will help leaders comply with surfacing regulations and adapt to the reformed global landscape. Risk-resilient supply chains are no longer a nice-to-have, but an essential component of a sustainable, profitable business. The future landscape will reward leaders who get ahead of incoming changes, and those inspired to act now will see benefits for years to come.
This article has been reprinted with permission from the CXO Magazine website.
Edmund Tribue
Vice President, Risk & Compliance, NTT DATA Services