Supplier risk: Definition and categories

Supplier risk
December 1st, 2020
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Through its suppliers, every company is exposed to risks that could have a negative impact on the smooth running of its activities.

In this post, you will find the answers to all of your questions about supplier risk:

What is supplier risk?

Supplier risk refers to any risk relating to the operation or organisation of a supplier that may potentially have a negative impact on the activity of a client company. For many years, supplier risk management has been a major issue for procurement departments. Today, 71% of procurement decision-makers say that they are focused on this matter[1].

Afnor, the French standardisation association, provides an official definition: "Supplier risk is defined as the probability that the economic activity of a client company will deteriorate, or even be interrupted, due to a breakdown in the company's relations with its suppliers and service providers, or due to undesirable behaviour from one of its suppliers or service providers".

What are the four main categories of supplier risk?

There are many different risks depending on the activity performed by the companies concerned and the type of purchases made. However, we can divide these risks into four main categories:

  • Strategic and financial risk concerns the financial health of suppliers; this can take the form of economic dependency, bankruptcy etc. Procurement departments must find out about their suppliers' financial health so as to prevent their company ending up in such situations.
  • Contractual and legal risk covers non-compliance with contracts and/or applicable legislation, e.g. legal challenges, fraud etc.
  • Operational risk is linked to the goods/services offered, e.g. quality, and disruption or delays affecting production or deliveries etc.
  • Reputational risk is linked to ethical, social and environmental factors, e.g. scandals, disasters etc.

You will recall that in 2013, the collapse of the Rana Plaza factory building killed more than 1000 Bengalis working for famous ready-to-wear brands and drew attention to the precarious conditions in which they were working. Or that in 2018, Carlos Ghosn, CEO of Renault-Nissan-Mitsubishi, was arrested in Japan for the misuse of company assets and tax evasion.

There are, of course, other categories that we could add: cyber security, health and safety, cost-cutting, politics, customer satisfaction etc.

In conclusion, regulatory requirements have become more stringent in many areas in recent years, for example with the regulation of supplier payment terms, the French Sapin II anti-corruption law, the duty of care, the GDPR (General Data Protection Regulation) etc. On top of this, there is also the current pandemic and its consequences: a major social and economic crisis. In this context, it seems more important than ever to manage, anticipate and control supplier risk by carrying out comprehensive and methodical mapping.

[1] AgileBuyer and the French National Procurement Council (Conseil National des Achats — CNA), 2020

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