The Importance of Supplier Risk Management | ADEC ESG (2024)

FAQs

Why is supplier risk management important? ›

Supplier risk management is critical for any business that relies on external suppliers for materials or services. By identifying and assessing risks associated with supplier relationships, companies can take steps to mitigate those risks, protect their interests, and improve their supply chain resilience.

ESG Explained

Broadly, the term ESG refers to the examination of a company's environmental, social, and governance practices, their impacts, and the company's progress against benchmarks. An ESG program is a form of risk management.

ESG risks in supply chains

Examples include: Environmental pollution. Shortages of raw material and natural resources. Workforce health and safety incidents.

Supply-chain ESG risk assessment helps an organisation to identify the most critical risks of their supply chain and, based on that, decide on the relevant mitigation actions, and allocate the risk management resources optimally.

Supply chain risk management is important because it gives companies greater insight into their supply chains, enables the prevention of supply chain disruption, and provides mitigation and recovery strategies in the event of a supply chain disruption.

Simply put, risk management aims to protect an organization from potential losses or threats to its continued operation. This can include financial losses, damage to the organization's reputation, or harm to employees. Keep in mind that when it comes to risk management, there's no one-size-fits-all solution.

While all three factors are important, the 'E' in ESG - Environmental - is perhaps the most critical, especially in light of the growing concerns around climate change and environmental issues. Common ways to address this issue is to lower greenhouse gas emissions and reduce carbon footprint.

Examples of ESG risks include environmental risks like pollution and waste management issues, social risks such as poor labor practices and community displacement, and governance risks involving unethical behavior or lack of transparency.

Importance of Advanced Shipment Notice in the Supply Chain

a) Demand Planning and Inventory Management: You get enough time to manage inventory levels when you receive the shipment details in advance through ASN. It also helps businesses minimize stockouts and plan other dependent operations more efficiently.

They can be broadly defined as any risks that arise from environmental, social or governance issues. These issues can include climate change, human rights abuses, corruption and bribery. ESG risks are often seen as “non-financial” risks, but they can have a significant financial impact on companies.

What are ESG biggest issues? ›

The 5 biggest ESG challenges for businesses and manufacturers globally are: climate change, supply chain sustainability, social impact, data privacy and cybersecurity, and governance and ethics.

By understanding and managing ESG risks systematically, organizations can continue to pursue their strategic objectives while reaping the benefits of managing their ESG risks, such as protecting their reputation, maintaining stakeholder trust, and improving financial performance.

By considering ESG factors, companies can mitigate potential risks, attract investors, reduce costs, and build a positive reputation. ESG also aligns with evolving consumer and societal expectations and regulatory trends, ensuring businesses operate responsibly and contribute to a sustainable future.

Integrating ESG into procurement can lead to a more sustainable supply chain. This includes reduced environmental impact, better social practices, and ethical governance.

Vendor risk management (VRM) is a risk management discipline that focuses on pinpointing and mitigating risks associated with vendors. VRM gives companies visibility into the vendors they work with, how they work with them, and which vendors have implemented sufficient security controls.

To limit financial, business and reputational risk, it's crucial to properly manage suppliers. Gartner defines this as a process that “enables organisations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle”.

SCRM attempts to reduce supply chain vulnerability via a coordinated, holistic approach ideally involving all supply chain stakeholders, collectively identifying, analysing and addressing potential failure points or modes within or affecting the supply chain.

Overall, the goal of procurement risk management is to minimize disruptions and ensure continuity in operations by identifying risks, implementing effective mitigation strategies, and building resilience within the organization.