Every organization, regardless of size, requires various suppliers and vendors to run their operations and handle multiple business facets in today’s technologically-dependent climate. While this helps with business continuity, managing and protecting cyber assets and adhering to rules becomes a difficult challenge for the companies.
With the growth of these supply chains, third-party risk management becomes more complex. Since these threats are diverse, high volume, and pose different degrees of risk to your organization, managing them is becoming more and more difficult. This is where you need a robust vendor risk management program.
When you have several partners for procurement, distribution, and various other supply chain activities, it becomes challenging to track all your vendors and determine risk at each point of your supply chain. There may be quality issues with the products or services you source from your vendors. This may affect the reputation of your business in the market. On the other hand, your supply chain may be impacted if one of your vendors files for bankruptcy or needs help to finish the services or deliver the goods, so your company will have to find a replacement vendor quickly.
Vendor risk management is the process that determines, evaluates, and mitigates the risk of supply chain interruptions brought on by the actions of your vendors. Through meticulous evaluation, a well-crafted third-party vendor risk management process expedites procedures, reduces risks, and upholds compliance from the start of screening until the end of the project. In this blog, we will discuss the steps of a vendor risk management program and why organizations should implement one. We will also highlight some best practices that can help you be successful with your vendor risk management program.
But first, what is a vendor risk management program?
What is Vendor Risk Management?
Vendor risk management is a strategy that aims to reduce the risks, vulnerabilities, and weaknesses your company encounters from your business connections to minimize risk and the possibility of business operations being disrupted.
A vendor is usually a non-affiliated company that offers goods, services, or equipment necessary for your company to run. The numerous layers of security that these third-party risk management programs must address are crucial. Security is a notable concern here.
Each third-party vendor connected to your company will carry some cybersecurity risk and pose financial, operational, regulatory, and reputational risks. Your company may be adversely impacted if they break their half of the bargain or become the target of a cyberattack. As a component of a larger vendor risk management strategy, an efficient risk assessment aims to find and address these possible sites of failure well before a crisis.
Now, let’s dive into the steps of a vendor risk management program.
What are the Steps of a Vendor Risk Management Program?
You will continue to handle vendor security risks with every new vendor you add to your supply chain in the future. While specific procedures may differ throughout organizations, the fundamental concepts remain the same.
The usual process involves the following steps as given below:
- Assess Whether the Vendor Meets General Regulatory Requirements:
Vendors must follow regulations pertaining to financial compliance, environmental, social, and governance (ESG) compliance, health and safety rules, and many other areas. By ensuring your supplier complies with regulations, you can reduce the chance of non-compliance. To lower vendor risk, you must also keep a close eye on your vendors to make sure they are up to date on the latest regulations and that they are in compliance.
- Classify Vendors Based on Risk Types:
Based on the degree of risk they pose, you can divide your suppliers into various groups during the vendor risk management and procurement planning stages. One group of suppliers maybe those who are most vulnerable to disruptions due to geopolitical factors, while another group may consist of essential suppliers that meet their compliance obligations on time and with consistency and who also provide a crucial component. It will be simpler for you to develop preventive action plans for each risk category if you categorize all of your vendors into high-risk and low-risk categories. Having backup suppliers for crucial parts or having strategies for business continuity in the event of severe weather occurrences are examples of preventive action plans.
- Diversify Your Vendor Directory:
The next action you may take is to diversify your vendor base after classifying your vendors according to the risks they pose to the supply chain. This may entail looking for different vendors for important components of your product. To ensure that the production of your product doesn’t stop, you can obtain the necessary parts from other vendors in the unlikely event that your existing providers cannot provide them. Locating suppliers in other nations or continents is another way to diversify. The time it takes to onboard new vendors can range from a few weeks to a year, depending on the kind of product they sell and the requirements for compliance.
- Engagement and Remediation:
In this step, the company works in conjunction with a third party on how to fill the security gaps. This can entail putting in place a security architecture appropriate for your sector. For instance, HIPAA compliance is required of healthcare organizations. In contrast, GDPR compliance is required of vendors doing business with European customers to fortify their business relationship with prospective vendors and incorporate compliance and regulatory standards for the industry into the design of your third-party risk assessment.
The remediation process can entail several steps, such as implementing various security measures, including data encryption, data limitation, and multi-factor authentication, in addition to granting privileged access to just those who require it. To learn about the vendor’s current compliance policies and procedures, security questionnaires may also be sent. Organizations should also ensure the vendor contract contains the following:
- Data security provisions.
- Adherence to your company’s vendor risk management guidelines.
- Reasons for terminating the vendor relationship.
- Safe offboarding.
- Approval for Vendor Contract Continuance:
Depending on risk tolerance, if the vendor has complied with industry regulations, and how important the service provider is to the day-to-day operations of your firm, the company decides whether to approve or reject the vendor relationship. Vendors who have been approved must be included with the justifications for the permission. If a vendor is turned down, this information should be recorded along with its reasons.
- Track Vendor Performance Over a Sustained Time Period:
Your vendor risk management plan should include regular quality inspections and vendor risk assessments. You may monitor each vendor’s performance and the procurement team’s overall relationship with the vendors. But this shouldn’t be a one-time thing. Your company can keep an up-to-date database with vendor risk categories and track records. Through recurring quality checks and periodic assessments, this approach can assist you in reducing vendor risk. You can maintain backup suppliers for vendors with poor performance and expedite vendor selection.
- Push Vendors to Update Their Data Regularly and Develop an Aggregated Vendor Database:
As regulatory criteria evolve, vendors must also make sure they are adhering to the most recent versions of the guidelines. Your procurement team can set up a procedure allowing your vendors to update their data. By doing this, you can control vendor risk and make sure you get the most recent vendor data.
Following this, you should build a consolidated vendor database to store all procurement and vendor information in one place for easy processing. You can easily access supplier data with a vendor consolidation platform, which can help you better understand the risk aspects. These solutions also help to monitor all pertinent vendor information and enhance supply chain visibility.
Why Should Organizations Implement a Vendor Risk Management Program?
When businesses use services from third parties, there are dangers involved. Working with vendors who handle proprietary, sensitive, secret, or classified information can put you in danger. Even with robust internal security safeguards, third-party providers who don’t adhere to recommended practices can pose a serious risk. Vendor risk management gives your company a defined plan that makes the procedure more efficient.
Here are the benefits of a well-crafted vendor risk management program:
- Reduce Danger to Third Parties: With a successful vendor risk management program, your company can more precisely evaluate the risk of any new vendor, thereby lowering its risk exposure.
- Cut Down on Interruptions to Operations: Every area of your organization should understand its part in assessing third-party risk, and a well-defined vendor risk management strategy helps to prevent any steps from being missed or omitted. By taking a continuous, proactive strategy to manage vendor risk, your company can maintain business continuity by avoiding breaches, attacks, or security incidents.
- Greater Openness: Since vendor risk data is transparent and available to all departments within the company, your security and business teams, along with executive leadership, may assess the possible effects of risk throughout the vendor ecosystem.
- Increased Capacity to Comply with Regulations: It is simpler to assess vendor compliance and determine whether to forge new business partnerships or hire staff to mitigate risk when there is a streamlined onboarding process that incorporates due diligence.
- More Efficient Use of Available Resources and Time: Dealing with possible dangers is simpler than dealing with them once they materialize. Instead of pausing ongoing projects to concentrate on onboarding, compliance, or risk management, your company can focus on business growth by taking a planned and thorough approach to the vendor risk assessment process.
- Raise the Effectiveness of Operations: Automating the vendor risk management process expedites risk assessments and improves workflows, fostering increased teamwork. Paying vendors for their goods and services on schedule is another benefit of an effective vendor risk management program.
Best Practices for a Successful Implementation of Your Vendor Risk Management Program
These are some areas you must be paying special attention to, in order to successfully implement your vendor risk management program:
- Precise Instructions and Objectives: What goals do you have for your vendor risk management approach? Though there are many possible weak points in both your company and your vendors, which ones are the most important to you? How are you going to evaluate potential new vendors? How will your tactics change as time goes on? Get clear answers to these questions before designing your vendor risk management plan.
- Relationships Based on Context. You should evaluate your providers according to their technological and business interaction with your organization. For instance, a vendor connecting to the IT systems of your business poses a greater danger than one delivering paper goods.
- Ongoing Observation: You must ensure that you are continuously monitoring your vendors because new technologies are always being developed; even a little lapse in awareness might lead to a blind spot.
- Setting Legal Priorities: You must comprehend the complete legal ramifications of your choices and the regulatory requirements that apply to your vendor connections. Regulatory compliance is often a company’s first concern when developing a vendor risk management plan. To ensure that you both get from the arrangement and can learn from it, let them know your standards, why they are what they are, and what frameworks you want them to follow.
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