Vendor risk management is an essential aspect of business that can be overlooked. Every company has vendors. When there are vendors involved in a business, it can come with risks that may or may not be worth it to go ahead and work with these vendors. Conducting vendor risk assessments will help the business determine whether the potential benefits of working with this vendor outweigh the risks they might be taking on.
What is Vendor Risk Management?
The concept of Vendor Risk Management is to assess, manage and mitigate the risk that a vendor poses. It does this by evaluating its business practices by looking at its strengths and weaknesses to minimize any possible adverse effects on your company. This process should be done before entering into an agreement with them for the supply chain management.
The majority of companies have implemented a VRM program, and for a good reason. A vendor risk management program can reduce the impact of disruptive events on an organization’s operations by minimizing losses in revenue, reputation, or profits due to poor product quality or delivery failures. VRMs also allow organizations to better manage their supply chain risks through early identification of potential disruptions.
Companies can gain a massive range of benefits from implementing an effective vendor risk management program. It offers far more than just reducing the company’s overall risk exposure. For example, it also allows businesses to evaluate and onboard new vendors more efficiently to get the right tools into the right peoples’ hands as quickly as possible.
Additionally, a well-run VRM program can give organizations insight into how vendor relationships are going over time, whether they need to be terminated for specific reasons or if you should make other changes in the relationship. It can also help measure vendor performance, helping organizations to identify new risks as they arise and equip themselves with the resources necessary to manage them.
With an effective VRM program in place, companies can receive more favorable vendor pricing from suppliers and vendors; they can often negotiate better rates on products or services that might otherwise be out of their budget.
What is Vendor Risk Assessment?
The process of Vendor Risk Management begins with a risk assessment. Vendor Risk Assessment is an evaluation of the risk that a vendor poses to your organization. It’s most commonly done before a contract with a new vendor or partner begins but can also be performed periodically throughout the life of a relationship. Businesses typically assess their vendor’s strengths and weaknesses to minimize the risks that might come up while working with them. There are many reasons why you would want to consider conducting a risk assessment for your vendors:
- You’re evaluating a new vendor or potential partner.
- To evaluate a current vendor’s risk as they change their level of service, products, and/or prices. Or to monitor for fraudulent activity from the vendor on your network.
- You’re evaluating existing vendors to determine if you need to implement stricter controls over what sensitive data is being shared with them.
- You want to know if you’re taking on too much risk by sharing specific data with the vendor.
- To evaluate how your current vendors handle customer information and what level of security they use for storage, retrieval, and transmission of this data.
By conducting these assessments periodically, it’s possible to take active measures against potential risks.
How to Conduct a Vendor Risk Assessment?
Catalog your vendors to keep ongoing records. Make sure you have all of them in one place, then go through each vendor to determine their risk level.
What is your involvement with this product or service? Are there any contacts that may present opportunities for fraud, abuse, misrepresentation of identity, theft, and other criminal activity? Assess each vendor against your established list of criteria, and monitor their behavior for possible changes in risk level.
- Use a self-assessment questionnaire.
Develop a questionnaire that addresses your specific needs. Use it to determine how easily a vendor could be compromised, so you know where they fit on your list—request documentation of your vendors’ standards in areas of concern to you.
- Assess Each Product and Service.
Assessing both the company and the product will give you a complete picture of possible risks. It can help you determine if you want to do business with them.
- Separate Vendors by Risk Level.
Rank your vendors based on their risk level. Start with the lowest and work up to the highest. Consider keeping a list of all these risks so you can track them over time.
- Monitor Vendors for Reassessment.
Schedule regular times where you review your risk assessment for each vendor. Involve other people in the process if possible, and be sure to keep a record of these reassessments so you can see where improvements are needed over time.
The risk assessment process for vendors is as vital to your business’s success as the products and services you provide. Make sure you know where each vendor stands on their security, customer service level, and other areas of concern before agreeing to do business with them. The more data points you have about a potential partner, the better off you’ll be in the long run.