How to Conduct a Supply Chain Risk Assessment

Supply chain risk management is an important aspect of any company’s overall risk management strategy. With the growing reliance on third-party vendors, it’s essential to understand the potential risks these relationships pose and take steps to prevent them.

Businesses must conduct regular supply chain risk assessments to safeguard their bottom line against threat actors.

What Is a Supply Chain Risk Assessment?

Supply chain risk management (SCRM) is the process of identifying and mitigating risks in a supply chain, including risks posed by regulations, economic conditions, and weak security. To carry out effective SCRM, organizations must review their supply chain and gain a thorough understanding of how it works. This process is called a supply chain risk assessment.

Supply chains have become increasingly digital in the past few years, but they aren’t without flaws. Among warehouse managers, 45% cited the need for improved IT infrastructure, including software that can take precise inventory, preview upcoming deliveries and order raw materials. The inherent imperfections in supply chain software — combined with human error and deliberate cyberattacks — make supply chain risk assessments crucial to a company’s operations.

Supply Chain Risk Factors

A supply chain involves so many people and companies that mistakes are bound to happen. Here are some of the main risk factors affecting supply chains.

Process Risks

Random, unforeseen events like hurricanes, machinery breakdowns, labor problems or quality control issues will always be a part of the supply chain. Although it’s impossible to completely avoid process risks, companies can use preventive measures like periodic maintenance and inspections to help mitigate their effects. Additionally, businesses should have plans in place to help keep the supply chain running smoothly during emergencies.

Bad Economic Conditions

The economy affects labor costs, interest rates, and exchange rates. Supply chains often operate across international borders, so there are several economies to contend with.

A single country experiencing a recession or epidemic can impact an entire supply chain. In 2020, for example, the COVID-19 pandemic affected 35% of respondents’ businesses due to international transportation disruptions. Raw material prices fluctuate depending on social, natural, economic and political factors as well.

Low Product Demand

A surefire way to back up a supply chain is to create unpredictable demand. Whether for cultural, economic or unknown reasons, consumers may decide they don’t need a particular product as much as they used to. Conversely, demand may suddenly spike, leaving manufacturers scrambling to catch up. Both conditions may lead to supply chain disruptions.

Security Problems

Relying on third-party supply chains creates inherent risk. Suppliers don’t always have high security standards and may face foreign threat actors. Hackers can use a third-party supplier, such as a provider or partner, to breach an organization’s data. Scammers frequently target varying levels of software supply chains.

When performing a supply chain risk assessment, company leaders should ask themselves questions about potential cybersecurity risks. For example, how relevant is the threat to the business? Is the threat internal or external? Studies show that 79% of security threats originate from inside an organization.

A business should also evaluate how likely it is that an attack would be successful. What impact would it have on the company? Would the attack be severe, or a small, localized attack that’s easy to resolve?

How to Conduct a Supply Chain Risk Assessment

Evaluating the supply chain will look a little different for each business, but a few steps remain the same across the board.

Identify and Prioritize Risks

The first step in conducting a risk assessment is to identify and prioritize any threats associated with the supply chain.

This process includes understanding the potential risks and vulnerabilities each vendor, product or service poses to the company. Organizations need to consider factors such as vendor security measures, the sensitivity of the data being transmitted and what they could lose in the event of a data breach.

Gather Evidence

After an organization has identified and prioritized the risks in its supply chain, it needs to gather data to support its assessment. This process may include reviewing vendor security policies, conducting security audits and reviewing regulatory requirements.

It’s important to gather this information from multiple sources to ensure a comprehensive understanding of each vendor’s potential risks.

Mitigate Risks

Once a business has evaluated the risks in its supply chain, it must take action to prevent them. This process may include implementing stronger security controls, renegotiating contracts or even terminating relationships with high-risk vendors.

In the U.S., 92% of organizations have experienced a cybersecurity incident originating with a vendor. That doesn’t necessarily mean the vendors had malicious intent, but weak security measures often pose as strong of a threat as purposeful attacks.

It’s important for a company to use strong security measures — including implementing strong authentication and access controls, encrypting sensitive data, and regularly patching and updating systems — to protect the supply chain from hackers.

Monitor and Update

A business should continuously evaluate and update its supply chain risk assessment. It should monitor for changes in the threat landscape, update its risk assessments as needed and regularly review the security posture of its vendors.

Independent third parties should also conduct regular security audits of vendors. This process helps protect the organization against supply chain threats.

Train Employees and Vendors

Employee training and vendor education are also critical components of protecting the supply chain. Employers should train workers and vendors on the importance of cybersecurity and the measures they need to take to protect sensitive information.

This tactic isn’t just good for mitigating supply chain risks — it’s also important for employee retention. One study found that 89% of workers are more likely to stick with an employer that offers opportunities for learning and personal development.

Finally, it’s important for businesses to develop incident response plans to address any potential supply chain security incidents that may occur. These plans should outline the steps employees must take in the event of a cyberattack, including how to contain the breach, notify affected parties and restore working operations.

Managing Risks Along the Supply Chain

Conducting a comprehensive supply chain risk assessment and implementing appropriate security measures is critical to maintaining a supply chain. Organizations that follow these steps can effectively identify and mitigate the risks their supply chain poses, helping them remain safe from threats.