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Conduct Due Diligence on Smaller Suppliers to Improve Procurement

Conduct Due Diligence on Smaller Suppliers to Improve Procurement

While many companies carefully analyze their largest vendors, such as by assessing their ability to fulfill orders and manage risk, smaller suppliers often do not get the same scrutiny. In fact, only 12% of companies conduct due diligence on Tier 4 suppliers, according to a survey by the Business Continuity Institute (BCI) and DHL’s Resilience360, a supply chain risk management platform.

Although diving down this deep into your supply chain may seem unnecessary, smaller suppliers can still add up to make a significant impact on your ability to procure products and services that keep your business running smoothly.

Even for Tier 2 suppliers, only 36% of organizations know the geographical location where all these vendors are located, the survey finds. Moreover, during the COVID-19 pandemic, nearly three out of four organizations experienced problems on the supply side, even more than those who faced demand challenges. Relatedly, 60% of organizations plan to conduct deeper due diligence following the pandemic.

How Due Diligence Can Reduce Risk

By drilling down deeper into your supply chain, such as looking multiple layers beneath your Tier 1 suppliers, you can reduce the risk of future supply chain disruptions.

You never know when an unexpected event could hit one of your suppliers. From financial issues to weather-related disruptions, your top suppliers might face supply chain issues of their own. As a result, even if you conduct due diligence on your Tier 1 suppliers and consider them to be risk-averse, they might end up being unable to deliver the products or services you need.

If you don’t know where your Tier 2 suppliers are located, for example, you might not know how issues like tariffs could affect the pricing for your Tier 1 suppliers. Or if a weather event causes a Tier 2 supplier to shut down production temporarily, you might be unaware how that ultimately affects your delivery times.

Due diligence can also reveal issues among smaller suppliers that you contract with directly but who only constitute a small portion of your overall spend. However, all it takes is one supplier to suffer an issue like a cyber breach to then expose sensitive corporate data.

Suppliers can also introduce risks related to areas like your company’s reputation. If your tail spend purchasing involves procurement from companies with unsavory business practices, for instance, that could reflect poorly on your company.

The biggest roadblock to effectively managing suppliers is not understanding the variety of risks presented and how they can negatively impact the business,” explains the Red Flag Group, an organization that helps companies select customers, suppliers and business partners.

Leveraging Technology to Simplify Due Diligence

To get a handle on the variety of risks suppliers can introduce, particularly for smaller, downstream suppliers that might be hard to track, technology can help. Almost two-thirds of organizations currently use technology to determine suppliers’ geographical locations, finds the BCI and Resilience360 survey. Among those who have not started to map their supply chains, the majority plan to start doing so post-COVID.

In addition to mapping supply chains to determine geography-related risks, organizations can use a variety of systems that help assess risk in areas like cybersecurity. SecurityScorecard, for instance, helps organizations determine their third-party risk via algorithms that analyze security issues and assign a corresponding letter grade.

The Red Flag Group also offers analyst reports that scrutinize risk across a range of issues, such as by analyzing court records. This information can then be integrated into tools like enterprise resource planning (ERP) platforms.

Simplify Purchasing From Approved Suppliers

After going through all the time, hard work and the investment in systems that can help you conduct due diligence on all types of suppliers, you don’t want maverick spend to then introduce new risks.

By using an e-procurement platform like GoProcure, you can make it easier for employees to purchase from approved vendors, rather than going off on their own. In cases where you’ve yet to assess and onboard a supplier, you can implement workflows so that purchase approvals automatically get routed to the appropriate members within your finance and procurement teams, rather than having employees make risky tail spend purchases on their own.

Want to learn more about how e-procurement/spend management technology can help you get a handle on supplier risk? Request a free consultation with our product experts today.

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