Phil Renaud, executive director of The Risk Institute at The Ohio State University’s Fisher College of Business, runs down the level of risk to supply chains created by relationships with third parties — and relates how a certain type of third party can help to mitigate it.
A recent survey by The Risk Institute found that 44% of responding companies were outsourcing some aspect of their risk-management function. In other words, they were relying on a third party to help them cope with the risk of third parties — in this case, any outside provider of goods or services.
One of the biggest sources of risk to an organization is the single-sourcing of materials and finished goods. The failure of such a vendor can be extremely disruptive to the entire supply chain, which depends on tight coordination of procurement, production and delivery. Companies might find themselves scrambling to secure alternative sources of supply, possibly in an entirely different region of the world.
Similar risks come with the outsourcing of labor, especially when additional bodies are needed in a warehouse or manufacturing plant during peak periods of production. It’s critical to manage that provider to make sure it has proper oversight of its workforce, especially when it comes to training and monitoring of worker health in a pandemic.
Companies can mitigate the impact of third-party failures by identifying alternative suppliers before a crisis occurs, Renaud says. Yet many continue to operate with a false sense of security, certain that the vendor with whom they have worked for decades will remain stable and reliable.
Proper oversight of third parties involves four areas on which to focus, Renaud says: a “robust” risk assessment, risk monitoring, auditing and training, and maintenance of a formal system of recordkeeping.
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