Thanks to improved transportation and communication links, there’s no longer any barrier to working with someone on the other side of the world. This frees businesses to work with the best vendors, suppliers, contractors, and service providers, no matter where they are located. But it also exposes them to new and increased risks. 

In a complex, global network of suppliers, logistics, and production, every piece of the system needs to run smoothly. But the more extensive your network, the higher the risks that something will go wrong with one of your third parties. A heavy storm near your production facility, for example, can suspend production for a day, which has a knock-on effect on the rest of the system and results in unhappy customers who might switch to your competition. 

It’s impossible to remove all risk from the global supply chain. But you can limit it as much as possible. In this article, we’ll discuss key third-party risks, share best practices for assessing them, and provide actionable strategies for mitigating them effectively. 

Key Third-Party Risks in Global Supply Chains

There are a number of types of third-party risks inherent in the global supply chain, and any one of them can cause serious harm to your business. The main risks to be aware of include: 

  • Cyber attacks due to poor third-party cybersecurity practices
  • Non-compliance with regulations through vendor compliance issues
  • Operational disruptions that affect delivery of products and/or services
  • Data privacy risks such as data breaches and non-compliance with data protection laws
  • Financial risks due to third-party financial instability 

Cybersecurity Vulnerabilities

Third-party cyber risk is one of the biggest threats to the global supply chain. Businesses today depend on a large array of third-party IT support services, software providers, analytics solutions, sales and marketing platforms, and more. 

If just one of them has weak security practices, attackers can breach their systems and travel their connection with you to steal data, disrupt your critical systems, and generally cause chaos. Phishing attacks, malware, ransomware, data tampering, DDoS, and other types of digital supply chain attacks can all have a significant impact on your business continuity. 

Regulatory Compliance

Regulations are mushrooming on international, national, and regional levels. Failure to comply can result in fines, penalties, damaged brand reputation, loss of customer trust, and more. You do all you can to ensure compliance, but what about your third parties? Some regulations even hold your enterprise responsible if your third party isn’t compliant. 

The problem is compounded by the existence of different standards in different countries and areas. Your third party in Asia might comply with their regional regulations, but not with those in the US where you operate, opening you up to compliance issues. 

Operational Disruptions

COVID-19 proved an object lesson in global supply chain vulnerability. But it doesn’t take a global pandemic to disrupt business operations. A regional epidemic, natural disaster, extreme weather event, or political instability can force factories and distribution centers to close, shut ports and airports, block trucks and trains from continuing, and prevent vital employees from getting to work. 

If any one of these events occurs anywhere along your supply chain, it can leave you unable to deliver products, provide services, or complete vital business activities. 

Data Privacy Concerns

Data is a valuable asset, so you need to protect it from prying eyes or malicious intent. A data breach can be highly damaging to your enterprise, resulting in fines and penalties from data privacy regulations, and negative publicity that causes customers to take their business elsewhere. 

You need to share sensitive data with third-party vendors across jurisdictions, but that raises the risks of data breaches and non-compliance with data protection laws. When more entities have access to your customer information or important proprietary data, there’s a greater chance that someone, somewhere, will expose sensitive data or accidentally enable unauthorized access. 

Financial Instability

Once a company is part of your supply chain, their financial headaches become your financial headaches. If one of your global suppliers is struggling with cash flow or bill payment, they might not be able to meet deadlines or fulfill their contract terms, or their business could fail entirely.

That can leave your enterprise in the lurch. You might face disrupted business services that affect your business continuity, delays in receiving products for your customers, or informational black holes that affect your ability to make strategic decisions. 

Identifying and Assessing Third-Party Risks in the Global Supply Chain

Before you can manage third-party risks, you need to know what those risks are. This involves vendor due diligence, to identify every vendor in your global supply chain and evaluate their risk exposure. Then you can assess the level of risk that they pose to your business continuity. 

Effectively assessing third-party risks requires you to consider every type of risk. This should include regulatory risks, cybersecurity risks, disruptions to operations or the supply chain, data privacy risks, and tech risks from outdated systems. 

Let’s take a deeper dive into the best ways to assess third-party supply chain risks. 

Vendor Due Diligence

The first step in assessing third-party risks is to carry out due diligence before you onboard vendors. This is a multi-faceted process which involves: 

  • Evaluating their cybersecurity posture, including examining their cybersecurity protocols, data protection policies, and incident response strategies;
  • Reviewing their compliance history for adherence to relevant regulations and industry standards, such as GDPR, HIPAA, or ISO, and checking for past violations;
  • Verifying their financial stability and economic resilience by analyzing financial statements, credit ratings, and market performance
  • Checking their operational reliability by reviewing their supply chain practices, quality control processes, and business continuity plans, generally through audits and site visits.

Regulatory Compliance Risks

Evaluating regulatory compliance for your third parties is vital for you to avoid penalties and legal threats across different jurisdictions. Review each vendor’s compliance history for previous violations, audit their adherence to regulations, and verify that they are certified for relevant compliance programs. 

You need to consider both international regulations like GDPR or DORA, and local regulations like CCPA. It’s also important to check that all your third parties prioritize compliance with trade laws, tariffs, and import/export regulations, otherwise they could expose you to legal and financial risks. 

Cybersecurity Risks

Third-party cyber risks can cause the most serious threats to your business. Robust cyber risk assessments enable you to identify potential vulnerabilities, ensure data integrity, and maintain the resilience against cyber threats. This should involve thoroughly reviewing third-party cyber defenses, including their data protection protocols and encryption standards. 

You should also evaluate each vendor’s incident response plans, to assess how well they can manage and recover from cyber attacks. Examine how quickly they can detect and respond to breaches, their communication processes, and levels of ongoing threat intelligence and incident response drills. 

Supply Chain Disruptions

Natural disasters, pandemic, and other events can disrupt operations for your vendors, which in turn affects your ability to deliver services or products. You need to assess how well your vendor can flex to ensure business continuity in unexpected circumstances, so as to minimize potential supply chain disruptions. 

They should take risk management seriously, and have robust contingency plans that detail items like alternative sourcing strategies, backup suppliers, and flexible logistics arrangements. Check that they stress test their plans, review how well they’ve handled previous incidents, and evaluate their communications protocols to ensure timely and accurate information flow. 

Operational Risk 

Assessing third-party operational risk helps ensure that vendors deliver high-quality products that align with your business’s standards and timelines. It involves reviewing their production capacity, technology, and infrastructure to see if they can consistently meet your requirements, and evaluating their scalability to handle fluctuations in order volumes. 

Look at their delivery logistics, transportation network, and warehousing facilities, to see if they can manage lead times effectively. You should also examine their quality control methodologies, including inspection routines and testing procedures, and look at their track record for defects, returns, and customer complaints. 

Data Privacy and Confidentiality Risks

Working with vendors that take data privacy seriously is critical for preventing data breaches and protecting your data. Check that their data management policies align with best practices and legal requirements. They should apply strong encryption and access controls, ideally based on a zero-trust approach, and only use secure data transmission methods. 

All your vendors should comply with relevant data protection laws, conduct regular audits, and have up-to-date compliance certifications. Their breach response procedures are equally important. Check how they handle incident detection, reporting, and remediation, so you can be confident that any issues will be detected and mitigated swiftly. 

Technological and Innovation Risks

Vendors who use outdated technologies or lag behind on innovation can pose significant risks to your supply chain. For example, older systems can be more vulnerable to cyberattacks, less efficient, and might not integrate well with newer systems, which undermines your resilience and competitive edge. 

Make sure that all vendors use up-to-date technologies, and are prepared for future industry changes. Review their current tech infrastructure to see if it’s modern, secure, and aligned with industry standards, and evaluate their commitment to innovation. Look for vendors that stay current with industry trends and plan strategically for upgrades and new tech. 

Building Strong Supplier Relationships

Forging strong collaborative relationships with your third parties elevates them to partners instead of just transactional entities. This makes them more likely to invest in improving service levels and create a more robust supply network. 

When you establish open lines of communication, it helps ensure that both parties share the same expectations and are aware of their respective responsibilities. Regular meetings and problem-solving sessions empower you to identify and address risks proactively, which helps minimize disruptions and improve operational efficiency. 

By encouraging third parties in transparent information sharing, they’ll be more likely to inform you about any issues that arise, helping you mitigate risks before they escalate. Joint risk management initiatives, such as shared contingency planning and coordinated response strategies, can further strengthen the resilience of your supply chain. 

Leveraging Technology for Real-Time Visibility

It’s inevitable that threats will arise in your supply chain. What matters is that you can detect them quickly and act swiftly to mitigate them. That’s why you need Supply Chain Management (SCM) software and Internet of Things (IoT) technology to give you real-time tracking and risk alerts.

SCM software integrates multiple data sources into easy-to-read dashboards that give a comprehensive view of the supply chain. This way, you can monitor inventory levels and supplier performance to spot potential disruptions in real-time, for proactive decision-making and timely interventions that address emerging risks.

IoT technology allows you to embed sensors and tracking devices in products, shipments, and infrastructure. These devices collect and transmit real-time data on factors such as the location, temperature, and condition of your goods in transit. With this data, you’ll know about deviations from expected conditions, like delays or extreme heat that could compromise product quality. 

Creating Contingency Plans and Resilience Strategies

Despite all your best efforts, the chances are high that some part of your supply chain will be affected by some kind of incident. Establishing contingency plans and resilience strategies in advance enables you to transition faster to new realities and minimize disruptions. 

This should include stockpiling critical materials in case of temporary shortages. You should also identify alternative logistics routes, in case your primary channels become blocked or unusable, and backup suppliers, ideally in a different region to your main vendors. This helps you diversify exposure to localized risks, and increases the resilience of your supply chain. 

Regularly test your contingency plans using simulations and scenario analysis, and update them as circumstances change. 

Ongoing Supply Chain Risk Audits

Your supply chain is dynamic and constantly evolving, so your risk management can’t remain static. Regular audits help you identify new risks that emerge due to changing regulations, market conditions, technological advancements, or geopolitical events, and discover existing vulnerabilities that might have been missed during earlier assessments. 

A supply chain audit should evaluate compliance with regulatory requirements, adherence to contractual obligations, and overall resilience for your entire supply chain. It’s a good opportunity to review your vendors’ performance and reliability. You should also consider the efficacy of your existing risk management practices for the new reality that you’ve just assessed.

Continuously Monitor Supplier Performance

Consistently tracking and analyzing supplier performance metrics helps you stay one step ahead of supply chain disruptions. It’s a proactive approach that enables you to identify and deal with potential issues before they escalate into significant problems, helping boost supply chain resilience and reducing the risks of business disruptions. 

For example:

  • Monitoring quality metrics helps ensure that the products you receive meet your standards; 
  • Delivery tracking gives you a heads-up about delays or disruptions so that you can reroute your shipments; 
  • Compliance monitoring minimizes legal risks by showing whether third parties are complying with regulations and contractual obligations.

Key Risk Indicators (KRIs) play a crucial role by delivering early warnings about potentially serious issues. Some KRIs to track include changes in defect rates, deviations from delivery schedules, or compliance breaches. Analyzing KRIs means you can implement timely interventions to keep your supply chain running smoothly. 

Third-Party Risks in a Global Supply Chain 

As supply chains become more extensive and customer patience with delays grows short, supply chain risk management is becoming increasingly important. Effective third-party risk assessment, ongoing risk audits and vendor monitoring, robust contingency planning, and fostering strong relationships are all crucial strategies for a resilient supply chain. 

It’s particularly important to take a proactive approach to supply chain management. When you have full visibility into your supply chain and trusted insights into changing economic, political, environmental, social, and other circumstances that could affect your vendors, you’ll be better placed to detect emerging threats and take steps to mitigate them. 

Panorays brings you vital tools that streamline global supply chain risk assessment and deliver accurate and timely insights into any changes in risk levels. These include:

  • Automated security questionnaires to make vendor due diligence faster and more reliable
  • External attack surface assessments that reveal third-party vulnerabilities
  • Continuous monitoring and threat detection for your entire supply chain in real-time
  • A dynamic Risk DNA score for each supplier to give you an updated view of supply chain risk

Ready to address global supply chain risk? Contact Panorays to learn more

Third-Party Risks in a Global Supply Chain FAQs