Are you interested in understanding the ins and outs of SAP Ariba Supplier Risk, but the complex jargon feels overwhelming? Don’t worry- we are here to demystify this product in straightforward terms through this blog.
Table of Contents
What is Supplier risk? Different types of Supplier Risks
What is Supplier risk management?
What are risk controls, Risk Assessments & Due diligence?
Inherent Risk Vs Residual Risk
What does SAP Ariba Supplier risk offer? How can SAP Ariba help with Supplier risk management?
Sustainability in Supply chains & the role of SAP Ariba Supplier risk
First things first! Let’s talk about the premise of the problem that we are trying to solve through SAP Ariba Supplier risk.
Remember when the world seemed to come to a halt at the start of the COVID-19 pandemic? Our lives got affected in various ways and different industries struggled to survive. Specific to Automotive industry, there was a huge problem with car prices, there were delays in production and delivery of cars. Major culprit behind this chaos for automative industry is semi-conductor shortage.
Without an adequate supply of semiconductors, car manufacturers struggled to meet the demand, and it resulted in production delays and increased prices.
This shortage of semiconductors is a prime example of the importance of supply chain risk management. It highlights the need for businesses to identify and mitigate potential disruptions in their supply chains. When a single component shortage can wreak havoc on an entire industry, it highlights the importance of building a resilient supply chain and managing potential risks. Let`s deep dive into understanding the details of supply chain risks and how SAP Ariba can help in managing Supplier risk.
2. What is Supplier Risk?
Supplier risk, also known as supply risk, refers to the potential risks that arise from a supplier's actions and choices, which could have adverse effects on your company. These risks can arise from various factors, such as a supplier's policies, financial stability, and data security measures. Additionally, relying on a limited number of suppliers or lacking adequate visibility into your supplier network can also lead to supply risk.
Different types of Supplier risks
Here are some of the common categories of supplier risks.
Financial risk: The risk of your supplier`s financial conditions impacting your business
Operational risk: The risks that can arise from everyday operations such as logistics, procedures and systems followed by your supplier
Environmental and Sustainability risk: The risk of your supplier`s environmental events and social impacting your business. Examples - manufacturer is in an earth quake zone or supplier` factory location is reported use of child labor or the likelihood of foreign invasion in a supplier’s country of operation.
Regulatory and legal risk: The risk of government regulations in your suppliers’ countries of operation impacting your business
Cyber security risk: This risk of potential negative consequences that can arise from uncertainties in information technology such as data breach
Now that we briefly talked about some types of risks, lets understand the process of managing supplier risks.
3. What is Supplier risk management?
Supplier risk management is the process of identifying, assessing, mitigating, and monitoring risks throughout the supplier lifecycle and procurement processes. This process helps your business ensure that the right checks and protocols are in place to keep your business resilient and safe from supplier risk.
With a clear understanding of the basics, lets now zoom into some key terms and hot topics in Supplier risk.
4. What are risk controls?
Risk controls specify the methods that a company uses to evaluate risk in a particular area when considering an engagement with a supplier or third party.
What is a risk assessment?
Assessments are associated with risk controls and are a set of questions designed to better understand the risks of working with a supplier or third party in particular area(s), relevant to a control.
What is Due diligence?
The investigative process by which a supplier or other third party is reviewed to determine their suitability for a given task.
Due diligence is an ongoing activity, including review of risks, addressing issues, and monitoring throughout the entire vendor lifecycle.
AI Generated image of a home owner trying to work with a contractor for home renovations
🪜To put this in layman`s terms, let`s say you want to hire a contractor to renovate your house. Before deciding, you would have certain rules or methods in place to evaluate the risks involved, such as checking their references, looking at their past work, and considering their reputation. These rules are your risk controls.
As part of the risk controls, you would also ask the contractor a series of questions to better understand the potential risks, like whether they have the necessary licenses and insurance, or if they have experience with similar projects. These questions are your assessments.
And throughout the renovation process, you would continue to monitor the contractor, address any issues that arise, and make sure they are doing the job properly. This ongoing activity of reviewing, addressing, and monitoring is your due diligence.
5. Inherent Risk Vs Residual Risk
What is Inherent risk?
Inherent risk refers to the level of risk that exists before any risk controls or mitigation measures are put in place. It represents the natural level of risk associated with each supplier.
In our example of hiring a contractor for home renovation, inherent risk would include factors such as the complexity of the project, the contractor's level of expertise, and the potential for any unforeseen issues to arise during the renovation process. Inherent risk is the risk that is inherent or inherent to a particular situation.
What is Residual risk?
Residual risk refers to the level of risk that remains after risk controls and mitigation measures have been implemented. It considers the effectiveness of the risk controls in reducing the overall level of risk. In the case of hiring a contractor, residual risk would be the remaining level of risk after you have conducted your due diligence, implemented risk controls, and monitored the contractor's work.
Now that we have set the stage on the nuances in Supplier risk, it’s time to understand how SAP Ariba helps in Supplier risk management.
6. What does SAP Ariba Supplier risk offer?
Clear visualizations that provide valuable risk due diligence insights - Risk profile provides a concise picture of a supplier’s exposure to risk categories such as regulatory and legal, environmental, social, financial, operational, and custom risk categories defined by the customers
Comprehensive risk data from an extensive monitoring network - insights from numerous sources including those reported in global and regional news sites, government and private databases, corporate information, natural disaster monitoring, and third-party data providers of financial data, environmental and social and the ability to bring compliance data and custom data via an API
Comprehensive process for supplier engagement risk assessments – Comprehensive risk engagement process with context-specific screening questions, supplier recommendations, data gathering, and review, findings management, and task tracking make for a quick and thorough risk due diligence process.
How can SAP Ariba help with Supplier risk management?
Conduct control assessments based on suppliers’ inherent risk
Calculate exposure to risks based on your relationships, with due diligence based on your supplier engagement
Identify suppliers of greatest concern by applying filters to data from more than 600,000 public and private sources
Generate and execute corrective actions plans to proactively mitigate risks while working with team members on risk-disposition workflow actions
Connect the supplier risk solution to your source-to-pay process to improve compliance
Identify where forced labor may exist in your supply chain
Receive personalized risk alerts through automatic tracking of more than 200 risk incidents
Monitor financial, operational, environmental, social, regulatory, legal risks and other categories of risks proactively
Track special handling needs or problems that require remediation or exceptions through Findings management
7. Sustainability in Supply chains & the role of SAP Ariba Supplier risk
Many companies are now considering supporting sustainability and human rights as a key aspect of their mission. Businesses are striving to make a positive impact on the society and environment. This ethical foundation is quickly becoming a requirement for customers and consumers. Businesses need to create an actionable social responsibility strategy. While there are many commodity- and region-specific sustainability supplier networks, a single point of truth across the entire supply base can support risk-aware core processes while allowing for targeted reporting and transparent audit trails.
Also, there have been several supply chain due diligence acts being passed by governments across the world to enforce sustainability to be embedded into supply chains. For example, German Supply Chain Due Diligence Act aims to increase supply chain transparency, boost human rights, and foster legal certainty and fair competition. Companies that fail to comply face high penalties.
SAP Ariba Supplier risk can help build digital bridges and facilitate compliance by:
Providing up-to-date supplier risk scores within supplier selection activities in the spend management process, so companies can easily select suppliers with low-risk profiles.
Incorporating internal and external data sources to provide comprehensive supplier risk profiles across all immediate suppliers.
Helping to identify, document, and reduce risks in close collaboration with suppliers
In conclusion, SAP Ariba Supplier risk software offers a comprehensive solution to mitigate and manage risks across the supply chain. Its capabilities empower organizations to proactively identify, assess, and respond to potential disruptions, ensuring business continuity and resilience.