Let's say you're a manufacturer of packaged food products. You rely on a specific supplier in Vietnam for your plastic packaging. It is not even a critical part. But suddenly, a typhoon hits, and shipments are delayed by three weeks.

Production can continue since you have all the required materials, but now packaging can't be done unless you've classified this supplier as high-risk and have a secondary supplier or safety stock; maybe there's some relief. If not, you're scrambling to find alternatives while customers wait.

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If you have ever been exposed to or own a manufacturing company, you already know how reliant your company is on your suppliers. However, this dependency on your suppliers does not come without risk. These risks can cause delays, additional costs, or even shutdowns if not managed properly. Companies must balance long-term relationships with suppliers while also avoiding business continuity issues. That's where supplier risk management comes in.

This article outlines the importance of supplier risk management to manufacturers, the associated risks, and how companies can develop strong practices to avoid problems before they occur. Let's dive in.

What does Supplier Risk Management mean?

Supplier risk management in manufacturing is about identifying, assessing, and mitigating external supplier dependence risks before they impact the business.

The whole production line can suffer if a supplier does not meet quality demands or provide inferior goods. It can be any supplier—whether raw materials, components, or services—but any miss will result in delays, missed timelines, and dissatisfied customers. So, supplier risk management focuses on early problem detection and systems to reduce disruption.

Why Supplier Risk Management Matters in Manufacturing?

Manufacturing is a complex process. A delay in one chain part can throw off the entire operation. Here are some real-world reasons why supplier risk management is so important:

Global supply chains are vulnerable. According to McKinsey, disruptions lasting a month or longer now happen every 3.7 years on average.
Costs add up quickly. Deloitte found that 79% of manufacturers experienced a supply chain disruption in the past 12 months, with 44% saying the impact was significant.
Customers expect reliability. If you can't meet deadlines, your competitors will. Hence, any delay in production schedules due to missed timelines or poor quality supplied by the supplier can directly impact customer experience and lead to potentially high sales losses.

In short, when you don't manage supplier risks well, your factory floor isn't the only thing that suffers—your reputation and revenue do, too.

6 Types of Supplier Risks in Manufacturing

Supplier risks are more than delayed shipments. These risks can come in different shapes and sizes and impact the supply chain and business in multiple ways. Here are the top 6 supplier risks that manufacturers need to watch out for:

Delivery Risks: This is the most common risk, but the impact on your customer's service can be high. Late shipments or missed deadlines can halt production.
Quality Risks: Substandard materials can cause defects and rework. Proper CAPA documentation and closures are essential to managing these risks.
Financial Risks: A supplier going bankrupt can cut off your access to crucial parts. For critical materials, always have a backup plan.
Compliance Risks: This can also affect your business if suppliers are not compliant. At the end of your supplier, always check for regulatory violations, unethical labor practices, or low ESG standards. This can ruin your business's brand image.
Geopolitical Risks: If your suppliers are scattered across the globe, supply constraints such as trade restrictions, tariffs, or political unrest can obstruct supply routes. These risks hit you where you least expect them and can surprise your business.
Cyber Risks: A supplier cyberattack can expose your business's confidential data. Hence, periodic audits of system integrations with the supplier should be planned.

This list can be longer depending on the industry type. For example, suppliers of medical devices or food also need to be GMP compliant to ensure that there is no risk to your customers due to a supplier's error.

So, we understand the risks well now. But how do we manage them? Next, we'll discuss a comprehensive seven-step plan to manage supplier risk in a structured way.

7-Step Action Plan: How to Manage Supplier Risk Better

Supplier risk management doesn't have to be overly complicated. Here's a step-by-step guide to building a solid risk management program:

1. Map Your Supply Chain

Know who your suppliers are and what they supply. If possible, know who your level 2 suppliers or suppliers' suppliers are. This visibility is critical because a level 2 supplier outage will likely impact your supplier's operations.

2. Classify Your Suppliers

Not all suppliers are equal. Group them by risk level. For example, a sole-source supplier for a critical part should be prioritized over a commodity supplier.

3. Assess Risks

Evaluate each supplier based on criteria like financial health, historical performance, geopolitical exposure, and quality track record.

4. Create Supplier Scorecards

Use Supplier Scorecards to monitor performance metrics (on-time delivery, defect rates, etc.), financial indicators, and even news or social media alerts about supplier issues.

5. Follow Share of Business (SOB)

Build dual or multiple sourcing options or maintain safety stock for critical components. Based on their supplier scorecard performance, maintain a share of business (SOB) between the suppliers.

6. Build Strong Relationships

Open communication with suppliers can help solve problems faster. Consider regular reviews and collaborative planning sessions.

7. Invest in Digital Tools

Modern risk management platforms can help track and flag issues in real-time. Integrating data from procurement, logistics, and quality teams helps create a complete picture.

For example, if a supplier providing electronic components for an HVAC product line is hacked, their operations go offline for a week. With good risk monitoring tools, you'd get notified quickly and be able to switch to a backup supplier or reallocate parts.

How Procurement, Supply Chain, and Quality Teams Should Work Together

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Supplier risk management isn't just a job for procurement. It should be a part of the larger supply chain strategy as it needs input and action from across the company:

Procurement should handle supplier selection, contract terms, and financial evaluations.
Supply chain should track performance, logistics, and lead times.
Quality should monitor product quality, audits, and corrective actions.

When these teams work in silos, key information can fall through the cracks. That's why integrated communication and shared dashboards go a long way.

Making Supplier Risk Management a Mature Business Process with Holocene

Supplier risk management is an often-overlooked business process in most companies. However, the more proactive you are as a business, the more reliable your supply chain will be and the happier your customers will become.

If you're in manufacturing and have not assessed your supplier risk yet, now is the time. Start small, develop a process, and keep improving.=

At Holocene, we help manufacturing companies create smarter, more resilient supply chains. Our solutions connect procurement, supply chain, and quality teams across the company to measure supplier performance, monitor risks in real-time, and drive better decisions faster.

Connect with us today to learn more about reducing supply chain disruptions and avoiding surprises.