Imagine you're about to add a new supplier to the manufacturing plant. Would you hire somebody new without their references or a background check? Most probably not. Yet many organisations enter supplier relationships with minimal due diligence, and then find nasty surprises a few months later. It is a gamble, particularly considering how prevalent supply chain disruptions have become. Nearly 79% of manufacturers reported a supply chain disruption within the last year, and 44% stated it was considerable.

This is precisely where Supplier Risk Management should come in early in the supplier's lifecycle with the company. Supplier risk management is identifying and managing potential supplier issues before they impact your business. It covers supplier quality assurance, regulatory compliance, financial strength, delivery reliability, and more.

The objective is quite simple: spot red flags early to avoid or lessen the troubles down the road. Doing your homework before signing a supplier agreement produces a much stronger, more cost-effective supply chain.

Early risk assessment is more than what it is perceived to be in manufacturing. In this article, we discuss supplier risk management, why it is important to assess suppliers before complete onboarding, how to implement risk checks while choosing vendors, and exactly why identifying risks early on saves headaches and money in the future.

What Supplier Risk Management Involves (and Why Start Early)

Supplier risk management evaluates the risks of working with a particular supplier and proactively mitigates those risks. This evaluation covers a range of factors, including:

Quality Risks: Could the supplier's materials or components be subpar? Poor quality inputs can cause production defects, rework, or recalls.
Delivery Risks: Is the supplier reliable in meeting delivery schedules? Late shipments can halt the production line and upset customers.
Financial Risks: Is the supplier financially stable? A supplier on the verge of bankruptcy might collapse, leaving the business stranded without key parts.
Compliance Risks: Does the supplier adhere to all relevant laws and industry standards? A non-compliant supplier could create regulatory or safety issues for the business.

Every supplier has its risk profile. Supplier risk management means systematically identifying these risk factors and assessing their likelihood and severity. Some companies use formal scoring models to rate suppliers (financial health, past performance, etc.), while others rely on simple checklists or audits. No matter which approach, the important thing is detecting threats early. By evaluating these risks before signing a supplier onboard, you can determine if you should proceed with them or what precautions to implement.

Starting risk management early, during supplier selection and qualification, lays the groundwork for a stable and long-term partnership. If you catch a serious issue early, you can choose a different supplier, require them to fix it, or set up contingency plans. If you skip early risk assessment, you're essentially flying blind. You might not discover a supplier's weakness until they've become your sole source for a part, and by then, any failure will directly hit your production.

It's akin to screening job candidates. You wouldn't hire someone without checking their credentials; similarly, you shouldn't onboard a supplier without vetting them thoroughly. It's much easier (and far cheaper) to address a risk upfront than to deal with a full-blown supply chain crisis later.

The Risks of Skipping Early Supplier Evaluations

What if you don't evaluate suppliers thoroughly before onboarding? Unfortunately, skipping those early risk checks can lead to painful lessons. For example:

Unexpected Disruptions: The supplier may have overpromised their capacity or operate in a high-risk region. If they fail to deliver on time, your production could halt. (In the automotive industry, an assembly line stoppage can cost around $22,000 per minute – a sign of how pricey a single supplier hiccup can be.)
Quality Catastrophes: Imagine discovering after onboarding that a supplier has poor quality control. Defective components might slip into your products, leading to recalls, warranty claims, or damage to your brand – problems that early vetting could have prevented.
Financial Failures: If you didn't check a supplier's economic stability, you might be blindsided by them going bankrupt or being unable to source materials for your orders. That leaves you scrambling for alternatives at the worst possible time.

Studies underscore how damaging these issues can be. The Economist Intelligence Unit found that supply-chain disruptions have an average financial impact of 6–10% of annual revenue. Beyond direct costs, there's the hit to customer trust when you can't deliver as promised. In short, reactive management – dealing with supplier problems only after they occur – is a recipe for higher costs and chaos.

By contrast, a proactive approach avoids many of these costs. Filing a supplier's quality and reliability upfront is much cheaper than facing a recall or emergency sourcing later.

Integrating Risk Management into Supplier Selection

Bake risk assessment into your supplier selection and onboarding process to reap the benefits. For example:

Set Clear Criteria & Do Due Diligence: Define what supplier qualifications are non-negotiable (e.g., specific certifications, financial health, safety standards) and build those checks into your selection. Collect information early, get financial statements, quality certificates, and other proof of capability, and consider conducting site audits (in-person or virtual). In short, do your homework on each prospective supplier before you commit.
Involve Cross-Functional Teams: Don't let supplier approval be a siloed task. When vetting new suppliers, include quality engineers, supply chain managers, and compliance officers. Each team can spot different red flags. One might notice a process issue, another a legal or credit risk. A cross-functional review ensures you cover all angles before onboarding.
Start Small and Test Performance: Whenever possible, begin with a trial order or pilot run for a new supplier. This is a low-risk way to see how they perform. Did they meet your specs and deliver on time? A test run can reveal issues with quality or reliability early, giving you a chance to address them (or reconsider the partnership) before they affect full-scale production.
Plan Mitigations and Monitor: Implement safeguards if you identify certain risks, but still need to proceed. For instance, when a supplier is crucial but in an earthquake region, line up a backup supplier or maintain additional inventory as insurance. Set performance indicators and check in regularly once the supplier is onboard to ensure they meet your standards.

By building these practices into your process, you'll choose suppliers based on cost, capability, and reliability. The result is a more resilient supply chain from day one. Plus, showing new suppliers that you take risk seriously sets the tone for a transparent, accountable partnership.

Why Catching Risks Early Is More Cost-Effective

Being proactive about supplier risk isn't just good for peace of mind and business. Fixing issues early can save plenty of money and trouble:

Preventing Disruptions: Every disruption you prevent is money saved. By spotting vulnerabilities in advance and securing backup options, you avoid the massive costs of downtime and emergency fixes later.
Fewer Surprise Replacements: Thorough vetting makes it less likely you'll need to replace a failing supplier mid-stream. PwC notes that a strong risk framework can reduce the need to replace failed suppliers, making sourcing more cost-effective. In short, investing time in picking the right partner now means you won't pay to find one under duress later.
Lower Crisis Management Costs: Companies with active supplier risk programs spend far less when disruptions occur. Deloitte found that businesses with proactive risk practices spend 50% less on managing supplier disruptions than those without such plans. Having contingency plans and early warnings cuts the cost of crises in half.
Protecting Revenue and Reputation: Early risk management keeps your operations running smoothly, so you can deliver to customers and maintain trust. By avoiding major supply failures, you sidestep lost sales and the kind of reputational damage that can hurt your brand (and finances) over the long term.

In one survey, 71% of organizations said they're developing in-house capabilities for supply chain risk management – evidence that companies recognize catching problems early beats reacting late. A bit of effort up front can prevent much pain later.

Sharpen Your Supplier Risk Practices with Holocene

Consider your own supply chain: Are you evaluating supplier risks early enough before bringing new suppliers on board? Strengthening those upfront checks now can save you from expensive surprises down the line. Managing supplier risk isn't about red tape but rather about keeping your production schedule, product quality, and profits steady from the beginning.

If you suspect gaps in how you vet or monitor suppliers, you're not alone. Holocene can support your efforts to improve supplier risk management. We help manufacturing companies build more resilient supply chains by connecting your teams with the correct data and tools to measure supplier performance and monitor real-time risks. With greater visibility and early-warning insights, you can catch issues before they catch you.

Don't wait for the next supply disruption to expose a weak link. Strengthen your supplier risk practices now before onboarding new suppliers. Your company and your bottom line will thank you for it.