When third-party risk management prevents a supply chain crisis

Introduction

Large companies often depend on a complex network of suppliers and subcontractors. A major problem at one of these partners can quickly turn into a crisis for the company if it is not prepared. This case study illustrates how rigorous management of third-party risks enabled a company to avoid the worst-case scenario in its supply chain.

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Context – critical supplier dependence

Let’s imagine Alpha, a large (fictitious) industrial manufacturer specializing in electronics. Alpha sources essential components from various suppliers. In particular, one of its suppliers, Beta, provides a key electronic component used in the manufacture of its flagship products. Beta is renowned for the quality of its parts and has been working with Alpha for many years. However, this close relationship has a downside: Beta is virtually the sole supplier of this critical component. A prolonged interruption in deliveries from Beta could cripple Alpha’s production in a matter of weeks. Aware of this challenge, Alpha’s management has integrated this point into its supplier risk management.

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Prevention through third-party risk assessment

A year earlier, Alpha launched a robust third-party risk management program, following a methodical approach to assessing its partners. During this assessment, Beta was identified as a high-risk supplier, not because of a lack of reliability, but because of the absence of an alternative in the event of failure. Alpha therefore decided to anticipate: the company began qualifying a second supplier, Gamma, for the same component, auditing its capabilities and contracting with it “just in case”. At the same time, Alpha worked with Beta to strengthen business continuity: Beta was encouraged to set up a disaster recovery plan and increase its security stocks dedicated to Alpha. These preventive measures came at a cost, but Alpha’s management saw them as insurance against a major risk.

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The incident: a supplier in difficulty

A few months later, the dreaded scenario occurred: a major flood hit the Beta plant. Production of the famous component came to a complete halt for an indefinite period. Several of Beta’s corporate customers suddenly found themselves in a critical situation, with no other way of quickly obtaining the part. For Alpha, the news could have meant an interruption of its own production and colossal delivery delays, with consequent financial losses and damage to its image of reliability. But thanks to its preparedness, Alpha is not helpless.

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Reaction and crisis averted

As soon as the flood at Beta was announced, the Alpha team activated its contingency plan. Alternative supplier Gamma is immediately called upon to increase production and supply the necessary components. Having already been approved and informed in advance, Gamma manages to deliver the first replacement parts within a few days, covering a good part of the needs. Internally, Alpha adjusts its manufacturing schedule to use in-stock and Gamma-sourced components first, and postpones some non-urgent production. What’s more, since Beta had built up a safety stock at Alpha, the company was able to hold on while Gamma ramped up its production. As a result, Alpha’s supply chain continues to function. Admittedly, there have been a few slowdowns and additional costs to switch to Plan B, but the crisis has been averted. Alpha honors its customer orders with only slight delays, while its less-prepared competitors suffer shortages.

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Assessment and lessons learned

This case study demonstrates the importance of good third-party risk management. Without Alpha’s foresight, the flooding at Beta would have triggered a chain reaction leading to an industrial and commercial crisis for Alpha. Instead, the company was able to absorb the shock thanks to its proactive approach: identification of the risk (single-supplier dependency), implementation of alternative solutions and regular monitoring. Investing in supplier risk management has a cost (audits, second supplier, additional inventory), but this investment potentially saved millions of euros and preserved customer confidence.

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Conclusion

A crisis in the supply chain can occur at any time, whether for environmental, technical or other reasons. Alpha’s case study shows that integrating third-party risk management into corporate strategy not only anticipates problems, but also prevents an incident at a partner from turning into a catastrophe for you. Large companies have everything to gain by seriously assessing their critical suppliers and preparing contingency plans. By following best practices (such as those outlined in our 5-step guide to assessing your partners), you’re putting the odds in your favor to maintain business continuity in the face of supply chain contingencies.