In response to the continued strain on supply chains, many businesses have started using multiple suppliers to build more resiliency. However, this introduces complexity and risk, so supplier risk management has become a significant concern.
Why Supplier Risk Management Matters
Suppliers can expose your company to risks on multiple levels. The most obvious is financial risks, which can occur if you pay a supplier but they don’t deliver, or if they don’t have the materials you need.
You can be left in the lurch to deal with delayed timelines and unhappy customers. In addition to financial, operational, and strategic risks, you can also face compliance risks in certain industries and damage to your reputation from associating with unethical suppliers.
The Evolution of Supplier Risk Management
In 2008, supplier risk management first became a significant issue when the FDIC issued official advice on third-party risk management. This is when taking a structured, risk-based approach to managing suppliers gained widespread adoption.
The practice soon spread to more industries as financial, healthcare, nonprofit, and other regulatory bodies began issuing their own guidance. As it stands today, federal and state regulations have joined industry standards for governing how organizations address supplier risk management.
How AI Integrates With Supplier Risk Management
One significant advantage of modern supply chain risk management is the use of artificial intelligence (AI). AI applications provide valuable insights into supply chain operations and shift your strategy from reactive to proactive. Some of the most innovative uses of AI in supplier risk management software include the following.
Predictive Analytics in Risk Assessment
Although no supply chain risk management software will allow you to see into the future, you can come as close as possible with an AI-based predictive model. AI provides predictive insights based on large datasets, along with real-time insights based on data from multiple sources, to foresee potential risks so that you can anticipate supply chain disruptions before they occur.
Generative AI for Enhanced Decision-Making
For risk management in supply chain strategy, generative AI is driving more effective decision-making. It helps business leaders create and evaluate multiple strategies based on business objectives. That means you can explore more options in much less time and implement contingency plans to mitigate risks.
Key AI Technologies in Supplier Risk Management
The following technologies can simplify supplier relationship management and reduce your risk exposure.
Automated Audits
Supplier audits drive effective decision-making and give you insight into supplier performance. However, conducting these audits manually is an expensive and time-consuming process that ties up resources that could be better used in high-value activities.
Automated audits analyze contractual data as well as other sources to provide data-driven insights into how suppliers are performing based on predetermined standards.
Real-Time Compliance Checks
AI applications also continuously monitor supplier activity for regulatory requirements, industry standards, and contractual agreements. If the system detects an anomaly, it can alert you so that you can take quick action to rectify it before the situation escalates.
Supplier Scoring and Segmentation
When you’re using multiple suppliers, you need to keep track of them and identify the best performers so you can make strategic supplier contracting decisions. AI simplifies supplier scoring and segmentation by analyzing supplier data and updating it in real-time based on parameters such as risk profile, geographical location, and historical performance.
Benefits of AI-Driven Supplier Risk Management
AI applications deliver significant benefits over traditional supplier and contract management solutions, in terms of speed, insight, and efficiency.
Proactive Monitoring and Early Warning Systems
AI continuously monitors all of your supply chain activity for any signs of unusual activity that could lead to negative consequences for your business. If it detects any, it will notify you so that you can take proactive measures to address the situation.
Increased Efficiency and Reduced Costs
Supplier risk management software can optimize almost all aspects of your supply chain and eliminate many risks through features such as:
Demand forecasting
Inventory optimization
Optimized logistics and route planning
Effective supplier management
Optimizing procurement strategies
Reduced waste
Improved strategic decision-making
Lower procurement costs
Enhanced Collaboration With Suppliers
AI strengthens supply-chain partnerships by providing transparency in all aspects of risk management in supply-chain management. You can share this data with suppliers so you can work together to meet common goals. Trust is the foundation of all effective relationships, and comprehensive data analytics creates a win-win situation for everyone involved.
Challenges in Implementing AI for Supplier Risk Management
Despite the many advantages of using AI to manage supplier risk, there are some challenges that can come with implementing it effectively.
Data Privacy and Security Concerns
Anytime you share data, you risk exposing it to hackers. Fortunately, there are comprehensive cybersecurity frameworks that outline best practices for protecting your data, such as encryption and access control. Make sure your software vendor has an established track record of strong security protocols.
Training and Skill Development
Even the best programs are only as good as the people using them. To get the most out of your software, you need to thoroughly train your staff on how to use it. Conduct comprehensive training based on roles, so you don’t overwhelm your staff with information they won’t use.
Integration With Existing Systems
Modern software solutions should easily integrate with the platforms and applications you currently use. Look for software that seamlessly integrates with your existing systems.
FAQs on Implementing AI for Supplier Risk Management
What is the role of artificial intelligence in supplier risk management?
Artificial intelligence can help you manage supplier risk by helping you make decisions based on actionable insights into risks, compliance, and optimization.
What is the role of AI in risk management?
Using data analytics, AI can give you predictive insights into potential risks based on global issues, weather patterns, supplier compliance, and other factors.
How does AI improve supply chain management?
AI can help you optimize all aspects of supply chain management, from routes and logistics to inventory. It provides visibility into all stages of the supply chain, from raw materials to finished products.
How will tools such as artificial intelligence help supply chain professionals better manage risk in the future?
As AI continues to develop, it will likely improve analytics, provide even more granular data, and drive more effective data-driven insights to head off future risks based on predictive capabilities.
Embrace AI With Terzo for a Resilient Supply Chain
In addition to diversifying and fortifying your supply chain, incorporating AI into your supplier risk management strategy can help you build a more resilient supply chain. To learn more about how Terzo can help you improve efficiency and reduce costs with AI, reach out to our experts for a consultation.
