Over the past few months, the headlines have been filled with sparring opinions on whether or not the global economy is on a crash course toward recession. The UN Conference on Trade and Development (UNCTAD) has issued stark warnings that policies like continuing interest rate hikes may create a worldwide slowdown with more dire consequences than the 2007 to 2009 financial crisis and even the Covid-19 pandemic.
While speculation is abundant, alarm bells are ringing for supply chain managers and inaction is not an option. With some of the biggest risks coming from your third-party network it’s time to consider how you can eliminate weak links and prepare for quick pivots in the event of an economic downturn.
How a recession affects your third-party network
Should a formally recognized recession occur, it will create sprawling ripple effects at every point in the supply chain for companies all over the world. Consumers will tighten their purse strings, which will force retailers to cut inventories. Shrinking demand will force manufacturers to alter production schedules, which will strain suppliers and distributors that aren’t flexible enough to adjust to those fluctuations.
Margins will shrink all the way from supply to retail, and the larger your third-party network the more likely it is that at least a few of those third parties will simply go out of business. Additionally, a recession will not stop the determined march of regulation–which means supply chain managers and executives may face an uphill battle on two fronts. That makes it essential to effectively map risk severity as a first step to helping current third parties improve performance and compliance, and plan for quickly onboarding new suppliers and distributors when necessary.
Evaluating resilience across your network
Your company’s own resilience is directly influenced by the resilience of your third-party network. If one point in your supply chain fails, it can cause a snowball effect that disrupts operations and drags down your bottom line. From a preventative perspective, evaluating resilience is a key measure in recession-proofing your supply chain–and the Explore, Enhance, Engage cycle is an effective framework for doing so.
Laying the groundwork for risk mitigation
Step one is to explore your network by profiling all third parties and ranking them based on how critical they are to your business operations. Factors like location-specific regulatory concerns, geopolitical risks, financial status and public reputation can all be used to tier partners based on inherent risk. You need to know what business resilience provisions they have in place, and how they align with frameworks like those from the National Institute of Standards and Technology (NIST), International Organization for Standardization (ISO) and other industry-specific standards.
Building focused investigation
After evaluating overall risk and resilience across your network, applying Enhanced Due Diligence (EDD) is essential for digging deeper into medium and high-risk third parties. Third-party EDD involves screening for litigation, criminality, bankruptcy and ultimate beneficial ownership, among other risks, as well as GAP analysis between what partners disclose about compliance and information that is publicly available. Third parties subject to EDD should be monitored continuously for the duration of the relationship.
Strong networks are built on mutually beneficial relationships, and engaging directly with your third parties is the most effective way to elevate standards and facilitate improved performance. Making use of questionnaires in specific areas including ESG, anti-bribery and corruption and the third party’s own supply chain due diligence improves transparency and creates a collaborative model in which both parties emerge better able to mitigate recession-related disruptions.
Action now can prevent chaos down the line
With a potential recession looming, assessing risk within your third-party network and taking action to shore up due diligence may make the difference between continued success and catastrophe. You need to know exactly where your third parties rank on the spectrum of risk so you can be prepared to replace them quickly–but safely–if necessary.
Leveraging a third-party risk management (TPRM) platform will become more essential than ever as budgets shrink while regulatory requirements continue to balloon in nearly every region. Supply chain transparency is imperative for companies to make swift and sound decisions in the wake of unexpected recession-related issues in your third-party network. Leveling up your TPRM program with Ethixbase360 today will provide a solid foundation for a disrupted tomorrow.