Supplier Risk Management in the Age of AI: Mitigating Risks with AI-Driven Due Diligence
In today’s fast-paced business world, companies face immense pressure to onboard suppliers quickly to keep up with demand. However, this urgency to bring on new suppliers often results in businesses overlooking critical due diligence procedures, leaving them vulnerable to a range of risks.
Fortunately, the rise of automation and artificial intelligence has led to a wealth of data available to businesses, making it easier than ever to conduct due diligence on potential suppliers. Automated due diligence solutions can help businesses assess the financial health, compliance, legal status, cybersecurity posture, and operational capacity of their suppliers, saving time and resources while providing more accurate and comprehensive assessments of potential risks.
In this article, we will explore five key risk areas that businesses face when dealing with suppliers: financial health and solvency risks, compliance risks, legal risks, cybersecurity risks, and operational risks.
- Financial health and solvency risks: Many enterprises find themselves blindsided when a critical supplier falls into insolvency or becomes entangled in debt recovery proceedings. Understanding a supplier’s financial position and monitoring litigations related to economic defaults is essential in today’s business landscape. Fortunately, a wide range of automated due diligence solutions can now help businesses assess the financial health of both domestic and foreign suppliers with ease.
- Compliance risks: Vendors failing to adhere to regulations and statutory requirements, leading to GST defaults, MCA compliance defaults, and ITR defaults, can result in fines, penalties, being struck off by the MCA, or being marked as a specified person. This can create additional compliance burdens and financial risks for businesses that engage with them. Ensuring that you’re doing business with vendors who file GST, TDS, and EPFO/labor payments on time and pay their employees promptly is crucial to avoid regulatory scrutiny, financial penalties, and potential supply chain disruptions. When engaging with foreign suppliers, it is also essential to screen them against global sanctions and criminal watchlists.
- Legal risks: Legal cases against a supplier or its promoters can disrupt the supply chain, making it critical for businesses to thoroughly screen parties against available legal databases. Engaging with litigious entities can be tricky, as it may expose your business to potential legal disputes. With most court systems in the country now digital, it is easier than ever to check a third party’s litigation history. Many AI tools automate this process and provide monitoring capabilities.
- Cybersecurity risks: Enterprises have faced breaches of sensitive information, such as employee health records, business know-how, intellectual property, and more, due to cyber attacks on their suppliers. It is becoming increasingly critical to assess the cybersecurity posture of third parties, especially when sharing sensitive information like product specifications, customer data, and employee details. Partnering with diligence teams that possess the capability to assist in evaluating the cybersecurity measures of third parties is essential for procurement and risk teams today.
- Operational risks: Vendors with inadequate operational practices, quality control, or capacity management can disrupt supply chains, affecting a business’s ability to deliver products or services on time and at the desired quality level. Collecting the right disclosures on capacity and ensuring that suppliers adhere to high operational standards is vital for mitigating these risks.
Businesses face a daunting challenge when it comes to manually collecting and processing information on their suppliers’ financial health, compliance, legal status, cybersecurity, and operational capacity. Furthermore, keeping track of suppliers on an ongoing basis can be a complex and time-consuming task.
Thankfully, advancements in AI and due diligence automation solutions have made it possible to streamline these processes and ensure that businesses can make well-informed decisions about their suppliers. By leveraging these cutting-edge technologies, procurement and risk teams can now effectively monitor and evaluate their suppliers’ risk profiles, both at the onboarding stage and throughout the duration of the business relationship.
Automated due diligence solutions not only save time and resources but also provide a more comprehensive and accurate assessment of potential risks. This enables businesses to mitigate potential disruptions in their supply chains, reduce compliance burdens, and safeguard their reputations.
As the business landscape evolves and the importance of managing third-party risks becomes more apparent, it is essential for procurement teams to embrace the power of AI-driven due diligence tools. By doing so, they can successfully navigate the complexities of supplier risk management and build a more resilient and secure supply chain for their organizations.
(The author is Govind Balachandran, CEO of Signal X, and the views expressed in this article are his own)