We are on Episode III of special five-part podcast series on an innovative approach to managing third party risk. This week I am joined by James H. Gellert, the Chairman and Chief Executive Officer (CEO) of RapidRatings International Inc. (RapidRatings), the sponsor of this special series. Our conversation is about helping companies manage their third-party supply chains through financial health. The RapidRating approach is incredibly innovative, with a series of products and services that should be considered by the compliance practitioner. In today’ episode, we discuss the issue of third-party expansion.
We began with a consider of the definition of third-party. Gellert related, “Historically, people talked about simply an entity outside of your organization as a third party. However, that definition is broadening, to mean really that entity with which your company works.” Obviously, this can be a supplier or vendor, it can be a service provider, a customer, a joint-venture (JV) partner and/or an intercompany affiliate. A broader view could include intercompany affiliates as third parties, even though many people would see them as just being another entity inside of a business. Gellert said, “the definition of third parties is expanding, which only makes life more complicated for anyone trying to do third party risk assessments and then the tiering just creates an exponential change.”
Specifically, “in supply chain, a tier one supplier is one of the suppliers your organization is directly purchasing from. Next a tier two is one that your company’s tier one is buying directly from. This means for risk managers assessing the various risks of their supply chain have to go deeper and deeper. One way to do so is through trying to understand the connection between tiers one, two, three, four and so on. The problem is there are many risks that companies do not manage because they cannot identify which companies are taking risks.” Gellert further noted, “one of the hottest topics in 2019 for a supply chain and risk managers is trying to get their arms around how to handle this particular question.”
I asked Gellert how would he suggest a supply chain professional began to think through some of these issues articulated but in the context of a global supply chain? He began by stating, “anyone who is involved in third party or supply chain risk management needs to try to map out and understand the suppliers whose exposure they need to assess for their organization. Obviously, this includes both direct and indirect suppliers but in terms of the tiering, the best way for anyone to understand the supply chain risk is to have really good communication with their tier one suppliers to be able to discuss the risks to both businesses.”
Moreover, “this means communicating with a tier one supplier about who their tier ones are that are providing product or service that are coming to that client. Only with that type of transparency and communication can businesses look through the tier one into the sub tiers to understand the risk your organization has and where there may be a risk concentration. Without effect communication and dialogue, created and fostered as part of the relationship, people are going to fly blind.” Finally, in this global economy with such internationalization and diversification of supply chains, organizations you “really do need to pull out all the stops to try to manage risk. Communication is one of the first places to start.”
Gellert concluded with some thoughts on transparency, which he believes is not only important but “should be applied everywhere.” He said you should begin with your tier ones but the ability “to look deeper into the supply chain is also really important.” Further, Gellert said, “a lot of supply chain risk professionals can go wrong if they use transparency as a bludgeon as opposed to as an opportunity. Then the company they are asking for information from only sees risks in disclosing information as opposed to seeing commercial value and we promote transparency as a means to commercial value.” But it is more about fostering the relationship so that you can adequately assess and then manage the risk. Gellert noted, “that’s the key part, that people have to embrace if they’re going to be able to look deeper into their supply chains.”
Please join us tomorrow when we consider some of the challenges Gellert is seeing in supply chain risk management for 2019 and going forward.
This podcast series is sponsored by Rapid Ratings International, Inc. For more information, check out their website at www.rapidratings.com.