Dejan Jasnic · Co-founder & Compliance Lead, Trusty · 20+ years anti-fraud & compliance · ACFE Swiss Chapter Board
In regard to supply chain management, companies often work with a diverse range of suppliers, varying in size, specialization, and geographical location. Managing these relationships can be challenging, particularly when it comes to mitigating risk. Many businesses adopt a “proportionality approach,” focusing their resources on larger suppliers while giving smaller ones less attention.
While this strategy may seem practical, it isn’t always the safest. Let’s examine the limitations of the proportionality approach and explore why smaller suppliers deserve more attention in your risk management strategy.
Understanding the proportionality approach in supply chain management
The proportionality approach is a common tactic in supplier risk management, particularly when resources are limited. For example, a company may identify 100 high-risk suppliers, but instead of addressing each with equal attention, it chooses to focus on the 10 largest suppliers that account for the majority of its business. This prioritization is often seen as efficient, ensuring key business relationships are well-regulated and controlled.
However, smaller suppliers, while still high-risk, are often monitored more superficially. The assumption is that their potential impact is minimal due to their size or the nature of their services.
At first glance, this focus on larger suppliers makes sense, bigger companies handle larger volumes and can cause more significant financial or reputational damage if something goes wrong. But underestimating smaller suppliers can lead to costly consequences.
In today’s fast-paced information landscape, a compliance breach or scandal involving a smaller supplier can rapidly impact your business. When a smaller supplier violates regulations, your company may still face public backlash for failing to provide adequate oversight.
Smaller suppliers may also have hidden vulnerabilities. They often lack the resources to implement strong cybersecurity measures, making them prime targets for cyberattacks that could compromise your entire supply chain. Additionally, inadequate labor or environmental compliance could expose your business to legal risks and damage your brand reputation.
Proportionality shouldn’t mean neglect
While the proportionality approach offers efficiency, it’s critical that smaller suppliers are not left without proper oversight. A more balanced risk management strategy involves ensuring that even smaller suppliers are subject to periodic audits, external reviews, or automated monitoring systems.
Using tools like Trusty’s whistleblower software, for instance, enables anyone in the supply chain to anonymously report irregularities or compliance violations, providing greater visibility into emerging risks, regardless of supplier size.
The strategic advantages of smaller suppliers
Partnering with smaller suppliers isn’t just about minimizing supply chain management risks; it also offers significant benefits, including:
- Risk Diversification: Relying solely on large suppliers increases your dependency on a few key players. This can amplify the impact of any issues with those suppliers. Incorporating smaller suppliers spreads risk and reduces over-reliance on a limited number of vendors.
- Agility and Responsiveness: Smaller suppliers tend to be more flexible and can adapt quickly to changing customer needs. Larger suppliers, due to their complex operations, may be slower to respond to unforeseen challenges. In contrast, smaller suppliers can adjust faster, making them valuable allies in uncertain environments.
- Compliance and Reputation: Smaller suppliers are often just as committed to regulatory compliance as their larger counterparts. In fact, many are highly motivated to maintain a strong reputation and competitive edge by strictly adhering to industry standards.
- Innovation and Specialization: Smaller suppliers are often leaders in innovation, as their size allows them to be more dynamic and open to exploring new technologies. They can implement changes more rapidly than larger suppliers, who may take months or even years to adjust.
A balanced supply chain management risk strategy
Ultimately, while it’s understandable for companies to prioritize larger suppliers, neglecting smaller suppliers can be risky. Their vulnerabilities may be less visible but can have equally devastating effects. To minimize risk, businesses should adopt a risk management approach that is both proportional and inclusive.
With tools like Trusty, companies can ensure that all suppliers, large and small, meet compliance standards, protecting their operations and reputation. The most effective strategy is one that balances efficiency with prevention, ensuring that every supplier, regardless of size, is properly monitored.
By integrating smaller suppliers into your proportionality approach, you not only mitigate risks but also unlock opportunities for innovation, agility, and risk diversification, ultimately strengthening your entire supply chain.
Frequently asked questions
Focusing risk management resources on the largest suppliers, for example the 10 biggest of 100 high-risk suppliers, while monitoring smaller ones more superficially on the assumption that their impact is minimal.
A compliance breach or scandal at a small supplier can still cause public backlash for poor oversight, smaller suppliers often lack the resources for strong cybersecurity, and weak labour or environmental compliance can expose the buyer to legal and reputational damage.
Risk diversification, agility and faster responses to changing needs, a strong motivation to stay compliant to protect their reputation, and innovation and specialisation.
With risk, not company size: screen every supplier at a baseline level, then apply periodic audits, external reviews or automated monitoring where the risk justifies it.
Related reading: why supply chain risk does not stop at strategic suppliers, third party screening for SMEs, supply chain compliance for SMEs, and QuickScreen360 for screening every supplier at a baseline level.
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