Supply Chain Risks, Threats, and Management Strategies

What Is Supply Chain Risk?

The supply chain encompasses all the organizations, individuals, resources, technologies, and activities involved in creating and selling a product. It is a network of all the elements used to deliver materials and parts from suppliers to manufacturers and eventually to end-users.

The final segment of the supply chain segment, which involves delivering a finished product to consumers from the manufacturer, is called the distribution channel.

To address supply chain cybersecurity, organizations must be aware of the risks. Supply chains expose many opportunities for exploitation. Even simple tasks can involve information transfer and product handoffs. All shipments carry risk, especially when digital technology is used to manage them. Any technology, software, data, or relationship with third-party vendors creates additional risks.

This is part of a series of articles about third-party risk management.

Supply Chain Risks and Threats

Digital Risks

While digital transformation has many positive effects on a business, it also inherently leads to increased digital risk. The more digital solutions are used by a business, the more potential entry points cybercriminals have. Exposure to attack can result from known software vulnerabilities, zero-day exploits, or overlooked configuration errors.

These security weaknesses can open the door to threats like ransomware, malware infection, intellectual property theft, and compromise of personal, financial, or medical data, which can lead to compliance violations.

Supplier Fraud

Supplier fraud is when a cybercriminal claiming to be a supplier or third-party vendor of a company demands changes to the payment process. These incidents are difficult to identify because scammers use sophisticated social engineering techniques such as artificial intelligence (AI)-generated voicemail, phishing attacks, and deepfake video recordings.

Data Integrity

Data integrity throughout the supply chain is a critical security concern. Security controls must ensure that data is secure at all junctures, both at rest and in motion. A unified data encryption scheme between third parties is especially important, because hackers know that a targeted third-party vendor may have access to sensitive data.

Related content: Read our guide to supply chain attack

What Is Supply Chain Risk Management?

Supply chain risk management (SCRM) is the systematic process of identifying and assessing an organization’s supply chain risks, exposures, and vulnerabilities. It allows you to discover and evaluate common and more unique supply chain threats and develop a mitigation strategy to overcome risks and protect business continuity.

A modern supply chain is usually complex and contains multiple connected elements. Each stage of the supply chain can impact the organization’s performance.

If your organization has many suppliers and different stages, you may face vulnerabilities and disruptions at any time. You must evaluate, monitor, and control these risks to prevent them from damaging your compliance, performance, and business reputation. Supply chain risk management can help achieve this.

While some businesses use conventional techniques like spreadsheets to handle SCRM, you can benefit from using supply chain management software to plan and enforce your supply chain strategy.

What Is a Supply Chain Risk Management Strategy?

A comprehensive supply chain risk management strategy is crucial for ensuring your organization’s resilience and responsiveness to minimize supply chain risks. It involves taking into account all risks that may be present throughout the supply chain, including logistics, suppliers, and locations. When properly implemented, SCRM offers a significant competitive advantage.

The SCRM process includes four basic stages that can help you identify, understand, and address the supply chain threats to your organization:

• Identification — list all risks that could impact the supply chain, identifying their location.

• Quantification — evaluate the possible impact of each risk on your company’s operations, finances, and reputation.

• Mitigation — establish an appropriate strategy for addressing the potential impact of each type of supply chain disruption.

• Response — evaluate how fast your teams can react to disruptions and how quickly the organization can recover.

Supply Chain Risk Management Best Practices

Establish an SCRM Framework

Establish your organization’s risk tolerance for supply chain risk, and decide whether to accept a risk, transfer it, mitigate it, or refuse it (for example, by avoiding a relationship with a risky vendor). The process starts with known risks and identifies strategies for managing them.

Key considerations of an SCRM framework are mapping out the key suppliers and customers, analyzing the impact of a potential data breach on the organization, prioritizing the most risky suppliers and customers, and identifying single points of failure.

While you cannot control the security of upstream or downstream supply chains, you can decide whether to accept, deny, mitigate or transfer these risks to protect your organization.

Monitor Risks

Monitoring risk throughout an extended supply chain can be very difficult due to various challenges, including visibility. Based on the SCRM framework, an organization should prioritize and focus on third-parties or systems in your supply stream with the highest security risk and highest impact on your business.

After determining these high-risk partners or systems, establish the following security controls:

• Security updates — define how often your organization, or the partner organization, must update shared systems.

• Network security — defines how to manage firewalls, cloud configurations, databases, and other critical assets on the local network or the supplier’s network.

• Endpoint security — defines how secure laptops, desktops, servers, and mobiles devices should be to access your network.

• Web application security — defines how to protect against web-based attacks such as cross-site scripting (XSS), SQL injection, or XML external entities (XXE).

With the right tools, organizations can gain insight into the security posture of their critical or high-risk supply chain partners. By evaluating the security controls in place by your own organization and third parties, you can identify potential risks posed by suppliers, customers, and the supply chain process itself.

Create a Risk-Aware Culture for Managing Unknown Risks

Managing unknown risks in the supply chain is the most difficult part of SCRM. You can't monitor what you don't know. However, you can build resilience and put strong defenses in place. Creating a risk-aware culture means breaking down communication silos within your organization.

Strategies for building a risk-aware culture to mitigate unknown risks include employee training, to ensure that everyone in the organization understands the impact of supply chain cybersecurity risks, and clear communication, to ensure that everyone is aware of the organization's risk tolerance across the supply chain, so stakeholders can make informed decisions when working with suppliers and customers.

Another important value is agility — encouraging all stakeholders to respond quickly to new risks and mitigate them, changing processes and partner relationships if needed.

Risk awareness should also be part of the supplier due diligence process. By partnering with suppliers with a risk-aware culture, you can create a risk-aware supply chain that helps reduce unknown