Importance of Third-Party Risk Management in Manufacturing

Importance of Third-Party Risk Management in Manufacturing

By: Beaconer, Sep 29, 2023

Importance of Third-Party Risk Management in Manufacturing


The manufacturing sector has always been vulnerable in terms of production, efficiency, quality control and many more factors. In today’s world of dynamic businesses, the manufacturing sector faces numerous challenges each day to overcome this vulnerability. Where there’s a concern to shift from traditional practices to modern ones, manufacturers must contend with an ever-growing web of third-party relationships. These days, such partnerships are essential, but at the time a crucial source of risk if not managed effectively. It is where one must integrate manufacturing third-party risk management services to ensure that their manufacturing unit can thrive while diminishing potential risks.

Significance of Third-Party Risk Management

Manufacturing is a complex ecosystem that relies heavily on partnerships with suppliers, vendors, and other service providers. These collaborations are essential for sourcing raw materials, components, and services required for the production process. However, such partnerships also introduce a level of vulnerability. If a third party fails to deliver on its promises, it can disrupt manufacturing operations, lead to production delays, and damage a company’s reputation.  Hence, the following explaining the significance of third-party risk management is imperative for a manufacturing unit.

Supply Chain Disruptions

Manufacturing operations are highly dependent on the timely and reliable delivery of materials and components. Any disruption in the supply chain can have adverse effects on production schedules, resulting in financial losses. Despite the known fact, 70% of organizations experienced at least one supply chain disruption in 2020.

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Regulatory Compliance

Non-compliance by a third party with industry regulations or environmental standards can expose the manufacturer to legal and financial repercussions.

Read Also- Most Common Third-Party Risk Management Compliance Mistakes

Reputation Risk

According to Edelman’s Trust Barometer, 73% of customers say they would boycott a brand if they perceived the business as putting profits before people’s needs and well-being. Therefore, any failure related to third-party relationships or mishap can tarnish a manufacturer’s reputation, making it difficult to attract customers and partners.

Quality Control Issues

The Harvard Business Review reported that poor quality control can cost a manufacturer up to 20% of its revenue. On the other hand, suppliers and third-party service providers may not maintain the same quality standards as the manufacturer. It can lead to defects, product recalls, and compromised product safety.

Data Security

Manufacturers often share sensitive data with third-party partners, such as designs, production plans, or customer information. Inadequate data security measures by these partners can lead to data breaches and intellectual property theft which leads to losses to manufacturing units.

Data Security

To address these risks, manufacturers must opt for robust third-party risk management services.

Role of Third-Party Risk Management in Manufacturing Industry

Third-party risk management includes the identification, assessment, and mitigation of the risks associated with third-party relationships. It is a proactive approach to protect a manufacturer’s interests and ensure the smooth functioning of its supply chain. Here’s why it’s essential:

Risk Identification

Third-party risk management service providers help manufacturers identify potential risks in their supply chain and other third-party relationships. By conducting risk assessments, manufacturers can prioritize their efforts and resources more effectively.

Loss Reduction Strategies

With the assistance of risk management experts, manufacturers can develop strategies to mitigate identified risks. These strategies might include diversifying suppliers, implementing stricter quality control measures, or negotiating more favourable contractual terms.

Compliance Assurance

Manufacturers must comply with various regulations (both judicial and non-judicial), and their third-party partners should as well. Third-party risk management service provider will ensure that all parties involved are adhering to relevant laws and standards, reducing the risk of legal penalties.

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Data Security

In the present immense digital world, protecting sensitive data is critical. Risk management service providers can help manufacturers assess the data security practices of their third-party partners and implement safeguards to prevent data breaches.

Reputation Management

By managing third-party risks promptly, manufacturers can protect their reputations. This, in turn, helps maintain trust with customers, investors, and other stakeholders.

Strategic Implementation of Third-Party Risk Management

To ensure effective third-party risk management for your manufacturing unit, you must consider the following strategic steps:

Risk Assessment

Start by identifying all your third-party relationships and categorize them based on their significance to your operations. This helps in prioritizing risk management efforts.

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Due Diligence

Perform thorough due diligence on potential third-party partners before entering into any agreements with them. This includes evaluating their financial stability, compliance history, and security measures. Look for reviews from their existing/past partners.

Contractual Safeguards

Create contract drafts that clearly outline expectations, responsibilities, and consequences in case of non-compliance or failure. These contracts should include clauses that address risk mitigation.

Continuous Monitoring

Risk management is not a one-day/one-time job. It’s an ongoing process. Regularly monitor the performance and compliance of third-party partners and be prepared to make adjustments as needed.

Integration of Technology

Utilize technology and AI for data analytics, monitoring, and reporting to streamline your risk management efforts.

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In The End

Third-party risk management is extremely important in the manufacturing sector. It safeguards manufacturers against a wide range of potential disruptions and pitfalls, from supply chain disruptions to data security breaches. To thrive in today’s competitive landscape, manufacturers must adopt a proactive approach to risk management, leveraging specialized services and strategies. By doing so, they can protect their operations, enhance their reputation, and ensure long-term success in the manufacturing industry.

At Beaconer, we deal with the vulnerabilities faced by the manufacturing sector on a daily basis. Therefore, we understand the problem and know its solution even better. Our aim is to offer manufacturing sectors customized third-party risk management solutions created especially to meet the specific needs of the industry. Contact us now!

Author Bio

Nagaraj Kuppuswamy

Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud native AI based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert, boasting over 16 years of dedicated involvement in the field of Cybersecurity. Throughout the course of their career, he has predominantly focused on elevating the realm of third-party risk assessment.


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