When outsourcing to a supplier, methods such as supplier assessments are undertaken during the onboarding phase.  Despite being a third party, they represent your business. Therefore, the supplier needs to not only meet the business need for the service but align with the business values.

Financial Supply Chain Management (FSCM) focuses on financial transactions, information, and relationships across the supply chain to help drive operational growth.

Supplier Assessments are a proactive way of ensuring your business is outsourcing to the right supplier during the supplier onboarding process/pre-contract management.

What are Supplier Assessments?

A supplier assessment is the process of evaluating a supplier’s ability to meet a business’s needs. This can be about quality, cost, delivery, and reliability. It includes reviewing factors like the supplier’s capacity, financial stability, and compliance with legal and regulatory standards. This process helps businesses reduce risks, ensure consistent supply, and maintain strong supplier relationships.

Fundamentally, a supplier assessment is made of two key concepts: segmentation and materiality.  These elements evaluate the criticality of a supplier’s role within the organisation’s operations and guide strategic decision outcomes in vendor management.

This blog explores supplier assessments, the process for analysing your potential suppliers through segmentation, materiality and the critical outsourcing functions within financial services.

Streamlining Supplier Assessments: Segmentation and Materiality

The supplier assessment process begins with segmentation and materiality analysis. While both processes can be unified under one assessment mechanism, it’s important to recognise that the criteria for identifying critical suppliers will vary based on business structure and market approach.

Segmentation categorises suppliers based on their importance and impact on the operations. It evaluates whether a supplier’s contributions significantly influence how the business delivers products or services to the market. Within supplier segmentation, key questions are raised such as:

• What percentage of the business’s offerings rely on the supplier’s products or services?
• Can these components be easily sourced from alternative suppliers?
• Does this supplier provide unique or critical components that would be difficult to replace?

For example, if a supplier is the sole provider of a specialised product essential to the company’s service delivery, they would be classified as critical. Conversely, a supplier with readily replaceable goods or services might be categorised as less important.

Materiality and Critical Functions

Materiality assessments focus on the criticality of outsourcing functions, especially those deemed essential for regulatory compliance or operational continuity. Financial services organisations must assess whether a supplier plays a key role in maintaining core business functions or complies with regulatory requirements, such as those set out by the PRA (Prudential Regulation Authority) or EBA (European Banking Authority).

Several key factors should be considered when evaluating a supplier’s materiality:

• Regulatory Alignment: Does the supplier provide services that are legally required? Are they performing functions that need authorisation by a regulatory body?
• Operational Impact: Could a failure by the supplier significantly disrupt your internal controls or core business lines?
• Market and Geopolitical Risks: Assessing geographical factors is crucial. For example, logistics, political stability, and local economic strength can all impact the supplier’s reliability.
• What is the financial risk associated with supplier disruptions? Consider the cost of delays in acquiring materials, potential lost revenue, and broader economic factors that might heighten these risks.

While a supplier’s financial spending may appear a straightforward indicator of importance, it doesn’t always equate to criticality. For example, a small supplier may provide a unique service or operate in a critical market, making them strategically important regardless of financial metrics.

Key Metrics for Supplier Assessment

Several additional factors come into play when conducting a thorough supplier assessment:

• Lead Time: How quickly can materials or services be sourced from the supplier? Extended lead times may elevate a supplier’s criticality.
• Supplier Dependability: Consistent quality, on-time delivery, and responsiveness to issues are indicators of a strong supplier relationship.
• Legal and Regulatory Dependencies: Compliance with regulations, such as GDPR and cybersecurity requirements, must be evaluated.
• Relationship and Communication: Strong collaboration with suppliers can mitigate risks and enhance operational resilience.

Moreover, evaluating the amount of critical business data held by the supplier is essential for assessing cybersecurity risks and ensuring GDPR compliance. Supplier data breaches can expose an organisation to significant reputational and legal risks, so understanding these dimensions is key.

Once segmentation and materiality factors are understood, businesses can use structured assessments to classify suppliers.

In summary, the assessment for segmentation and materiality encompasses a comprehensive evaluation of various factors to determine suppliers’ criticality and inform strategic decision-making in supplier management.

Optimising Supplier Management: Differentiating Segmentation from Materiality and Critical Functions in Financial Services

Supplier Assessment in financial services demands a thorough evaluation of segmentation and materiality factors. These structured assessments allow businesses to classify suppliers based on their criticality, helping guide strategic decision-making. By understanding a supplier’s importance and their role in business operations, organisations can mitigate risks, make informed decisions, and ensure compliance with regulatory standards.

However, the process is far from one-size-fits-all. Each organisation must refine its approach to reflect its unique operational landscape, considering factors such as market risks, cybersecurity concerns, and the strength of supplier relationships. A holistic, tailored assessment process is key to effectively managing the supplier base and fostering long-term operational resilience.

Learn how to navigate supplier onboarding and third-party assessments, by reading our whitepaper. The paper includes a FREE template for your next supplier assessment for Material Outsourcing, Segmentation, and a combined Segmentation and Materiality assessment.

Download Now