Understanding the Importance of Vendor Risk Management

A successful medical equipment distributor serving hospitals and clinics across three states, with 85 employees and annual revenues of $ 132 million, had built a reputation for reliable, on-time deliveries. They had invested in their own business continuity planning, with backup systems, documented procedures, and emergency protocols.

When their operations manager, suggested they needed to audit their vendors' business continuity plans, leadership was sceptical.

"We've already done our continuity planning," said the CEO. "We're covered. Why do we need to worry about what our vendors are doing?"

The operations manager explained that 60% of their inventory came through a single logistics provider. "If that provider goes down, we go down with them. We should at least know if they have a continuity plan."

The CEO waved off the concern. "That logistics provider is a major company. They've been in business for fifteen years. They know what they're doing. We can't micromanage every vendor we work with. That's their responsibility, not ours."

The conversation ended there. The medical equipment distributor had more pressing concerns, like expanding into a fourth state.

Then unthinkable happened. The sole logistics provider suffered a catastrophic warehouse fire.

On a Friday evening in March 2020, a fire broke out at the logistics provider main distribution center, the same facility that handled all of medical equipment distributors inventory. The building was a total loss. Worse, logistics provider had no disaster recovery plan, no backup warehouse, and no alternative fulfilment arrangements.

The medical equipment distributor learned about the fire from a brief email Saturday morning: "Experiencing operational disruption. Will provide updates as available."

What followed was a nightmare. The medical equipment distributor had no direct relationships with the logistics provider suppliers, so they couldn't arrange alternative shipping. They had no inventory visibility beyond what the logistics provider, now-offline, system had provided. They had no alternative logistics providers vetted and ready to step in.

Hospital orders went unfilled. Emergency equipment requests couldn't be met. Critical supplies for surgical procedures never arrived. Within days, frustrated customers began switching to competitors who could actually deliver.

The CEO worked frantically to establish new vendor relationships, but proper vetting and onboarding takes weeks. The logistics provider, facing its own survival crisis, offered little communication and no timeline for recovery.

The financial impact was immediate and severe. Two major hospital system contracts were terminated for failure to deliver. Smaller clients simply stopped ordering. The medical equipment distributor revenue dropped 65% in the first month. The company was forced to lay off thirty employees.

Three months later, the logistics provider announced bankruptcy. The medical equipment distributor had found alternative logistics partners by then, but the damage was done. They had lost half their customer base, and rebuilding trust in the healthcare industry, where reliability is paramount, would take years.

In a painful board meeting, the CEO acknowledged the oversight: "We planned for our own failures but never considered that our vendor's failure could destroy us just as effectively. We had no backup suppliers, no contractual requirements for their continuity planning, nothing. We were one fire away from collapse, and we didn't even know it."

The Hidden Vulnerability in Your Supply Chain

The medical equipment distributor story illustrates a critical blind spot in business continuity planning: third-party risk. Most companies focus exclusively on internal threats while ignoring that their operations are deeply intertwined with vendors, suppliers, and service providers.

Consider the dependencies most businesses have: 

• Logistics and shipping providers who handle product delivery.

• Cloud service providers who host critical data and applications.

• Payment processors who enable transactions.

• Suppliers who provide essential materials or inventory.

• Telecommunications providers who enable communication.

• Outsourced services from IT support to customer service.

  
  

A failure at any one of these third parties can halt your operations as effectively as a fire in your own building. Yet most companies have never asked their vendors a single question about business continuity.

Why Companies Ignore Third-Party Risk

Several factors contribute to this dangerous oversight:

Misplaced trust makes leaders assume that established vendors must have proper planning in place. In reality, many don't.

Complexity avoidance means companies shy away from the work of auditing multiple vendors. It feels overwhelming, so they don't start at all.

Contractual blindness leads companies to focus on service level agreements for normal operations while ignoring disaster scenarios entirely.

Scope creep concern makes leaders worry that vendor management will expand endlessly. They fear being responsible for auditing dozens of third parties.

Most dangerously, companies believe vendor failures are "not their problem." But when your vendor fails and you can't deliver to your customers, it absolutely becomes your problem.

Supply chain failure

The Reality of Third-Party Failures

Research shows that 60% of companies have experienced a business disruption caused by a third-party failure. The average cost of a third-party incident is $ 1.2 million, and recovery time averages six weeks.

The companies that weather these disruptions share common characteristics: they identified critical vendors, assessed vendor continuity capabilities, maintained alternative supplier relationships, and had contractual requirements for business continuity planning.

What Your Third-Party Continuity Plan Needs

An effective third-party business continuity strategy includes:

Vendor criticality assessment

Identify which vendors are critical to operations. Ask yourself: if this vendor failed tomorrow, how long could we operate? Which vendors have no easy replacement?

Continuity requirements in contracts

Include business continuity obligations in vendor agreements. Require vendors to maintain continuity plans, provide proof of backup systems, notify you of incidents within specific timeframes, and participate in joint continuity testing.

Regular vendor audits

Review critical vendors' continuity plans annually. Ask for documentation of their backup systems, recovery time objectives, and recent test results.

Alternative supplier relationships

Maintain relationships with backup vendors for critical services. This doesn't mean paying for duplicate services, but it does mean having vetted alternatives you can activate quickly.

Communication protocols

Establish how vendors will notify you of disruptions and how frequently they'll provide updates during incidents.

Exit strategies

Document how you would transition away from each critical vendor if necessary. What data would you need? How long would migration take? What's the process?

Start Now

If your business continuity plan doesn't address third-party vendors, you're not actually prepared for the most likely source of disruption.

Begin by listing your top ten vendors ranked by operational criticality. For each one, ask: Do they have a business continuity plan? Do we have a backup option? How long could we survive if they went offline tomorrow?

Start with your most critical vendor. Request a copy of their business continuity plan. If they don't have one, that's a serious red flag that should influence your risk management strategy. Consider adding continuity requirements to contract renewals.

Identify at least one alternative supplier for your most critical vendor relationships. You don't need to split business between them, but you need to know who you'd call in an emergency.

Third-party business continuity planning isn't about controlling your vendors. It's about protecting your business from dependencies you didn't fully understand. In today's interconnected business environment, your continuity plan is only as strong as your weakest critical vendor.

Don't let someone else's lack of planning become your company's crisis. The question isn't whether you can afford to audit your vendors' continuity capabilities. It's whether you can afford to discover they have none when it's already too late.