How can the heavy industry sector minimise third-party risk?

Third parties are essential to the success of the heavy industry sector, but companies must implement strategies to safely manage the many risks they carry.

1. Third parties are essential to the success of the heavy manufacturing sector but can introduce risk into supply chains.
2. These risks can take many forms, ranging from operational, integrity- and identity-related to data, cyber, ESG, financial and reputational.
3. Companies in the sector need to implement well-designed strategies to identify, mitigate and manage the full range of risks that may be present in global supply chains.

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Third parties and heavy industry

The heavy manufacturing sector, or heavy industry, is responsible for the production of large industrial items and typically serves other businesses and industries, as well as governments.

Capital-intensive in nature, the industry typically comprises companies with extensive physical footprints engaged in large-scale production, such as shipbuilding and locomotive manufacturing.

Given the nature of the sector, most products are custom-built and rely heavily on third-party supply networks to deliver the raw materials and specialised services needed to complete each new project.

These networks are fundamental to the operation of the sector but can also introduce new and unexpected risks. Sector participants, therefore, need to be able to identify and mitigate a range of different potential risks.

Refinitiv Third-party risk: Make sure all your business relationships are built on solid foundations.

Identifying key risks

Our expert talk identifies and discusses some of the key risks that impact the sector, including:

• Integrity risk, which is a key concern in heavy manufacturing. Regulatory obligations around supply chain due diligence are rising, and there is a growing expectation for companies to understand the operations of both their suppliers and their suppliers’ suppliers.
• Identity risk – the risk that an individual is not who they claim to be or that the ultimate beneficial owner (UBO) of an entity is unknown – can be a concern in the sector.
• Data and cyber risk can be substantial. Most products are made to order following specific design plans and this makes the adequate protection of data and intellectual property crucial.
• Environmental, social and governance (ESG) risk continues to attract global attention. Sector participants must ensure that raw materials are responsibly sourced and that third parties are fully compliant with all regulations relating to, for example, the environment, modern slavery, the protection of human rights and more.
• Financial risk is always present, but the capital-intensive nature of heavy manufacturing intensifies this risk.
• Operational risk, which can quickly escalate if, for example, a supplier is unable to deliver raw materials on time. Such disruptions cause ripples throughout the supply chain.

All of the risks outlined above can raise reputational risk levels since compliance breaches or links to illicit activity anywhere in the supply chain can have substantial consequences.

It is typically the recognisable brand within the chain that suffers the brunt of reputational damage.

Refinitiv Due diligence solutions: With over two decades experience serving the global due diligence market, we offer a range of due diligence services to help organisations manage and mitigate risk.

Steps to an effective risk management strategy

When building an effective strategy to manage these risks, there are certain key steps that companies in the sector should follow, including:

1. Screening
   Screening is an essential first step and should be conducted both at the time of onboarding a new third party and on an ongoing basis since a third party’s risk profile changes over time. Thorough screening forms part of a best practice strategy to manage third-party risk and can help identify links to Politically Exposed Persons, financial crime and other illicit activities. Companies should also screen their third parties (and relevant owners) for sanctions risk, a growing concern in light of the exponential growth of sanctions over the past few years.
2. Due diligence
   Where screening provides an expedient and cost-effective way to quickly understand a third party’s potential risks, companies should also carry out thorough due diligence on high-risk entities and individuals. Conducting due diligence also allows companies to better get to know a third party, as it provides detailed information about the third party. As such, due diligence reports augment screening solutions, which combined provide a risk-based approach to help decide whether to engage or reject a third party.
3. Include ESG insights
   Given the growing importance of ESG-related matters on the world stage, ensuring ESG compliance and understanding the ESG status of each third party in heavy manufacturing supply chains is key. Failure to do so can not only result in regulatory action but also increasingly in costly reputational damage. We offer a range of market-leading solutions that can enable companies to manage third-party risk efficiently. Our trusted data and leading-edge technology can power effective risk management strategies and help firms in the heavy manufacturing sector to identify, mitigate and manage the full range of risks that may be present in their global supply chains. Read the full expert talk here.