Lessons from other industries

Any ERP

ExplanationIntroductory10 min read

In short. Regulated industries have spent decades learning to manage third parties: banks run a life cycle from planning to exit, healthcare and defense push obligations down the chain in contracts, food and pharma verify suppliers instead of trusting them. A distributor can borrow the practices without the regulatory weight, and may already have them flowed down by its customers.

Written for Leaders, finance and operations, administrators.

Wholesale distribution has no single regulator telling it how to manage suppliers, carriers and software vendors, but many industries do, and they have written down what works. Banks run third parties through a formal life cycle and hospitals sign business associate agreements. Food and drug companies verify their suppliers rather than trusting them, and defense contractors flow security clauses down to every subcontractor. Below we take one lesson from each industry and say what a distributor can borrow. Some of these obligations may already reach you through the customers you sell to.

The lessons at a glance

Industry	Mechanism	Distributor lesson
Banking	Formal third-party risk life cycle	Manage vendors from planning to exit, scaled to how critical they are
Healthcare	Business associate agreements	Put data protection duties in the contract, and make them flow to subcontractors
Automotive	Tiered supply chains and supplier development	Know your suppliers' suppliers, and help key suppliers improve
Retail	Vendor compliance programs and chargebacks	Write down what you expect of suppliers and price the cost of failure
Software and cloud	Shared responsibility and dependency inventories	Know which half of the job is yours, and what your software is built from
Government	Standardized cloud authorization	Assess once to a standard, then reuse the result
Aerospace and defense	Flowdown clauses and certification	Obligations you accept travel to everyone you hand the work to
Food	Supplier verification programs	Verify suppliers based on hazard, and document it
Pharmaceuticals	Quality agreements with contract manufacturers	Define who does what in a separate, specific agreement

Banking: a life cycle, scaled to risk

In June 2023 the Federal Reserve, FDIC and OCC issued joint Interagency Guidance on Third-Party Relationships: Risk Management (Federal Reserve SR 23-4, OCC Bulletin 2023-17, FDIC FIL-29-2023, retrieved 2026-09-28). It replaced each agency's earlier guidance with one principles-based document. In paraphrase, it says a bank's use of third parties does not reduce its responsibility compared with doing the work in-house, that risk management should match the risk and complexity of each relationship and that relationships run through a life cycle.

Stage	What banks do	What to borrow
Planning	Decide whether to use a third party at all, and what could go wrong	Write down the job and the risks before looking at vendors
Due diligence and selection	Check the vendor's finances, controls, experience and reputation	Scale the check to how critical the vendor is. A 3PL gets more than an office supply vendor
Contract negotiation	Cover performance, audit rights, data, subcontracting, termination	Use a standard list of terms you always ask for
Ongoing monitoring	Review performance and risk through the relationship	Annual review for critical vendors, at renewal for the rest
Termination	Plan the exit, recover data, move the work	Know how you would leave before you sign

The key idea to borrow is criticality. Banks apply more rigor to relationships that support critical activities. A distributor can sort its vendors into three tiers and spend its limited time on the top one. Third-party risk management shows a right-sized version.

Healthcare: data duties written into contracts

Under the HIPAA Privacy Rule, a covered entity (a provider, plan or clearinghouse) may share protected health information with a business associate, a vendor that handles it on the entity's behalf, only with satisfactory written assurances, usually a business associate agreement (45 CFR 164.502(e) and 164.504(e), eCFR, retrieved 2026-09-28). The business associate must in turn get the same assurances from its own subcontractors, so the duty travels down the chain.

What healthcare does	What to borrow
Names the kinds of vendor that must sign data terms	Decide which of your vendors see sensitive data (customer, employee, bank) and require data terms from all of them
Specifies what the agreement must cover: permitted uses, safeguards, breach reporting, return or destruction at the end	Use the same headings in your own data terms, even where no law demands it
Makes the vendor obtain the same terms from its subcontractors	Ask each vendor to name its subprocessors and confirm they are bound by equivalent terms

If you distribute medical products, a healthcare customer may ask whether you are a business associate. Most product sales do not make a distributor one, but services that handle patient information can, so take the question to counsel.

Automotive manufacturing: tiers, development and fragility

Automotive makers organize suppliers in tiers: tier 1 supplies the vehicle maker directly, tier 2 supplies tier 1 and so on. Just-in-time delivery cuts inventory cost but leaves little buffer, and the semiconductor shortage that began in 2020 showed how a shortage several tiers down can idle assembly plants. The industry answer has been two practices: mapping the tiers beneath direct suppliers, and supplier development, where the buyer invests in improving key suppliers' quality and capacity.

What automotive does	What to borrow
Maps suppliers several tiers deep for critical parts	For your top lines, ask where the manufacturer sources key components and how many plants make the product
Invests in supplier development rather than switching	Share forecasts and sell-through with key suppliers so they can plan, and treat fill-rate problems as joint work
Balances just-in-time savings against fragility	Set safety stock for single-source items by supply risk, not only demand variability
Uses a common quality standard for suppliers	Ask key suppliers what quality system they certify to, and keep the certificate on file

Retail: vendor compliance programs

Large retailers publish vendor compliance manuals that spell out labeling, packaging, advance ship notices, routing and delivery windows, and they charge suppliers fixed chargebacks for each failure. Retailers that offer drop ship also set rules for how suppliers ship directly to consumers in the retailer's name.

What retail does	What to borrow
Writes down every requirement in one manual	Publish a short supplier requirements guide: labels, ASNs, packing lists, lead times, how to confirm orders
Prices each failure with a chargeback	Track the cost of supplier failures (receiving rework, missed shipments) even if you never charge it back, and bring it to supplier reviews
Measures on-time and complete delivery	Score key suppliers on fill rate and on-time delivery. See fill rate and OTIF
Sets drop ship rules	If suppliers drop ship for you, agree packing slip branding, tracking data and returns handling in writing

The lesson cuts both ways. If you sell to large retailers, you are the one receiving the chargebacks, and your ERP, EDI provider and warehouse must meet their manual.

Software and cloud: shared responsibility and dependencies

Cloud providers and their customers split security duties. The provider secures the infrastructure, and the customer secures its own users, configuration and data. CISA's Cloud Security Technical Reference Architecture (version 2, June 2022, retrieved 2026-09-28) covers this shared model for agencies adopting cloud. The software industry also learned, most sharply with the Log4j vulnerability disclosed in December 2021, that products are built from open source components most buyers never see. CISA promotes the software bill of materials (SBOM), an inventory of those components, as a way to know what you are running.

What software and cloud do	What to borrow
Publishes a shared responsibility matrix for each service	For each hosted or SaaS system, write down which security tasks remain yours: users, access reviews, configuration, data
Inventories software components through SBOMs	Ask critical software vendors how they track and patch their own dependencies, and how fast they respond to a major vulnerability
Treats a vulnerability in a common component as everyone's problem	When a major vulnerability is in the news, have a list of vendors to ask "are you affected?" the same day

See security and data sharing with vendors.

Government: assess once, reuse many times

FedRAMP, run through the U.S. General Services Administration, standardizes how cloud services are assessed and authorized for federal use, and its marketplace lists authorized services and the agencies that authorized them so others can reuse the work. The idea is to avoid every agency assessing the same provider from scratch.

What government does	What to borrow
Assesses providers against one standard	Ask for existing independent reports, such as a SOC 2 report, instead of sending a long custom questionnaire
Reuses authorizations across agencies	Keep your vendor assessments on file and reuse them at renewal, updating only what changed
Publishes what has been authorized	Keep an internal list of approved vendors so departments do not buy the same kind of tool twice

Aerospace and defense: flowdown

Defense contracts carry clauses that the contractor must include in its own subcontracts, called flowdown. DFARS 252.204-7012 requires contractors to protect covered defense information and report cyber incidents, and to flow the clause to subcontractors whose work involves that information. The Cybersecurity Maturity Model Certification (CMMC) program adds assessment. Its 32 CFR Part 170 program rule took effect December 16, 2024. The DFARS rule that puts CMMC into contracts took effect November 10, 2025, with flowdown requirements for subcontractors and a phased rollout (Federal Register, retrieved 2026-09-28).

What defense does	What to borrow
Flows contract obligations down to every tier that touches the work	Before you accept a customer requirement, check which of your own vendors it must reach, and whether they will agree
Requires evidence through certification	For critical vendors, ask for third-party evidence of controls, not a self-declaration
Phases requirements in over years	Give your own vendors notice and time when you add new requirements

If you supply defense contractors, even with commercial products, read your purchase order terms closely. Flowdown clauses often arrive in the fine print, and CMMC requirements can reach suppliers that handle controlled information.

Food: verify suppliers based on hazard

The FDA Foreign Supplier Verification Programs (FSVP) rule under the Food Safety Modernization Act (final rule published November 27, 2015, retrieved 2026-09-28) sets out what food importers must do. They analyze hazards and evaluate each foreign supplier's performance and risk. They verify suppliers through methods such as on-site audits, record review or sampling and testing, and take corrective action, including dropping a supplier. Domestic food facilities that rely on suppliers to control hazards run a similar supply-chain program under 21 CFR Part 117 Subpart G.

What food does	What to borrow
Starts from the hazard, then chooses how hard to verify	Match your supplier checks to what could go wrong with the product: safety, counterfeit, regulatory
Documents verification activities	Keep supplier certificates, audits and test results in one place, tied to the supplier record
Requires corrective action when a supplier fails	Have a written path: warning, improvement plan, suspension, removal
Depends on traceability	Lot tracking lets you act fast when a supplier recalls. See lot and serial traceability

If you import food or food contact products, FSVP may apply to you directly. Confirm with counsel.

Pharmaceuticals: a quality agreement for each contract manufacturer

Drug companies that outsource manufacturing remain responsible for product quality. The FDA guidance Contract Manufacturing Arrangements for Drugs: Quality Agreements (final, November 2016, retrieved 2026-09-28) describes how owners and contracted facilities should divide that work. They define which party is responsible for each quality activity in a written quality agreement, separate from the commercial contract.

What pharma does	What to borrow
Separates the quality agreement from the commercial contract	Keep operating terms (who counts, who labels, who handles returns) in a schedule that operations can read and update, apart from price and legal terms
Assigns each activity to one party	For every 3PL or outsourced process, list each task and name the party responsible. Blank cells are where failures happen
Keeps the owner accountable for outsourced work	Treat a 3PL's error as yours in front of the customer, and manage it that way

Across every industry

The same few practices recur across these industries.

Common practice	Where it shows up	Distributor version
Tier vendors by criticality	Banking, defense, food	Three tiers: critical, important, routine
Put duties in writing, specifically	Healthcare, pharma, defense	Data terms, service levels, a task list per outsourced process
Make duties flow down	Healthcare, defense	Ask vendors to bind their subcontractors to the same terms
Verify, then trust	Food, defense, government	Independent reports, certificates, reference checks
Plan the exit	Banking	Data export and transition terms before signing
Know the chain beneath	Automotive, software	Ask who your vendors depend on. See fourth parties and concentration risk

The FTC Safeguards Rule (16 CFR 314.4) applies similar thinking outside banking for the non-bank financial businesses it covers: select service providers that can protect customer information, require safeguards by contract and periodically assess them.

Questions to ask yourself

Which of our customers are regulated, and what have their contracts flowed down to us?
Which of those obligations have we passed on to our own vendors?
Do we tier vendors by how critical they are, or treat them all the same?
For each outsourced process, is there a written list of who does what?
Could we name, today, the vendors to call if a major vulnerability or recall hit?

Red flags

Customer contracts signed with flowdown clauses nobody has passed to vendors.
The same long questionnaire sent to every vendor, from the 3PL to the coffee service.
Supplier certificates that expired years ago still on file as current.
Outsourced work with no written division of tasks.

Putting it into practice

Pull your top customer contracts. List any security, quality, traceability or data clauses they require of you and your subcontractors.
Tier your vendors. Critical, important and routine, using the landscape in the third-party landscape for distributors.
Borrow one practice per quarter. Start with the banking life cycle for critical vendors, then data terms, then a task list for each outsourced process.
Keep evidence in one place. Certificates, SOC reports, audit results and contracts, tied to the vendor record, with renewal dates.