By Sanday Chongo Kabange and Rich Hoffecker, The Red Flag Group®
Over the last five years, organisations have begun to take compliance and integrity risks in the supply chain more seriously.
Traditional third-party risk-assessment programmes were focused on agents and resellers due to the substantial regulatory risks around bribery and corruption. Suppliers, however, were seen as only having an arm’s-length relationship, with little implications on the purchasing organisation if they engaged in nefarious business practices.
This perception has changed, though, in part due to the increase in regulatory scrutiny of these relationships, but primarily because of the significant impact bad actors in the supply chain can have on a company’s brand and reputation. With greater frequency we have witnessed major brands struggle to overcome the negative media attention brought on by misdeeds of a supplier, so companies can no longer ignore the fact that the integrity of a supplier must be considered during the supply chain onboarding process and throughout the relationship.
Ensuring integrity across an entire supply chain is complex. It requires extensive planning, the appropriate tools and expert resources to provide needed transparency without slowing the business down. Organisations are going to great expense to design, implement and staff their integrity assessment programmes, yet many overlook one of the most basic opportunities to make the process faster and more efficient: setting expectations with suppliers.
The standards that supply chain partners are held to should be no secret. Organisations should be explicit about what is and isn’t acceptable when it comes to things like interactions with government officials, ensuring the dignity of employees and being a good steward of the environment. This open dialogue will not only improve the chances that supply chain partners maintain compliance – there is also evidence to show that it will improve the effectiveness of budgets and resources invested in supply chain integrity programmes.
In this article we will explore how setting proper expectations about the integrity with which suppliers conduct business can reduce supply chain compliance risk and foster more effective business relationships.
Suppliers rarely start out with the intent to engage in suspect business practices; problems most commonly arise out of ignorance of the issues in their environment and a lack of understanding about how to prevent them.
Following are some of the common reasons why suppliers create integrity risks.
- Lack of awareness
Often supply chain partners are simply unaware of the integrity risks they create in their business interactions. For instance, in the Middle East and Africa it is considered normal for private entities to be owned by members of a royal family or public officials, as these persons of influence ensure easy access to certain privileges such as mineral rights or government permits. Although this may appear normal locally and is usually regarded as a status symbol, it can create significant risks for your company if one of these public officials misuses their influence to obtain a business advantage on your behalf. Suppliers must be made aware of how this potential integrity risk can affect your business. An upfront discussion about proper controls and oversight can help you implement proper protections.
- Lack of resources
The second-most prevalent cause of integrity and compliance issues with suppliers is the lack of resources dedicated to identifying risks and putting controls in place to mitigate those risks. Smaller organisations rarely have staff with the knowledgeable expertise required to define and implement compliance policies, deliver employee training programmes and put processes in place to assess the supply network. Even when there is a desire to conduct business with integrity, if there are no proper resources to build out an internationally-acceptable compliance programme, individual bad actors can take shortcuts that put your supplier, and ultimately you, at risk of significant regulatory and reputational damage.
- Lack of shared values
The final – and potentially the highest – compliance risk is if a supply partner simply does not share the integrity values of your company. This can be because the supplier is cutting corners to save on costs, or possibly because of a misalignment of cultural values. Many suppliers will engage subcontractors to work on your behalf without your knowledge and without conducting reasonable due diligence to identify and mitigate risks. Non-disclosure of such information may create risks for you in the event that a subcontractor is caught up in an integrity issue. Similarly, suppliers may not be transparent when disclosing their ultimate owners – some of whom may be politically-exposed persons or sanctioned parties. Other suppliers may simply conduct their business in ways that don’t conform with your values, cultures and business practices. In many cases, setting expectations for your supplier at the beginning will weed out the problematic suppliers so you can focus on partnering with those that present lower risks.
Building common values by setting expectations
Given these (and many more) reasons, it’s important to have a clear outline of your standards for your suppliers and your suppliers’ suppliers. Your integrity expectations in the supply chain shouldn’t start and end with your direct suppliers, but rather they must go across the entire chain: from primary contractors through to lower-tier suppliers. It’s in lower-tier suppliers where most misconduct occurs; as such, your expectations must get to the lowest supplier in your entire supply chain. Having well-thought-out and clearly-outlined requirements before each engagement will help you minimise risk exposure and maximise the value of your partnerships. It will also help you to develop better working relations as all parties involved will have a unified understanding of each other’s expectations.
Organisations must set proper guidelines for effective oversight of their partnerships with suppliers. Here are some tips that you can use to communicate and manage those expectations.
1. Get internal buy-in
All internal stakeholders that work with suppliers should fully understand your organisation’s values and be able to promptly flag and report any identified issues through established processes and procedures. All employees should be trained on your organisation’s integrity expectations so they can live, breath and preach these values to all suppliers they come into contact with.
2. Promote your supplier code of conduct
One of the most effective tools for communicating integrity values throughout the supply chain is to develop a supplier code of conduct. This simple document should incorporate your values, culture and code of ethics and conduct, ensuring expectations are clear as you enter into every deal. Promote your supplier code of conduct everywhere: on your website, in every proposal, and with every contract you negotiate. There should be no case where a potential supplier has not agreed to fully adhere to the values outlined in this document. If a supplier intends to subcontract out work on your behalf, the subsuppliers must also agree to your supplier code of conduct. Your suppliers are a representation of who you are, what you do and what you stand for; thus, your values must be adopted by your suppliers.
3. Be willing to walk away
It is important that you and your suppliers agree on common values as a baseline of your partnership. Walk away from suppliers that don’t subscribe to your values. Although this can be painful when business is at risk, the benefits of ensuring shared values can save you time and expense in the long run. Strict adherence must be enshrined in the supply chain and the lifeblood of your partnership.
4. Conduct frequent business reviews
Business does not remain static. Ownership and management can change often, but your values should be maintained throughout the term of the relationship. Quarterly briefings and business reviews with your suppliers are a great way for you to constantly review and assess their commitment to your values. Make your supplier code of conduct an essential discussion point at every opportunity you have to meet with a supplier so you can reaffirm their commitment.
5. Empower your suppliers
As previously discussed, many smaller suppliers do not have the knowledge or resources to track the political, cultural and social issues that can impact integrity risk. Partner with your compliance team to identify which changes in the business environment may increase the risks in certain suppliers, and share these details during your business reviews. Discuss the steps that can be taken to avoid situations where new risks may occur, and partner with the supplier on a plan to mitigate potential issues.
6. Use the power of purchase
The last resort, when confronted with a supplier that is unwilling or unable to continue adherence to your values, is to set expectations about the impact that may have on your relationship. The power of purchase should not be used as a stick, but rather as the natural consequence if you are unable to count on a supplier to do the right thing. When confronted with the options of a loss of business or a clear path to a sustained high-integrity relationship, most organisations will see the value in the latter.
In this article we have explored how setting expectations can be an effective tool for promoting compliance throughout your entire supply chain. Implementing these techniques is not the only step for driving compliance in the supply chain, but just one of many steps that can reduce risks at the onset of each supplier relationship as well as potentially lowering the long-term cost of building a high-integrity supply chain.
Once you have set your expectations, you will need to build trust among your suppliers and verify continued adherence to the agreed-on values. In our next article, ‘Trust but verify’, we will explore the tools and techniques for ensuring active oversight of supply-chain integrity.
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