Written by Zahra Saeed
Posted on 05/02/2015

Does your supplier check out? Due diligence within SCM

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As we arrive at the second anniversary of the 2013 horsemeat scandal, it might be a good time to review the due diligence checks your company has in place to ensure that your suppliers – food-related or otherwise – are meeting the required legal and ethical standards. And of course making sure that they are doing all they can to avoid or mitigate risk.

At the time of the infamous scandal, accountancy firm Ernst & Young carried out a survey that revealed that only 48 per cent of UK companies carry out due diligence on their supply chain. Even more shockingly, 30 per cent of firms said that they did not carry out any checks whatsoever and 14 per cent didn’t even know the meaning of third party due diligence. To ensure that the supply chain management system you have in place is ethically and economically robust, make sure you’re taking the following checks into account.

Don’t forget the ‘third tier’ suppliers

According to José Copovi King, products and services director at supply chain data sharing platform Sedex, companies tend to apply substantial due diligence when it comes to the first and second tiers of their supply chain, but then lose momentum further down the process. This is particularly dangerous as a recent report conducted by the not-for-profit organisation showed that the rate of non-compliance increases the further down the supply chain you go. King explains:

“While the sample in the report achieved an engagement rate of 44.5% with the first tier of suppliers and 47% with the second tier, engagement dropped to just 7.3% of third tier suppliers. On average, these third tier supplies raised 27% more non-compliances than the first tier, meaning that companies often have little or no visibility of where the real risks in their supply chain lie.”

Conducting due diligence checks all the way down your supply chain is especially important if your business is consumer-facing, says King. Such companies often also have the best processes in place as a result, and he highlights Marks & Spencer and Unilever as brands that stand out: “Marks & Spencer’s Plan A has been held up as an industry gold standard and Unilever’s Sustainable Living Plan has achieved significant progress.”

Establish and monitor your key performance indicators (KPIs)

The importance of maintaining transparency across your supply chain should work both ways, and part of this should involve your suppliers being fully aware of the key performance indicators (KPIs) you have established for them. Not only will this help you to measure progress better from your partners, but will also provide visibility on both sides when it comes to your suppliers’ contribution to your business strategy. You might be reluctant to entrust a third party with this potentially confidential information about your business, but closer collaboration can ensure a clearer understanding of each other’s needs and a better working relationship in the long term.

Equally important to establishing the KPIs for your supply chain partners is monitoring them, so make sure to implement a strong structure to systematically check that they are being met.

Know your legal obligations

Remember that ignorance of the law is no excuse, so it’s essential to know your legal obligations when it comes to auditing your supply chain. For instance, you are required under the UK Bribery Act to be able to demonstrate that you have adequate procedures in place to address supply chain risks. Failure to do so could result in a hefty fine or even a prison sentence.

Similarly, if you are working with a supplier based abroad, you should be aware of the legal requirements of the country in question, particularly when it comes to health and safety, employment and environmental laws. At the same time, products bought from the supplier should adhere to the required UK standards.

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