Know Who You Are Doing Business With
APICS Magazine – 2018
By Charles Thomas
Transparency in global supply chains is vital. Without it, it’s impossible to anticipate and manage supplier risk, minimize supply chain disruptions, prevent litigation, and protect your brand. Unfortunately, for years now, global supply chains have been a bit of a murky business. As the impact of the Foreign Corrupt Practices Act ripples across the globe — alongside increasing antibribery and corruption regulation and enforcement in many Organisation for Economic Co-operation and Development (OECD) countries — the pressure for supply chains to be transparent continues to mount.
Many companies in the retail, telecommunication and technology sectors have lagged in getting up to speed with antibribery and corruption compliance, especially when compared to some in the financial and industrial sectors. Businesses that do not have strong and effective third-party compliance processes can face multimillion-dollar fines. Furthermore, revelations of corruption erode consumer trust — which, once lost, is tough to win back.
The risks of third-party relationships
Whenever there is corruption within a supply chain, it means the honest money that is being invested is likely going to be used for something bad. Consider, for example, what happened to Rolls-Royce PLC when the U.K.’s Serious Fraud Office found that the world-renowned engineering firm failed to prevent bribery in China, India and other markets. The wrongdoing included payment of large sums of money and gifts of luxury cars to intermediaries in connection with multimillion-dollar contracts in these countries. Significant capital was wasted on bribes, and, in the end, Rolls-Royce was fined more than $800 million. Add to that the potential price of internal investigations and the damage that comes with decreased employee morale and customer confidence, and the total cost of corruption in a supply chain can top billions of dollars.
Lack of transparency also can devalue a business on the stock market. Revelations of a bribery investigation often shock a company’s stock price, as investors worry about the hidden risks of mismanaged capital and potential fines. Likewise, corruption scandals can dissuade socially conscious investors from investing in a company. Impact investing is on the rise, as more and more people today expect organizations to be transparent about their environmental, social and governance impacts. According to the Global Sustainable Investment Alliance, more than $22 trillion of assets were managed under responsible investment strategies in 2016 — an increase of 25 percent compared to 2014.
Turn compliance into an advantage
Transparency in the supply chain goes beyond eliminating risk. It also can be a great opportunity to be more competitive in the global marketplace. For example, in recent decades, a number of Asia-Pacific countries have received bad press for human rights violations and corruption. As a result of the perceived brand and reputational risks, many organization leaders in developed countries have become more skeptical about doing business in these regions.
To counteract this, some Asia-Pacific companies are turning compliance and ethics to their advantage by taking the appropriate steps to comply with the same requirements as the companies to which they sell. For instance, Japanese chemical and cosmetics company Kao Corporation promotes the fact that it is one of the most compliant and ethical businesses in the world. Wearing transparency and compliance as a badge of honor helps soothe partner and investor concerns about corruption and human rights issues.
This concept also applies to organizations in developed countries that are looking to do business in higher-risk nations. If a German manufacturer wants to sell its goods and services in China, for instance, it is equally important to prove to the Chinese market that it is an ethical supplier because transparency in third-party relationships and compliance with the Chinese Criminal Code speeds up engagement with potential buyers.
Practical due diligence
There is no doubt that better due diligence on third-party relationships improves transparency within the global supply chain. Yet the fact is, for many organizations — particularly those with tens of thousands of vendors — conducting this due diligence is a massive challenge. Just running a simple internet search on each vendor would take countless working hours, and, even then, the results might not be able to ensure compliance with antibribery and corruption legislation. Hiring an external law firm to conduct the due diligence is a good option, but costly.
So, how can you guarantee transparency within your supply chain without wasting time and money? The key is organizing your supply base by risk factors and tiers. Following are some strategies to help you accomplish this objective:
- Begin by segmenting your suppliers based on their relative risk.
- Create formal categories, including political, economic, societal, technical, legal and environmental. (See Figure 1.)
- Evaluate the importance of the product being supplied and the time it would take to switch vendors.
- Focus on collecting the right data and getting the type of information that can make a positive impact on the whole organization.
In addition, you may consider using an ongoing monitoring program. This is a solution that automatically notifies companies if a third-party supplier is connected to criminal activity, is politically exposed, or poses a greater risk of corruption and bribery. These global databases also can link information, including names and addresses, to the right people and entities so users can verify the true identities of the suppliers they are working with.
Clearing the waters
We are facing some of the greatest global supply chain challenges in history. In this environment, accurate, timely, third-party supply chain data is a true competitive advantage because it enables transparent business practices. Transparency is an essential method for protecting your organization from the risk of financial and reputational recriminations and enabling heightened operations.