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Supply Chain Due Diligence: Reducing Risk with Information

What is due diligence and how to conduct it properly? 

Simply, due diligence is the process of investigating the different tiers and partnering companies of your supply chain. In other words, making sure that the potential partnering company is appropriate and doesn’t involve risks. Find out what risks can impact your business and how to stay ahead of the curve, leveraging all available data sources for better decisions.

As Supply Chains grow in complexity, the variety of risks involved in the supply chain is increasing and the role of rigorous due diligence becomes more crucial for companies. One of the outstanding risks for modern supply chains is the growing number of third parties involved. Namely, the more parties are involved in the supply chain, the higher is the risk that one of them is involved in illegal or unethical practices, such as corruption, fraud, money laundering, human trafficking, slavery, other violation of human rights, or environmental damage. The existence of such entities that are involved in illegal activity in the companies’ supply chain could lead to breaking international anti-corruption and bribery regulations. Except for the legal consequences, such cases usually lead to severe reputational damages to a company. Over time the risk of third parties involved in illegal actions isn’t declining. According to Global Financial Integrity, levels of trade-related illicit fund flows have barely changed from 2006 to 2015, and IFF remains a significant feature of global trade. Furthermore, the commitment of high-level management to managing supply chain risks has fallen from 41% in 2017 to 26% in 2019, according to a BCI report

With all that said, we understand the importance of due diligence and risk management across all industries. But what is supply chain due diligence and how can we effectively conduct it?

Supply chain due diligence or third-party due diligence is the process of interrogating all third parties of companies’ supply chains. Third-party could be anything, such as distributors, suppliers, consultants, and even clients. For a sufficient completion of the due diligence process, it is important to conduct third-party due diligence up and down the supply chain. Any external entities are to be considered third-party, any third party could potentially be a corruption risk. Eventually, a company should be able to make knowledgeable decisions in regards to possible partners by conducting proper supply chain due diligence. 

Effective due diligence could be split into two main parts. 

1) Due diligence on the entry-level 

When investigating a potential party to be added to the chain, the entry-level is crucial. Offering a potential cooperator to fulfill a survey and provide the internal data might be helpful to indicate the required level of clarity. The preliminary data might offer a framework to continue with the second part of effective due diligence, namely 

2) Ongoing monitoring of the party 

Establishing a monitoring system is crucial in due diligence and overall management of the supply chain. As management and strategies of the partners might face certain changes, which might not align with the ones of the company in point. 

One of the key factors in establishing the entry survey and monitoring systems for the third parties is the level of risk of the specific company or its overall sector. Trading with more risky industries requires assessing a higher volume of details on the party’s operations. 

It is recommended to go through this checklist to make sure that third parties comply with the requested values:

1. Assessing your chain of third parties 

The typology, industries, and strategies of the parties involved in trade with your company could be accessed easier if doing their evaluation becomes a typical business process or the one which is included in the SCM system. Moreover, leading a portfolio of third-parties will support the process of defining due diligence suitable individually for your NGO’s SCM. 

2. Understand the risks involved in third-party operations 

Contingencies that the suppliers face might provide a better perception of the potential risk to occur concerning your supply chain. 

3. Find an equilibrium between processed risk and performed due diligence on a party 

From points 1 and 2 it might be concluded, that each level of risk should be met with a tailored set of actions. 

The basic levels of accessing the third-party risks are: 

  • Screening the databases – checking the involved party for non-compliance with your requirements through global databases of certain violations might be a useful preliminary filter for cooperation. 
  • Reviewing the publically available sources – Internet search on the party might indicate the news, achievements, conflicts, and accusations, in which that party has been involved in. 
  • Reviewing the Public Record – accessing the basic criminal history of the party, overseeing the public violations conducted by the party. 
  • Analyzing the reputation of the party – certain prejudices and stereotypes of consumers and the market about the company might have a strong underlying basis. Assessment of the nature of the ‘rumors’, such as a weak reputation of a party as an employer due to unethical business governance, might add to the list of potential risks to be expected from this company. 

After establishing a basis for the supplier analysis, it is important to design a system of ongoing monitoring and notification in case of a mismatch between the party’s actions and our corporate values. 

Currently, corporate abuse is one of the biggest subversive factors for NGOs. The need to introduce a moral jurisdiction in working with resource suppliers and other third-parties. Supply is power, specifically in the monopolistic market. This factor plays a role of a crucial reason why the companies need a thoughtful due-diligence system imposed on their supply chain. Suppliers should comply minimum with the basic human rights provision, and, moreover, have a strong reputation, which might be an asset for the initial company, rather than a risk. 

One of the comprehensive frameworks for supply chain due diligence has been created by the OECD. Specifically, this framework will be applicable in sectors of high risk. 

The OECD risk management system of supply includes the following key points: 

  • Establishing a framework for dealing with suppliers of conflict minerals 
  • Proactively conduct the supply chain risk assessment in a reasonable ongoing way 
  • Proactively deal with identified issues 
  • Conduct independent due diligence of suppliers and access their due diligence approach and findings 
  • Provide regular reports of the due diligence findings to support the efficiently and morally done SCM and risk management

To initiate active due diligence of the supply chain in your company, consider engaging professional parties into the due diligence of your supply chain. One of the reasons to outsource the risk management of SCM due diligence is that the Supply Chain Management system offers lower costs than allocating an individual department for this purpose. 

We at Prewave offer a historical data for a reputational and operational risk analysis of your current and potential suppliers. Make your Supply Chain Management more resilient using AI and an instant notification system, to make sure to stay ahead of risks and ensure your partnership won’t harm your companies reputation. Go beyond simple financial and self reported data while evaluating suppliers. The full picture is only one click away.

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