Checking on Supplier Compliance in Challenging Times
Procurement’s role within an organization has changed dramatically over the past couple of decades. Once primarily considered a tactical function focused on pricing and inventory management, procurement has now taken on a much more strategic role. Pricing is still an essential part of the job as is managing inventory; however, the role has expanded to include oversight of asset utilization, confirmation of supplier compliance, and provision of data and analytics-backed insights to senior management. Risk assessment has also become a major concern and that concern now is being tested as never before.
Last month, my colleague, Jennifer Ulrich, posted a blog discussing the need for diversity in the supply chain and how COVID-19 is presenting unique challenges to fulfilling that goal. But what challenges does the pandemic pose for procurement’s regular oversight of the supply chain including shortages, regulatory compliance, forced or child labor, and any product-borne illnesses or defects? What is even more challenging is conducting this oversight, globally, while working from home rather than in an office. Fortunately, the emergence of digital supply networks has enabled procurement professionals to perform their tasks, anywhere they might be. But more than a change in where one works, this significant crisis has proven that procurement needs to reconsider a number of long-standing beliefs and behaviors.
Considering supply chain challenges
Regardless of the situation, procurement still needs to focus on issues like pricing, inventory management, contracts, and advantageous terms. Yet, faced with “black swan,” effects (an unpredictable global event with potentially severe consequences), the legacy linear procurement practice is no longer viable. We need to be more flexible than we may have been in the past and need to build in both resilience and agility into our supply chain. It is so easy to become complacent and that can mean that when a catastrophe occurs, we are not prepared to react quickly.
As I said earlier, we are fortunate that digital supply networks help us address the many challenges we face, both as part of the normal global supply chain and in unforeseen events, from pandemics to terrorism to demand spikes to supplier bankruptcy and more. This technology, by ensuring end-to-end visibility and enabling collaboration, allows procurement to optimize the supply chain, yet there are practices that still need to be undertaken. Procurement can never minimize the oversight role it carries when it comes to supplier compliance.
There are few relationships more important for an organization’s success than that between procurement and suppliers. Maintaining good partnerships with suppliers does more than simply guarantee good service in good times; it can also can give the buyer priority positioning when it comes to disruptions and shortages (think PPE, Lysol, antibacterial wipes, and paper goods, like toilet paper). A good supplier-procurement relationship involves a high level of mutual transparency. When procurement has a strong understanding of the challenges and obstacles that a supplier may encounter, educated decisions can be made regarding the relationship. By understanding potential challenges, procurement can modify upcoming order schedules, control internal demand, and avoid the mad rush to find a substitute in the event of a shortcoming by the supplier. Likewise, it is vital for a supplier to understand their client/procurement challenges. For example, if a company’s policy requires long lead times before placing an order, the supplier should know and understand these requirements to reduce the challenges this could cause for either party.
It is also important to really understand how your suppliers are set up to respond to disruptions. This is where a risk assessment comes into play. Risk Assessments are essential for developing a supplier profile. That doesn’t mean that your supplier is necessarily doing anything wrong; it just may mean, through no fault of their own, that they cannot meet your demand in times of a disruption. If the Risk Assessment discovers areas of concern, procurement has several options to take:
- Option 1: remove the supplier and find a reasonable substitute with an improved risk rating
- Option 2: collaborate with the supplier to accurately identify the cause of the risk and work to correct it.
- Option 3: Create contingency plans for a disruption event such as alternative supply chain routes and sources.
More on expansion later. The best results are typically derived from a combination of these options. Professionals may elect to keep a supplier with a high-risk score while pledging to reduce the impact a disruption could cause to the company; or, they could terminate relationships with any high-risk strategic suppliers.
But it is essential to identify the weak links in your supply chain. Although we are now in the midst of a crisis, this is a practice you should undertake when times are good…just to not be caught unawares the next time a crisis arises. And this can lead to…
Procurement usually focuses their greatest attention on Tier 1 suppliers; however, due to the crisis, many companies are now exploring their relationships with Tier 2 and Tier 3 suppliers as well, with the intent of pushing more business their way. Besides their own supply base, procurement is looking to expand that base, both nearshore and offshore. That’s a bit counter-intuitive to the direction that procurement has been taking over the last five years, which is to consolidate their supply base, especially when it comes to the area of indirect spend. But what COVID-19 has shown is that you can consolidate too much.
On that same thought, there are suppliers that also have a very diverse supply chain. Procurement should understand how their suppliers receive that supply. With many suppliers operating in several countries, each location will be impacted with a different level of severity. These suppliers with diverse supply chains may still prove to be great partners during a pandemic. In the same sense, suppliers with limited supply chains and operations could be the most dangerous to rely on.
But adding in new suppliers can put an extra burden on procurement especially when it comes to compliance. The response should be…
Better and more frequent auditing
When investigating new suppliers, procurement professionals do their research to see how those suppliers not only fulfill their obligations, but also how they handle issues including fair labor practices, complying with government and industry regulations, and maintaining safe and clean workplaces. For the last point, remember how the coronavirus impacted the produce and meat industries, shutting down processing plants throughout the U.S.
During times of a pandemic, it is reasonable to assume there has been a loss of human capital in the workforce. Across the world unemployment rates rise and businesses are getting by with fewer employees. On the other end, there are businesses that can’t fill their vacant positions due to population drops. Procurement must ensure that suppliers are not violating any labor practices due to resource changes. It is vital to monitor news stories and business updates of each strategic supplier during the relationship and take action when concerns arise. To ensure compliance, procurement must not think that the task is completed once the negotiated contract is signed. Things can and do change, especially when a supplier does not have the infrastructure, policy and processes in place to handle an emergency (again, think processing plants above). This makes it increasingly important for procurement to perform ongoing audits of how its supply chain is performing.
The pandemic has forced many of us to look at the way we do business; however, many of the changes that we have made should become part of our normal business practices in good and challenging times.
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