Checking on Supplier Compliance in Challenging Times
Procurement’s role within an organization has changed dramatically over the past few 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, which is now being tested as never before.
We need diversity in the supply chain and COVID-19 is presenting unique challenges to fulfilling that goal. But what obstacles 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? Conducting this oversight globally while working from home rather than in an office presents an additional set of challenges.
Fortunately, the emergence of digital supply networks has enabled procurement professionals to perform their tasks anywhere they might be. Nonetheless, despite where one works, this significant crisis has proven that procurement must reconsider a number of long-standing beliefs and behaviors.
Considering Supply Chain Challenges
Regardless of the situation, procurement still needs to focus on the core issues of 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 should build 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.
Digital supply networks help us address the many hurdles 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, which provides end-to-end visibility and enables 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 solid partnerships with suppliers does more than simply guarantee good service in good times; it also can give the buyer priority positioning when it comes to disruptions and shortages (think PPE, Lysol, antibacterial wipes and paper goods such as toilet paper).
A healthy supplier-procurement relationship involves a high level of mutual transparency. When procurement has a strong understanding of the challenges and obstacles 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 roadblocks this could cause for either party.
It is also important to 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 your supplier is necessarily doing anything wrong; it just may mean, through no fault of their own, they cannot meet your demand in times of a disruption.
If the risk assessment discovers areas of concern, procurement has several options:
- 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. Alternatively, they could terminate relationships with any high-risk strategic suppliers.
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. 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 procurement had been taking over the last five years when it prioritized consolidating the supply base, especially in the area of indirect spend.
However, COVID-19 has shown that you can consolidate too much. On that same thought, there are suppliers that also have a highly 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 high-performing partners during a pandemic.
In the same sense, suppliers with limited supply chains and operations could be the most dangerous to rely on. 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 evaluating new suppliers, procurement professionals research 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. To illustrate the last point, one only has to 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. Worldwide, 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 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 safeguard compliance, procurement must not think the task is completed once the negotiated contract is signed. Circumstances 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). This makes it increasingly important for procurement to perform ongoing audits of how its supply chain is performing.
The pandemic has forced us to re-examine the way we do business; however, many of the changes we have made should become part of our normal business practices in good and challenging times.