Posted Monday August 18, 2014

Know your sources: trends in supply chain due diligence

Know your sources: trends in supply chain due diligence

At Arachnys, our core customer base is in the banking and financial sector and focuses on third-party due diligence processes around money laundering and identity verification. Many of our customers, however, are expressing an increased interest in supply chain due diligence and transparency. With the 2013 horsemeat scandal and the more recent Thai prawn slavery investigation, the need for better oversight of global supply chains is clear.


Thai fishing boat (source)

But what does good due diligence look like in the supply chain world? We reached out to José Copovi King, Director of Products and Services at the supply chain data sharing platform Sedex to discuss current trends, challenges and strategies among suppliers, consumers and regulators in the sector.

While the requirements of due diligence processes in finance are usually fairly precisely described by regulatory requirements, King explained that due diligence in the retail supply chain world can cover a multitude of emerging issues, including environmental, social and governance concerns. He highlighted recent events such as the tragic collapse of the Rana Plaza factory in Bangladesh as a defining example. “At Sedex we cover these issues across four pillars,” he explained: “labour standards, health and safety, the environment, and business ethics, ensuring that our members – both retailers and those working in other sectors – assess the key issues by having visibility beyond tier one of their supply chains where greater degrees of risk can occur.”

Jose King

So does the pressure to improve due diligence come mainly from consumers or regulators, or are retailers themselves proactively driving improvements? King pointed out increasing legislative pressure on retailers to adopt a proactive and multi-tier due diligence approach, including the Dodd Frank Act, the California Supply Chain Transparency Act, the UK Bribery Act, and the UN Guiding Principles for Business and Human Rights. He also argued that combined pressure from consumers and media attention were a strong driving force: “As ethical consumerism becomes more mainstream and CSR moves from a ‘nice to have’ to a ‘need to do’, the pressure from consumers has increased. Taking clothing as an example, a poll conducted by YouGov for the ‘See Through Fashion’ campaign in 2013 found that 78% of shoppers do not believe UK clothing firms are transparent enough about the conditions of the workplaces and 74% of them would be happy to pay extra for their clothes if there was a guarantee that workers were being paid fairly and working in safe conditions.” The rise of ‘ethical investing’ also means that investors often address companies’ ethical performance and responsible sourcing practices are becoming increasingly vital to attract sustained investment.

So how much due diligence is enough and what is the highest priority issue to address? With the increased complexity of global supply chains, it’s easy to see this problem as a bottomless pit. King argued that, although there are several global trends pushing supply chain due diligence, the call for transparency is the most pressing. He cited a recent report by Sedex and BSR that argues that the need for transparency goes well beyond the first tier of the supply chain and that the further down a company’s supply chain you go, the higher the rate of non-compliance – and therefore the greater the risk to the company. “The report sample analysed ten companies with a combined total of 3,922 supplier relationships and 6,775 audits,” he explained. “It found that 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.”

In terms of global and sectoral trends, King explained that consumer-facing brands are among the most proactive as they are more often subject to NGO and media campaigns and are keenly aware that consumer loyalty is hard to win, but very easy to lose: “Many companies are launching sophisticated programmes to improve practices in their supply chain,” he explains, “Marks & Spencer’s Plan A has been held up as an industry gold standard and Unilever’s Sustainable Living Plan has achieved significant progress in its first two years.”

And are any countries leading the pack? In a story similar to the situation in natural resource governance and perception of corruption, King reveals that it is the Nordics who are ahead of the game in incorporating sustainability and transparency into their supply chains. “Europe is also making progress,” he points out. “North America is generally judged to be lagging behind slightly, while in China certain issues such as environmental impact are pushing progress at an impressive rate.”

At Arachnys we’ve seen the transformative impact of leveraging big data tools to streamline and augment the painstaking workflows involved in due diligence in the finance world. With the supply chains of some large companies stretching into 100,000s of suppliers it’s a no-brainer that technology is essential to help collect, manage and assess this data to accurately identify and resolve risks throughout the supply chain. “The equation is simple,” says King: “knowledge is power. Leading companies are using better data from deeper in the supply chain to enable more robust risk management and to build more resilient supply chains. They can also identify positive trends, replicate good practice, and build a web of supply chain partners and sustainability champions; allowing companies to quickly identify supplier sustainability needs. What is required to achieve this are technologies that can truly scale to accommodate, process and analyse vast and disparate sets of data from all over the world. By embracing and combining big data technologies, machine learning, and predictive analytics organisations can really begin to get ahead of issues faster and more efficiently than a sole reliance on traditional methods can achieve.”

Finally, what are the potential risks of failing to put together an adequate due diligence programme? In the banking world we recently saw a record fine imposed by the United States on BNP Paribas for violating sanctions. For retailers, the downsides to poor due diligence are more likely to impact consumer spending, but King argues that companies are often complacent about this, even after a major story has surfaced: “When the horsemeat scandal hit in February 2013, some companies thought they were not affected by the issue because they knew who their first tier supplier was. This quickly proved not to be the case. Similarly, after the Rana Plaza factory collapse there was a rush of companies denying that they sourced from the building. However, due to complex international supply chains and unauthorised subcontracting, it took some companies a significant amount of time to find out if that was the truth. Many of them just didn’t know. It’s vital that companies audit and assess risk in their supply chain to identify and address issues before they hit the headlines, their stock price and consumer spending.”

Sedex is a not for profit membership organisation dedicated to driving improvements in ethical and responsible business practices in global supply chains.

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