Beyond tier 2 suppliers – what are the options for qualifying risks?
Responsible companies have always been concerned about what makes up the products that they sell to their customers and how those ingredients or components got there. What are the risks of ‘bad things’ being included in traded goods or ‘bad things’ happening as they were included? How far up the supply chain do you need to go in order to quality all the risks?
Methods for focusing due diligence efforts
The Modern Slavery Act 2015, and the European Union Timber Regulation 2013 are examples of regulations that require companies to take a serious look at the entire supply chains that provide the goods delivered to their tier 1 suppliers. They specifically reference the need for businesses to demonstrate that they have carried out an appropriate level of due diligence.
Due diligence is the name of the game – with the effort put into the due diligence exercise being proportionate to the perceived product/supplier related risks.
So some sort of prequalification of risk is needed before a business starts their due diligence. This is commonly based on:
Type of product (i.e., hover board = high vs bag of nails = low)
Country of origin (i.e., Central African Republic = high vs Sweden = low)
Type of raw material (i.e., tropical hardwood from natural forest = high vs plantation grown softwood = low)
This makes it is broadly possible for each business sector to come up with a crude set of supply chain risk rating rules, but this does rely on a general understanding of the structure – from top to bottom – of each supply chain. Using this model companies know where to focus their due diligence efforts.
Beyond tier 2 suppliers
Once a business has identified a high risk supply chain – then how is the degree of risk associated with the products and suppliers quantified?
Currently it seems that on the ground audits of tier 2 factories (and for the tiers above) is how risk in the supply chain is being qualified. The large businesses at the market facing or near market facing are paying huge amounts to carry out their due diligence, or to 3rd parties to do it on their behalf.
No new approaches seem to have been adopted over the last decade. Due diligence is either by blanket questionnaire or on-the-ground audits – with questionnaire filling happening on-site by the auditors.
A new approach is needed
Online systems provide the opportunity to provide increased transparency and openness with suppliers taking more responsibility for provision of appropriate information. IT based systems are currently not being used to their full potential. There will always be a role for feet on the ground, but this ultimate means of gathering information needs to be used selectively and as a last resort rather than as standard practice. It needs to be used in support of IT based approaches.