Supplier Risk & Ethics Analysis: Time to Get Started

For many buying firms, the quality of goods and services are contingent on their suppliers. Suppliers can indirectly impact brand perception from business to consumer. While delivered goods can be inspected through quantitative metrics, there are a host of other metrics that firms should track related to their vendors, including risk and ethics.

As supply chains grow more complex, risk increases exponentially. Suppliers further downstream may reside in different legal and geographic jurisdictions, with varying cultural and business norms. They may have environmental and labor oversights that could damage a firm’s reputation by association. Beyond ethics, many factors can affect risk, including the nature of items sourced, country of origin, political factors and the sensitivity of intellectual property.

Transferring Risk is Risky Business

Placing risk management solely on suppliers is negligent. Firms are increasingly expected to act with social responsibility within their entire supply chains and are held accountable through legislation such as the Dodd Frank Act and the EU Directive 2014/95/EU. Beyond meeting compliance set by these regulatory bodies, firms that actively mitigate risk maintain clear communication and close relationships with their suppliers. Accurate and timely information allows firms to respond quickly to changes in the supply chain. By evaluating and communicating with riskier suppliers, firms can reduce harmful practices and strengthen partnerships that take advantage of a supplier’s nimbleness and innovation.

Supply Chain Ethics Start with Strategy

Firms pressured to cut costs and move quickly may build a supply chain with poor ethical practices. Taking control of ethical risk in the supply chain requires a risk segmentation process that is continuously monitored. Suppliers can be assessed in tiers of low to high risk, based on a holistic understanding of their corporate responsibility and financial health. Digital technologies help align a firm’s risk priorities to actual business outcomes. Firms are encouraged to segment suppliers based on characteristics such as product category, location, nature of supplier relationship and broader risk factors dependent on a supplier’s situation.

Complexity Should Be Respected, Not Feared

Processes enabling qualitative analysis in supplier risk and ethics are also best practices that promote inclusive supply chains. The act of sourcing changes a firm’s supply chain network and likely adds complexity. Complexity is an opportunity to manage and engage with suppliers, to create a sustainable approach to sourcing strategy. Multi-tier supplier management systems involve complex decision theory and require smart solutions that span the procurement process. In this environment, firms must learn to cope with the uncertainties and disruptions of a global supply chain. This requires a shift in attention from purchasing operations to supply management.

Our Approach to Risk Analysis

At ConnXus, we have robust tools for your supplier management needs. Our Risk Scorecard™ helps buying firms make informed business decisions related to sourcing by ranking each supplier within its own industry using financial information and past performance. The tool offers widespread comparison with other suppliers, including risk segmentation beyond economic risk. Our detailed risk scores will include debt scores by country, private and public sector cost of capital, and alerts for risk mitigation in human trafficking reports and legal proceedings. These metrics will help your firm make better decisions in choosing supplier relationships.

Daryl Hammett is the COO and GM of ConnXus.