Recent years have been characterised by supply chain disruption–from Covid-19 to the Suez blockage to the invasion of Ukraine. Moreover, companies who fail to identify and manage illegal or unethical activity in their supply chain face increasing regulatory, reputational, financial and strategic risks. In this blog, we look at some of these risks, and show how smart use of data and technology can give companies critical supply chain intelligence. We also explain how Nexis® Solutions can help to identify and manage those risks.
Why understanding your supply chain is more difficult than ever
Supply chain resilience has become a core aspiration for companies after three years of flux and disruption. This comes from transparency–firms who understand their supply chain and carry out due diligence on the companies within it are more able to anticipate and manage risks. But gaining this supply chain intelligence is now more difficult than ever because of four trends:
- Globalisation: A product or service sold by one company can easily have passed along a chain of dozens of companies in multiple jurisdictions. Keeping on top of that process is not easy.
- Digitisation: The pandemic accelerated companies’ adoption of digital services and remote working. It made it difficult or impossible to visit prospective or current suppliers to verify their compliance regime and ESG record. This trend is likely to be here to stay.
- Supply chain shocks: Ukraine, the energy crisis, lithium shortages, the blockage of the Suez Canal, natural disasters–the list goes on. These shocks appear to be increasingly common, and they bring with them drastic changes to supply chains meaning more than ever companies need to mitigate supplier risks.
- Shifting sanctions: The conflict in the Ukraine has generated numerous global sanctions measures highlighting the need to screen individuals and companies to mitigate sanctions breaches.
Opaque supply chains: an existential risk to companies
Supply chain due diligence is difficult, but it is essential to companies seeking to survive and thrive. Regulators increasingly demand that companies demonstrate effective third-party and supplier due diligence to mitigate human rights abuses and the environmental impact of their supply chains. Recent legislation includes:
- European Union: The European Commission’s draft Corporate Sustainability Due Diligence Directive will introduce mandatory human rights and environmental due diligence obligations for companies and a new enforcement regime.
- Germany: The Supply Chain Due Diligence Act, which comes into force in January 2023, mandates large companies to carry out risk management to ensure there are no human rights violations in their supply chains.
- France: The Corporate Duty of Vigilance Act 2017 requires large French companies to publish and implement a plan to identify, and prevent and mitigate human rights and environmental violations, among other issues. Further amendments are expected in light of the EU’s draft directive.
- United States: The US Uyghur Forced Labor Prevention Law 2021 bans companies from importing any products produced in Xinjiang in China, unless they can explicitly prove forced labor was not involved at any stage.
- Singapore: The Monetary Authority of Singapore released new guidelines in 2018 which require financial institutions to carry out effective risk management when outsourcing. Due diligence should cover a business’ reputation and corporate governance, and enhanced due diligence should be done if a supplier’s jurisdiction has a heightened risk.
Regulatory risks are critical for firms, but a failure to understand their supply chains brings other challenges:
- Reputational risk: Companies need to manage their reputational risks to demonstrate sound ethical conduct and ESG commitments, but this work can be undone overnight if it turns out one of their suppliers has been involved in unethical or illegal activity. For example, many companies who used one of the world’s largest suppliers of steel pipes are currently being asked questions about their due diligence processes after the supplier was fined by the US authorities for alleged bribery.
- Financial risk: Supply chain disruption can devastate a company’s business activities and, as a result, its bottom line. Yet if a company has already assessed the financial health of its suppliers, it can better predict which are most likely to survive an unexpected shock and sustain business growth. Failure to prevent supply chain risks can also lead to large fines. For example, companies who do not comply with the human rights due diligence requirements in Germany’s forthcoming Supply Chain Due Diligence Act could face fines of up to 2% of their global revenue.
Data and technology can provide critical supply chain intelligence
Technology has become a powerful asset to firms seeking supply chain intelligence. Artificial Intelligence and Machine Learning tools can analyse high volumes of data on suppliers instantly, and platforms like Nexis Solutions can help screen and monitor thousands of suppliers against trusted sets of data to develop risk scores. While some firms use blockchain technology to track products and services along the supply chain.
However, too many firms have failed to take advantage of these opportunities. Less than a quarter of UK companies surveyed by Deloitte in 2021 included technology as part of their risk strategy. Moreover, many firms prioritise technological developments without realising that these tools are only as effective as the data powering them. High-quality and trusted data is the fuel that powers effective use of technology for supply chain intelligence.
We will soon release a White Paper which recommends further steps companies should take, including:
- Clearly communicate expectations to suppliers: A firm’s compliance policy and expectations of ethical behaviour should be communicated clearly to third parties and enforced in the terms of the contract. Firms should consider asking prospective suppliers to submit to an audit if the potential risks are significant.
- Maintain ongoing monitoring of the supply chain: Suppliers change constantly so companies must capture relevant changes which might bring new risks. Supply chain intelligence is not possible with a one-off assessment but requires ongoing review.
- Train staff on supply chain expectations: All employees who engage with suppliers should receive effective training on policies concerning supply chain risk management, and the tone from the top of the organisation should empower employees to report suspicious activity.
- Never cut corners on due diligence: When a supply chain is interrupted, it can be tempting to take a shortcut on due diligence in the hope of re-establishing business operations as quickly as possible. But this will bring greater costs in the long run, and effective due diligence is likely to make the supply chain more resilient against future shocks.
Nexis Solutions: cutting through the noise to surface supply chain risks and insights
Nexis Solutions helps firms to gain an understanding of the risks in their supply chain by surfacing insights from across our broad range of data. For example:
- News data helps firms to assess the reputation of their suppliers.
- PEPs and sanctions data lets companies screen their suppliers for sanctioned entities or riskier PEPs who might warrant enhanced due diligence.
- ESG Ratings provide an at-a-glance view of a company’s environmental, social and governance (ESG) profile to better understand reputational or ethical business risks.
- Legal data can expose if a supplier or one of its directors has been involved in a breach of regulations.
- Company data helps support an assessment of a supplier’s financial health and therefore its likelihood of insolvency in case of supply chain disruption.
Stay tuned to our blog, and don't miss our upcominng whitepaper on - ‘The Supply Chain Intelligence Checklist: Overcoming Rising Supplier Risks with Nexis Solutions’, to understand more about supply chain risk and plan out your strategy to gain true supply chain intelligence.