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Keep Up With Supply Chain Intelligence to Mitigate Disruption

October 11, 2023 (7 min read)
Supply chain due diligence is crucial to avoid regulatory risk

Recent years have been characterized 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 several 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: globalization, digitization, supply chain shocks, and shifting sanctions.

Globalization

Supply chains now span multiple countries and jurisdictions, making it challenging for companies to fully map out and understand all entities involved. For example, a U.S. technology company may source raw materials from Africa, have them assembled into components in China, and then shipped to factories in Southeast Asia for final assembly before being distributed globally. Keeping track of regulations, compliance, and risks across such a complex web of suppliers across continents is extremely difficult. 

Digitization

The acceleration of digital services and remote work due to the pandemic has made in-person supplier visits and on-site audits impractical in many cases. This lack of physical oversight makes it harder for companies to directly verify supplier compliance, workplace conditions, sustainability initiatives, and other important factors. For instance, an apparel company would have previously sent ethical sourcing teams to visit factories, but now it must rely more on questionnaires and self-reported information. This could lead to false reporting that is hard to verify. 

Supply chain shocks

From natural disasters to geopolitical conflicts, supply chain disruption events are happening more frequently. These shocks force sudden supplier changes and scramble supply networks, meaning companies struggle to maintain visibility and control. For example, a shortage of a key semiconductor component could require electronics manufacturers to hastily find alternate suppliers, leading to heightened risks.

Shifting sanctions

Geopolitical and economic sanctions imposed on certain countries, entities and individuals are rapidly shifting. Companies must vigilantly screen suppliers and partners against sanction lists that are constantly changing. Even long-time suppliers based in sanctioned countries like Russia and Iran can unexpectedly become prohibited partners. Failing to keep up with sanctions shifts can expose companies to steep legal and reputational risks.: 

MORE: Managing third-party bribery and corruption risk

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 came 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.

MORE: Recent regulatory enforcement shows the need for due diligence

Other risks companies need to consider

Regulatory risks are critical for organizations, but a failure to understand their supply chains brings other challenges, including reputational and financial risks--each of which can cause business losses. 

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. Because of this association, this company is losing business, leading to financial losses. 

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 risk 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 new Supply Chain Due Diligence Act could face fines of up to 2% of their global revenue. This could be massively detrimental to a small business. 

MORE: Why managing reputational risk is key to your business success

Strategies to mitigate supply chain risks

With the every growing supply chain challenges, it's important to be aware of the steps you can take to get ahead of supply chain risks. Here are some things you can do today to protect your company in the future. 

Clearly communicate expectations to suppliers

Companies should have a formal policy outlining their standards and expectations for ethical behavior, human rights, ESG, and compliance. This policy should be directly shared with all suppliers and partners as a part of due diligence to eliminate any ambiguity. Contractual terms should mandate adherence to the policy, with the option for audits. Setting clear expectations from the start enables suppliers to understand the company's values and avoid any prohibited practices.

Maintain ongoing monitoring of the supply chain

Due diligence can't just occur at the start--supply chains evolve constantly as suppliers change. Companies need to regularly review relationships, screen for red flags, re-evaluate risks through questionnaires, data analysis, site visits and audits. Ongoing monitoring enables proactive risk identification as supply chains shift.

Train staff on supply chain policies

Employees engaging with suppliers play a key compliance role. Robust training on supply chain policies, risk factors, protocols and escalation processes is crucial. Proper training empowers staff to monitor vendor relationships, spot issues early, and address them appropriately.

Never cut corners on due diligence

Disruptions may pressure companies to cut corners on vetting new suppliers, but this is risky. Hastily approving high-risk suppliers without thorough due diligence exposes the company to legal, financial, and reputational damages. Maintaining rigorous due diligence builds resilience against future shocks. Shortcuts lead to long-term costs.

Data and technology can provide critical supply chain intelligence

Too many firms have failed to take advantage of opportunities to prevent supply chain risks. Less than a quarter of UK companies surveyed by Deloitte in 2021 included technology as part of their risk strategy. Moreover, many firms prioritize technological developments without realizing 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.

Technology has become a powerful asset to firms seeking supply chain intelligence. Artificial Intelligence and Machine Learning tools can analyze 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. Or, some firms use blockchain technology to track products and services along the supply chain. Additionally, well-vetted API data can provide a firm foundation for any due diligence research. 

Get to know exactly what you need to do to mitigate risks in your supply chain with our recent E-Book, exploring why supply chain transparency is important in the consumer goods industry. Then, get started with a free trial of Nexis Diligence+ to take your due diligence to the next level.