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In Supplier Management, Companies Need to Step Up Their Game

The ability to monitor the behavior and condition of one's suppliers depends on having access to hard numbers. But a surprisingly large percentage of companies lack this critical data.

In Supplier Management, Companies Need to Step Up Their Game

Good supplier management is all about having a series of key performance indicators and metrics in place, to ensure that vendors are meeting the buyer's criteria for stability, quality, sustainability and compliance with standards on factory working conditions. Increasingly, suppliers are being called upon to demonstrate their vigilance in these areas. It's all part of a heightened focus by manufacturers and brands on supply-chain risk management.

In many cases, however, the supporting numbers just aren't there. Only 40 percent of companies report having KPIs or metrics for supply continuity and supply-chain risk mitigation, according to Ben Wilde, director of Europe with ADEC Innovations, a provider of technology and data management for environmental, social and governance (ESG) initiatives.

Why the gap, at a time when companies acknowledge the need for better risk management? Having the right KPIs in place “is very expensive,” Wilde says. At the same time, suppliers are being inundated by audits, sometimes at the rate of 40-50 per year. Smaller firms become overburdened and desensitized to the onslaught. In response, they might adopt an attitude of “doing the minimum to get through the audit and get past it.” There’s a distinct lack of emphasis on improving the exercise. Hence the condition of “audit fatigue.”

The first step toward developing an effective supplier-management plan is, of course, to identify one’s suppliers. But companies can fall short in even this most basic of efforts, if they’ve lost track of a multi-tier supply chain or are unaware that several suppliers might be clustered within the same geographical area.

Having identified the identity and location of its supplier base, the buyer needs to show vendors how they can benefit from a rigorous set of performance measurements. Reputation should serve as a strong incentive to suppliers competing for the business of major accounts. But the system only works if the criteria are clearly laid out, and consistently applied.

A transparent scoring system can help suppliers to understand where they rank among their peers, and how they might improve. Gamification and other competitive initiatives can further help to see where they stand. Key elements to measure include ongoing improvements in areas such as energy and carbon use, Wilde says.

To a certain degree, a company’s ability to motivate suppliers to participate in such initiatives depends on its bargaining power over them. A major account is in a better position to dictate supplier compliance. Conversely, if the supplier is less reliant on a single customer, it might balk at the effort required to satisfy that nominal partner.

It can be a challenge to put into place an effective system when the power dynamic is skewed in favor of the supplier, Wilde acknowledges. Smaller buyers can offset their lack of clout by coming together in industry associations or group purchasing organizations, when such bodies don’t violate antitrust rules.

In addition, a general awareness of the need for environmental and social responsibility can be an incentive for suppliers large and small to participate. Existing initiatives ranging across industries, such as the Carbon Disclosure Project, are valuable tools for enlisting supplier support.

Suppliers and buyers of any size should be able to come to terms on a solid monitoring arrangement when it’s shown to be of benefit to both sides. But the conversation needs to occur from the start, says Wilde, with the customer’s requirements built into the contract. “The earlier you can engage them on that, the better,” he says. “If you already have that in place, you’re much more likely to get a response.”

The effort of canvassing suppliers and obtaining the necessary data can be arduous, even burdensome. But duplication can be minimized through the use of questionnaires that cover a wide range of basic issues. Beyond that, they must be tailored to address the concerns of particular industries. The chemical sector, for example, requires its own set of questions to ensure compliance in the sourcing of sensitive or hazardous materials. Apparel manufacturers need to trace leather, cotton and other items back to the farm.

Non-governmental organizations can be a big help in drawing up the necessary questions and targeting them for the appropriate industries. (Third parties also play an essential role in verifying compliance.) It’s not a question of reinventing the wheel for each buyer-supplier relationship. Wilde recommends that companies turn to others with prior experience in the creation of effective programs.

When it comes to obtaining supplier compliance, the multi-tier supply chain presents companies with their biggest challenge. Traceability gets progressively tougher beyond the first tier. Yet suppliers need to know the ultimate source of raw materials. And buyers must be assured that their products aren’t being made by invisible subcontractors that don’t meet the requirements of a carefully crafted supplier code of conduct. Wilde says Tier 1 suppliers can be instrumental in obtaining key information from further up the chain.

There’s plenty of progress yet to be made in achieving full visibility of a multi-tier supply chain. Ideally, KPIs should be established up front and “cascade” up the tiers. “We’re not seeing the baton being passed quite in that way yet,” Wilde says. “But I think that will happen.”

None of this relieves the original equipment manufacturer or buyer from responsibility for violations of a supplier code of conduct. Regular audits and on-the-ground inspections, whether by the customer or its representative, are essential. In the end, it’s the most visible partner that will be blamed, so constant vigilance at all levels is a must. “If I’m a brand,” says Wilde, “I can’t disassociate myself from my supply chain.”

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