Supply chain due diligence has become one of the most important ways to mitigate risk, ensure regulatory compliance, engineer resiliency, and prevent brand damage from angry, supply-chain-conscious customers and activists. It involves a close look at suppliers, manufacturers, logistics, and other crucial aspects to identify and manage risks, ensure compliance with regulations, and improve transparency and accountability in the supply chain.
But maintaining effective due diligence in a complex supply-chain is no easy task. It takes time, dedication, expertise, and technology—and, done correctly, is an ongoing, ever-evolving practice, not an occasional check-in. Supply-chain due diligence itself is also changing rapidly because the pressure to understand what is happening at every layer and stage of the supply-chain is greater than ever.
Key Tenets of Supply Chain Due Diligence
Supply chain due diligence practices will differ for each supply chain. However, there are several key aspects of due diligence that should be included in any due diligence strategy, including a comprehensive risk assessment, a tailored approach, mapping adverse impacts to your business’ contributions, and maintaining a dynamic, ongoing process to capture evolving risks and changing business operations.
- Comprehensive Risk Assessment
Due diligence involves a thorough examination of risks, considering both potential harm to the company and potential impacts on the rights of individuals or entities. This comprehensive risk assessment ensures a holistic understanding of the challenges and opportunities within the supply chain.
- Tailored Approach Based on Business Size and Risks
The extent of due diligence varies based on factors such as the size of the business, the perceived risk of impacts, and the nature and context of operations. A nuanced approach ensures that the level of scrutiny aligns with the specific characteristics and potential ethical challenges faced by the business.
- Mapping Adverse Impacts to Your Business
Adverse impacts resulting from associated actions must be meticulously mapped against the roles a business plays in the supply chain. This includes mapping and assessing direct causation of impact, contribution (facilitation or incentivization of impact), and linkage to impact through relationships (even if no direct contribution to impact). Understanding these roles is crucial for effective risk mitigation and ethical business conduct.
- Dynamic and Ongoing Process
Due diligence is not a one-time event but an ongoing and dynamic process. To capture changing risks, evolving impacts, and shifting business operations, continuous monitoring and reassessment are essential. This adaptability ensures that the supply chain remains aligned with ethical standards amidst a constantly evolving due diligence landscape.
Create a supply chain due diligence checklist
Put together a formal checklist that potential suppliers will be screened against, both by sending suppliers questionnaires to complete and by carrying out appropriate research. In this way, you can ensure that suppliers are compliant both with your own policies, and with current or impending legislative obligations. This could include:
- General company information, including ownership of the company
- Financial and insurance information
- Reputational risk – e.g. litigation history, negative news, watchlist and politically exposed persons (PEP) screening
- Operational risk – e.g. employee turnover, business continuity and disaster recovery plans
- Cybersecurity and information security policies
- Hiring practices
- ESG credentials
As business relationships with third parties increase, mitigating the inherent corruption risks in your supply chain will become more central to a successful business strategy.