Your supply chain is a huge part of, and more often than not a necessity to, your business. Unfortunately, it can also be a huge liability for your business if your suppliers aren’t vetted properly and if you don’t ensure compliance throughout your supply chain.
Thorough vendor risk management, then, must be a vital component of your compliance strategy.
This article explains ways in which retail compliance officers can reduce potential problems in their supply chain.
The Two Threats from Non-Compliance
There are two primary concerns in ensuring supply chain compliance, and they are equally important. The first is a matter of quality control and timely delivery of the products. You can’t sell what you don’t have, and low quality control doesn’t exactly make your customers happy either.
The second issue is the increasingly stringent legal regulations, such as the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and the Dodd Frank Wall Street Reform and Consumer Protection Act in the US. Violations of these regulations can close your business and even result in jail time.
A recent example of this problem was seen in the exploding Chinese e-commerce market, where government officials found (admittedly using a very small sample) that 40% of the products available through major Chinese e-commerce sites were either fake or illegal. Despite the small sample size and the claims of innocence from the e-tailers, some have been affected by stock price drops and even possible class-action suits. Third-party vendors almost exclusively provided the offending products.
Vendor Risk Management: Costs vs Rewards
Most businesses see compliance as a costly burden – and that may be true in the case of many specific regulations – but proper risk assessment and management throughout the supply chain is ultimately a win for the business. The results are better delivery, better quality and less chance of fines or worse.
One US-based business with operations in China had to vet roughly 300 local distributors for compliance with the FCPA rules as part of their risk assessment. The assessment results required them to drop two thirds of those distributors. Despite the obvious time and money needed for this assessment, the end result was a 17% increase in their profit margins.
Risk management is a necessity in business, and leads to a greater state of compliance throughout the supply chain. Lower risk almost always means more compliance, and better business as a result.
Best practices
Here are 3 ways retail compliance officers can alleviate potential problems down the road with your supply chain:
- Consider Them Part of the Family – Because of the need for compliance, from production to sale, suppliers should be considered as a division of your business and held to the same exacting standards as anyone in your direct employ.
- Start with a thorough risk assessment – This can be time consuming up front, but the long-term benefits outweigh the initial investment of time and money, as seen in the example above.
- Provide motivation – Usually this motivation is “comply or we’ll find someone else”, but what if your options are limited? You likely incentivise employees in some way (sales bonuses, safety awards, etc.), so do the same with your suppliers. This goes back to the “one family” idea. The right motivation to comply and report deficiencies, which can be in monetary or non-monetary incentives, is a win-win situation when the results include increased efficiency, lower risk, timely deliveries, and higher profit margins.
One excellent motivator is having a system that isn’t overly complex, which can be a burden that encourages shortcuts among suppliers. When your auditing and compliance system is simple, portable and consistent from one end of the chain to the other, compliance becomes a simple part of the job instead of a cumbersome addition.
