Supply chain due diligence: A challenge worth embracing

Supply chain due diligence is becoming increasingly important, and can bring real benefits if done correctly. Inflexion’s ESG Director Jennie Galbraith invited the portfolio to discuss this topic at Inflexion's latest ESG Exchange.

Assessing the robustness of a supply chain has never been more important. The last two years have cast a spotlight on the fragility of supply chains, with recently published data suggesting 6-10% of annual revenue can be lost from supply chain disruption. 

It is becoming more important from regulatory point of view as well, with the UK’s modern slavery act as well as forthcoming EU legislation forcing companies to act.  “Customers expect you to have strong standards in the supply chain, so it is important for both business continuity and reputation,” Jennie stresses.

What exactly is supply chain due diligence? It is the ongoing, responsible management of your supply chain, based on the identification and management of ESG risks and remediation of negative impacts. It also involves multi-stakeholder working, legislative compliance and clear communication, according to Bex Hall, Global Head of Consulting at supply chain specialist Sedex, who was invited to talk through the topic to Inflexion’s portfolio.

Numbers show why this matters: an estimated 17.3 million people are trapped in forced labour in the private sector, and to date in the US, $961 million in goods have been stopped entering the country by the Uyghur Forced Labor Prevention Act.

Being accountable for your supply chain is now considered a core aspect of of responsible business behaviour, looking at the positive impact you can have on people, as well as yourself, stakeholders and the environment. But the farther you get from your own operations, the higher the risk typically gets, and it is why supply chain due diligence is so important. This is often a lot broader than something that you might see as traditional due diligence, and you have to bring in a lot of other stakeholders.”

From a ‘nice to have’ to a ‘must have’

“It’s moved beyond compliance and is now about improving a company’s competitive position with customers, increasing attractiveness to investors and recognising business opportunities in social and environmental challenges,” Bex explains.

Of course, supply chain due diligence brings with it challenges for businesses. Not only are we operating in a rapidly changing legislative environment, but now there are laws threatening reputation, fines and criminal offences. From a company perspective, there are likely competing internal priorities which make effort and budget allocation challenging. For companies still using paper audits for compliance, there is probably a lack of suitable data, while companies at the forefront of ESG best practice may face fears of greenwashing and social-washing. Warns Bex: “Transparency on reporting really matters, and it’s led to unintentional – and perhaps intentional – unjustified claims or ones that are tough to back up.”

And wherever a company sits on the spectrum, there is sure to be reporting fatigue.

But this diligence can foster strong collaboration-based relationships with suppliers, and Bex points to a shift: “We are certainly seeing is a shift in the power dynamic and approach towards a more collaborative way of working. Previously organisations at the top of the supply chain could make demands however we're now seeing suppliers regaining power because the buying organisations need the data for their own reporting. It is empowering suppliers, with the benefit of information sharing really key.”

Supplier due diligence in retail

The case of omnichannel retailer Mountain Warehouse illustrates the symbiosis that supply chain due diligence can inspire.

Emmaline Squires joined as Head of Quality and CSR in 2018 to set up supplier due diligence – no mean feat given there were some 400 tier one suppliers. The firm worked with Sedex to get reliable data and then develop a strong reporting suite to help quantify the ethical behaviour of Mountain Warehouse’s suppliers. “We spent the early years getting our suppliers off paper audits and onto our digital capture. Ultimately it fostered two-way collaboration which has helped to ensure our business ethics are in line with our supply chain and it’s helped us develop much stronger relationships with them,” Emmaline enthuses. “Our motto is that if we’re not finding risk, we’re not looking hard enough because with a supply chain of our size, that’s crucial,” she adds.

It is clear that diligencing the supply chain is a challenge which brings opportunities. These can include reducing costs, managing risks, protecting reputation, building trusting business relationships (with suppliers as well as customers), avoiding penalties from non-compliance, creating shared value, and effective communication.

Jennie concludes with a softer but vitally important added benefit gleaned from earlier in her career: “It’s about finding that common ground and working together collaboratively to develop relationships with suppliers. Since after all, we’re talking about people's lives, and that’s a benefit that shouldn't be forgotten here.”

7 trends in supply chain due diligence

  • Supply chain due diligence operates on the principle of continuous improvement, with wherever you are today being just the starting point or a step in the journey
  • There is an increasing requirement from laws and customers to perform due diligence of full value chains and across entire product lifecycle. This is changing from before when there were no legal requirement and voluntary supply chain due diligence was expected to touch on tier 1 and perhaps tier 2.
  • Regulators are targeting different important issues – from forced labour to deforestation – requiring holistic approaches. It is important to be mindful of greenwashing – how valid are your claims?
  • Moving from risk to impact assessment.
  • There is an increasing reporting burden – which some companies see as an opportunity. Firms need to report in different ways and at different times to different audiences for supply chain due diligence – this requires a lot of resource.
  • There is a growing need for data, all linked to the above points. Without the reliable data you can’t make insight-driven decisions and actions.
  • Collaboration and the use of tech is essential (namely around SDGs, for example). If companies aren’t already using technology, they will find addressing this more challenging.

All Inflexion portfolio companies, regardless of size or ownership stake, have full access to our Value Acceleration resources covering ESG, digital enhancement, international expansion, M&A, commercial strategy and talent management. This discussion was part of a series of sessions provided to the portfolio to share best practise and enhance collaboration. These sessions are supplemented by guidance documents on specific ESG topics the portfolio may need support with, forming part of our ESG Value Acceleration support.