What is supply chain due diligence?

What is supply chain due diligence? A quick guide giving you the essentials from a corporate governance viewpoint. 

Supply chains are the most crucial arteries for profits in most businesses, and the level of scrutiny on them has never been higher. In many parts of the world, it’s becoming increasingly common for businesses to be judged not only on their own activities, but also on the activities of any associated businesses. Suppliers and couriers, at every stage from raw materials to last-mile delivery, are included in that. 

Regulators, investors and consumers are demanding more data, so they can get to the bottom of whether your business lives up to today’s strict standards, as well as your own code of ethics. Ensuring you know the answer to those questions first is what supply chain due diligence is all about, and it’s as crucial an item for boards as it is for executives and management.

It’s the network of processes designed for corporate leadership to conduct full examinations of their supply chains and ensure they align with ethical principles. 

There is a prominent negative view of this kind of due diligence – dismissing it as a big company invasively “checking up” on suppliers, couriers and last-mile delivery agents. However, at its core, supply chain due diligence provides the clearest possible picture of important risk issues like human rights, environmental impact, and ethical conduct. There is no other set of controls that is able to monitor these risks to the extent that stakeholders expect.

It’s important because we are entering an era where businesses are officially judged by the companies they choose to work with, as well as their own actions. This has been the case for decades in terms of consumer and investor sentiment, but now regulators are getting involved too. 

They’ve realised that their higher standards mean little if they just judge every business in isolation. Modern reporting demands that companies broaden their data sets, including any associated companies and how they conform to the same standards. If that company is overseas, in a jurisdiction where you’d think the rules don’t apply, it doesn’t matter. The contemporary lens ignores borders. 

In this context, supply chain management falls directly into the core governance concept of fiduciary duty. Directors are expected to navigate any risks that could impact a company’s bottom line, whether it’s within their own ranks or those of their supply chains.

The common processes

1. Supply chain mapping allows you to pinpoint every link in the chain, from raw material extraction to the final assembly.
2. Risk assessment of every supplier. Do they have a history of questionable ethics? Does their local government enforce the same kinds of ethical standards as those where your company is headquartered?
3. Establishing clear codes of conduct for all suppliers.
4. Ensuring whistleblower channels are active so that violations of your code of conduct can be reported safely.

The biggest misconception is that supply chain due diligence is a task for the procurement team or the sustainability officer. They’re an important part of the process, yes, but the board has crucial oversight responsibility that they need to respect.

Directors approach this area like every other governance issue: set the tone from the top, ask questions, probe risk, and gain complete awareness so as to ensure decision-making is as sound as possible. 

Practically, this translates to overseeing the due diligence policy and holding the CEO accountable for its execution. Any pitfalls or mistakes should be noted and discussed, as should how the policy performs in practice from one period to the next.

Ultimately, these will vary depending on the company size and industry, but some general questions remain important no matter the context: 

• Do we know who our suppliers are and what their own codes of conduct look like?
• If we ever discovered something like human rights violations in our supply chain, what’s our process for dealing with it?
• Does our strategy indirectly “incentivise” corner-cutting in the due diligence area? For example, does our drive for profit actually encourage the C-suite and other teams to seek out suppliers with questionable ethics without any ramifications?

Ultimately, for a director, supply chain due diligence is about future-proofing the business. It’s the difference between being a proactive leader and being the person standing in front of a camera explaining why the company didn’t see a crisis coming.