Supply Chain Due Diligence – The Factors to Consider

16 September 2021

Following well over three decades of accelerating globalisation of trade and finance, businesses have suddenly found themselves in a period of significant supply chain turbulence. Several distinct factors are at play, and this period of disruption will be of uncertain duration, but we can say that for many companies the cross-winds are already fierce and there is a real risk of running aground.

What are these howling gales, and what can be done to lessen your exposure to them?

Most obviously, the COVID pandemic has led to bottlenecks and worse in the supply of many goods, from chips to ships; and to sharp peaks and troughs in demand for particular goods. Perhaps more important over the medium term, the second order effects of the crisis have also been pronounced: fiscal and monetary stimulus on an unprecedented scale is leading to inflationary pressures which may or may not be transitory; and the long periods of lockdown have left many businesses in an financially enfeebled state – who can be sure that all of their current suppliers will survive the pandemic intact?

Combined with this, export-oriented businesses in the UK – and indeed in the EU – must deal with the effects of Brexit, a localised and comparatively minor example of another big source of potential supply chain disruption: geopolitical tensions. If the US and China continue to march headlong into the Thucydides Trap, there are risks of catastrophic disruptions in global supply chains. Not unconnected to this theme are a marked increase in sophisticated cyber attacks, in the use of international sanctions as a tool of foreign policy, in pressures to shorten complex supply chains and near-shore production, and accelerating moves towards decarbonisation.

Finally, businesses are trying to get to grips with the increased salience and potential impact on them of the social media revolution, as well as with a step-up in regulatory pressure in areas from labour rights to corruption to money laundering. Both of these themes speak to the increased importance of protecting brand and reputation.

Each of these swirling forces in its own way contributes to a need for companies, particularly those with international exposure, to increase the resilience of their supply chains. In extreme cases, this may involve finding entirely new sets of suppliers. More commonly, it may involve a paradoxical combination of deepening ties with existing suppliers – getting to know them better, creating closer strategic alignment, perhaps introducing technology such as enterprise blockchain into the equation – and seeking out new reliable suppliers to allow increased optionality.

In both cases, Integrity Due Diligence (IDD) will be a vital tool in your armoury. At the simplest level, IDD services allow a business to understand, before cementing a new supply chain relationship, whether a given supplier (or indeed distributor) has a track record which makes them a credible and reliable supplier of the goods or services sought, and whether there is anything in the track record of the supplier or its principals which might lead to reputational damage to your own business, or indeed to more direct financial losses. Is the supplier financially stable, or might it disappear overnight? However well-established the supplier is as a business, might its involvement in the supply of the goods you seek be far more recent, perhaps an opportunistic sideline in which it has little expertise? Has the supplier – or perhaps one of its founders – faced accusations of involvement in fraud or corruption? Do they have close personal ties to any of your key competitors? Any track record of facing allegations of IP theft? Or might they be serial aggressive litigators? Is the ownership of the business transparent?

Looking a level deeper, what is the nature of the supplier’s political connections in its country of origin, and are there any hints of corruption involved? Or perhaps suggestions of dependency on or strong informal patronage by key politicians? Might a supplier or distributor’s very existence be vulnerable to regime change in its country of origin? Equally, are there any locally-known concerns over the supplier’s track record on environmental safeguards or labour rights? On a more mundane level, if the relationship with your new supplier is going to work over the long term, if your interests are going to be a priority for them, who on their side do you need to negotiate with and keep personally engaged for the duration of the relationship?

There are many factors to consider, and those with the greatest salience will vary from business to business, but in all cases commissioning tailored IDD investigation in advance of contracting with fresh suppliers will go a long way towards protecting your corporate ship and giving you confidence in the durability of your new supply chain relationships.   

For more information please contact Alexander Davies.