Managing supplier risk in manufacturing

IN 2022, businesses deemed supply chain disruption as their biggest business risk. And as we move through 2023, there looks to be no relief in sight. 

According to research by Ernst and Young at the end of 2022, 72% of businesses in the UK felt the pandemic had a negative or significantly negative impact on their companies. And if we look at the results through a manufacturing lens, that increases to 97% of firms. 

It's fair to say the COVID-19 pandemic represented a global disruption across trade, finance, health and education systems, businesses, and societies like few others that we've experienced in the past 100 years. 

Doing business in a changing landscape

We continue to see and feel the repercussions of COVID-19 in 2023 as national lockdowns across the globe last year continue to slow or even temporarily stop the flow of raw materials and finished goods, disrupting manufacturing as a result. 

Companies are continuing to report delivery delays, increased costs and ongoing uncertainty. In response, manufacturing businesses have been adapting and designing a supply chain organisation that will fit with the new digital and autonomously focused era. 

The term, Environmental, Social and Governance, is now firmly embedded in the language of business. Over the past two years, while the pandemic has disrupted lives and industries, the pressure on organisations to prove they are helping address key ESG issues has rapidly intensified. 

ESG in a manufacturing context

Let's consider for a moment exactly what ESG means in the context of the manufacturing sector. 

For Environment, that's almost certainly going to involve shrinking your climate footprint and cutting carbon emissions throughout your value chain. But it will also come down to having an energy-efficient infrastructure, avoiding natural capital depletion, and better managing waste, all the way from the shop floor to the HQ. 

For Social, that includes fundamentals like promoting diversity, economic inequality, tackling discrimination and working with local contractors and suppliers. But more broadly it requires manufacturers to actively protect human rights, labour relations and employees' safety across every aspect of their operation and supply chain. 

For Governance, it means behaving ethically, as well as being open and transparent in your decision-making at board level and across the C-suite. It also relies on having the right escalation protocols, risk tolerances and compensation policies for every site, everywhere. 

The new focus on ESG and resilience in supply chains has led to new regulations coming online around the globe. And these will soon impact supply chains across every sector. Organisations have long viewed their supply chains through the lens of quality and cost. They will now have to consider stricter compliance requirements in areas like sustainability, environmental impact and human rights. 

Many of these compliance burdens will not only apply to companies but also to their third-party contractors and suppliers in all tiers. As they strive to assess risk and initial compliance with these new regulations, the complexity of their supply chains and the decision-making involved will increase significantly.

The evolving landscape of supply chain regulation 

We know it's never been more important to dig deep into supply chains in real time with that one true view. And not just around health and safety risks but also wider factors such as modern slavery; diversity; equality; workplace wellbeing and financial stability. 

Staying compliant is clearly going to continue to be high on the agenda in 2023 as governments implement stricter and more stringent supply chain regulations, meaning organisations need to take full responsibility for their supply chain compliance across the entire ecosystem. 

Some of the existing key acts which are relevant to the manufacturing industry include:

•    Health and Safety at Work etc. Act 1974
•    Right to Work Act 
•    UK Climate Change Act 2008
•    Environment Act 2021
•    Workplace Health, Safety, Welding and Welfare Regulation 1992
•    The Modern Slavery Act 2015

Looking ahead, with the new era of supply chain due diligence, it's not a surprise to see the EU moving towards tighter regulations on supply chains. 

We see this as the beginning of regulations which demand a different approach on the part of businesses which depend on supply chains, both domestically and abroad. 

Forthcoming regulations include: EU Supply Chain Law; UK Procurement Bill; The European Commission (Ec) For A Corporate Sustainability Due Diligence Directive; and German Supply Chain Due Diligence Act (2023). 

What do these mean for supply chain, procurement and safety professionals in the manufacturing sector? Businesses will need to prove they are managing their supply chain diligently and they need to gain greater visibility into their supplier and contractor base. This will provide reassurance that suppliers and contractors have appropriate credentials in place for key aspects such as health and safety; environmental management; modern slavery and anti-corruption in order to meet those legal requirements and create a resilient supply chain network. 

Building a robust and resilient supply chain

Having a robust and resilient supply chain empowers you and your teams to behave more proactively and look ahead to oncoming regulatory risks. 

There are a range of steps businesses can take. No doubt you will already be doing some of these or looking to enhance what you currently do. 

1. Adopting a regulatory change management process

Look at the process of anticipating, capturing and implementing regulatory changes in your business. Are you currently identifying changes in regulatory requirements? What resources are you using and how are you implementing them into your management systems? 

2. Conduct impact and gap assessments 

A commonly used approach is the plan/do/act principle, to determine how the changes apply to your business, review compliance risks and identify any weaknesses in existing controls. 

Are you currently doing this, and, if so, is it time to review your methodology? 

3. Map out the business areas impacted  

Also, don't work in silos. Map out all the business areas impacted. Where will the regulatory changes need to be applied and who will it impact along the supply chain?

4. Scenario planning and risk assessment 

Once you've mapped out those business areas, develop scenario planning exercises. Know the full scale of impact based on the way your supply chain runs and plan for the many scenarios which may form as a result, together with the risks you may need to tackle. 

5. Assess operational and financial risks

Through these scenario planning exercises, assess the operational and financial risks. Clarify how the regulatory changes will impact supply chain operations, for example, will it stop your output; cause you delays; or most importantly, hurt your bottom line? 

6. Engage with the impacted stakeholders

It's crucial to detail the level of impact per stakeholder group, e.g. contractors and suppliers, based on your assessments. 

7. Review and amend processes, policies and procedures 

It is important to stay in line with the regulation changes. At the same time, this allows for greater flexibility to adapt your business to future changes down the line. 

8. Develop a regulatory change plan

The aim is to future-proof your business against any ongoing regulatory changes, again with the overall goal of minimising disruption both to your operations and those of your supply chain. 

9. Collaborate with departments to understand and action the changes

Make sure you work with employees to ensure they fully understand the changes in the compliance processes and provide the training needed, with regular check-ins and refreshers along the way. 

A sustainable supply chain

It's fair to say that one of the significant regulatory areas of discussion over the last five to ten years has been ESG and sustainability.

Many manufacturers are under mounting pressure to create more sustainable supply chains. With this comes complexity, particularly when looking to revamp operations to meet net zero goals. 

The future state of your supply chain and the way legislation is going, more and more manufacturers will need to report on items such as:

• Carbon footprint and waste management reporting
• Maximising social value using SMEs
• Human rights - modern slavery 
• Work exploitation - human trafficking
• Anti-bribery and corruption
• Ethical sourcing 
• Health and safety 
• Environmental best practices 
• Responsible business practices 
• Cyber security 

This is necessary, not only to be sustainable but also to have greater visibility and additional control to allow them to grow their businesses and avoid costly fines and brand damage. 

Getting expert advice

Alcumus is on a mission to create the safest and most ethical global network of responsible buyers and suppliers for a better working world.  We simplify supply chain compliance, create visibility, and we enable buyers and suppliers to connect with ease. 

We use our experience and market insight to create consistency and clarity for supply chain compliance requirements. We use technology to create a simple interface for suppliers to easily understand and fulfil these requirements, enabling them to prove that they meet buyers' standards. 

Alcumus can help businesses make more informed decisions, identify risk, and drive constructive change. Reflecting this, Alcumus Supply Chain Compliance solution delivers full lifecycle management of verified suppliers and accredited contractors with a mutual commitment to high standards and ethical best practice. 

Remember, we're now moving to a world where verification should no longer be restricted to just those main contractors and suppliers, or those of a large size. It needs to be extended throughout all tiers. Where there is limited visibility into the credentials of suppliers and contractors, businesses will be left more exposed to fines, investor scrutiny and falling shareholder value.

Rebecca Sperti is SVP of sales at Alcumus and Barney Feely is head of customer success at Alcumus

If you'd like to listen to Rebecca and Barney discussing how to manage supplier risk in more detail, together with what Alcumus can do to help, why not check out their webinar on the subject, available here: https://tinyurl.com/2uzuy5ae

For more information: 

www.alcumus.com

Tel: 0330 127 1723