Corruption in supply chains: an overview
Corruption in supply chains has long been a persistent problem for may businesses which can lead to sever consequences, both in terms of cost and the reputation of the business. Because of the globalized nature of today’s business systems, supply chain corruption can be hard to pinpoint and even harder to weed out.
The COVID-19 pandemic has further amplified the fragility of today's global supply chains. Suddenly, everything from toilet paper to baby food became scarce, with a streamlined model that focused on profits struggling to cope with an ever-increasing demand. This type of situation has proven to increase the risk of supply chain corruption even more.
In this blog post will take you through What supply chain corruption is and where it can occur. We will also give you actionable steps on how you can mitigate risk.
What is corruption?
Depending on your location, corruption may or may not be endemic. As a concept, it’s typically dishonest or illegal behavior, achieving goals through improper or unlawful means. In many areas, such as Latin America, it can be a persistent problem which can, in the long run, affect the productivity and profitability of your supply chain.
Transparency International found that the “2019 Corruption Perceptions Index shows anti-corruption efforts stagnating in G7 countries”, with the United States receiving its lowest score (69 out of 100) in eight years. The UN Global Compact released a report on fighting corruption in the supply chain and found that “the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.”
Corruption boils down to money and power, so it’s no surprise that it’s a valid concern for businesses, as well as their respective supply chains. Today it is no longer enough to not be aware of hidden corruption in your supply chain – if discovered by outside parties, it can lead lengthy legal procedures and heavy fine's.
Corruption in the supply chain
Briberyand fraud are two common forms of corruption in business. Collusion can include kickbacks to ensure a supplier is awarded a contract or misrepresentation of goods and services.
The practices are accepted in some regions, while they may be prevalent - and even widely accepted by society as a whole.
For instance, the jurisdiction may not enforce white-collar laws, or they might be used to dealing with collusion between suppliers to raise the overall prices. Suppliers may circumvent protocols to cut costs or skim from the top, and there are also other, more esoteric issues to think about.
Corruption in the supply chain can lead to environmental issues, while aspects like human rights and worker safety also have to be considered. Bypassing health and safety requirements is a common complaint, affecting even the largest companies worldwide.
Apple’s Foxconn facilities in China regularly make the news, as China Labor Watch continues to report on worker conditions. They claim that Apple’s factories don’t report injuries, and that “the factory does not provide workers with adequate personal protective equipment and workers do not receive any occupational health and safety training.”
There’s also a reputational risk that will be difficult to shake off if corruption in the supply chain is made public. This could lead to further problems with customers and suppliers in the future.
Regions with less reported supply chain corruption are still at risk, be it through diversion of public/business funds or conflicts of interest. But what steps can be taken to improve the strength of your supply chains?
Mitigating risk in a global supply chain
Mitigating risk is difficult, especially when you could potentially be dealing with a supply chain that stretches halfway around the globe. This can include anything from political, governmental, or economic changes in a region, with Brexit being a prime example in Western Europe.
The pound has weakened, while the London School of Economics estimates that; “the economic consequences of Brexit are overwhelmingly negative”. Increased levels of compliance will help to deal with the developing market in Britain, ensuring that you’re one step ahead of any policy or regulatory changes.
Research suggests that most businesses have a reactive, unstructured approach to fighting corruption risks, so it’s important to work on identifying and implementing procedures that can help your business specifically. Consider taking a corruption risk assessment, or using an independent body to check the quality and sustainability of your supply chains.
Mitigate risk of supply chain corruption with these steps:
- An emphasis on training will help staff to identify everything from potential conflicts of interest, to improving current corruption prevention and detection measures. This also includes building trust within the business, which is essential for risk mitigation. The development and implementation of safeguards and compliance programs will also help to improve their skills in the long-term.
- Supply chain visibility is important because it provides real-time insights is important because it provides real-time insights into the activities and actions occurring across your supply chain. It can help businesses limit risks of corruption and bribery and help reduce the risk of reputational costs and damage.
- TransparencyTransparency is an important facet, so it’s best to document every step of the planning stage, is an important facet, so it’s best to document every step of the planning stage, as well as any procedures created. Transparency is also useful for partnering, training and reporting, as well as maintaining professional relationships with stakeholders in a global economy.
- Traceability is another aspect that can be improved to ensure less corruption is another aspect that can be improved to ensure less corruption in your supply chain. Essentially, the better your ability to identify, track and trace elements of your product/service, the less chance there will be of corruption somewhere in the supply chain.
- Machine learning and algorithms have been mentioned as potential methods to help in this regard, using data and number crunching to identify any potential flaws or fraud. Using data to ensure a sustainable supply chain will help you to easily trace where the greatest risks will help you to easily trace where the greatest risks are and consequently take necessary action to mitigate the risk. This could mean anything from adopting new policies to more drastic measures as changing supplier if necessary.
- The rise of blockchain could also be useful. Using data to ensure a sustainable supply chain will help you to easily trace where the greatest risks makes transactions simpler and faster, with a larger emphasis on transparency and security. The technology keeps a clear digital record of transactions on a network of millions of computers worldwide, making it harder to commit fraud along a supply chain as the ledger can’t be changed without great effort.
Circumstances will differ depending on the nature of your business, as well as the regions you operate in and the size of your supply chain. You’ll need to take the time to understand the local markets, as there’s no simple solution to supply chain corruption. Regulations could help to provide defined rules, but they can easily differ from your normal operating environment depending on the region.
It’ll be incredibly difficult to eliminate all corruption along supply chains, but it is possible to lessen risks with smart decision making and clear procedures in place.
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