An Overview of Corruption in Supply Chains

Enroute from the supplier to the customer, almost every product or service goes through a supply chain of some kind. 

This includes the device you’re using to read this, from the specialized parts involved in manufacturing, to shipping it each step of the way. The point is, supply chains are important.

Take the Covid-19 virus, which made everyone acutely aware of the dangers of globalization and limited supply chains in February 2020. Suddenly, everything from toilet paper to baby food became scarce for a week or two, with a streamlined model that focused on profits struggling to cope with ever-increasing demand.

In a globalized world, supply chains are an inevitable part of doing business for many companies. But how does corruption factor into the process, and what can be done to 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 behaviour, achieving goals through improper or unlawful means.

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. 

Corruption in Business

Bribery and 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 supply chains 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 is made public, which could lead to further problems with customers and suppliers in the future.

Regions with less 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 the prospect of 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.

An emphasis on training will help staff to identify everything from potential conflicts of interest, to improving current corruption prevention and detection measures. The development and implementation of safeguards and compliance programs will also help to improve their skills in the long-term.

Transparency 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 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.

The rise of blockchain could also be useful. Blockchain 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.

Further Recommendations

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.

You should take the opportunity to audit your supply chain if possible. This tests the effectiveness of existing processes, and will also be helpful during the planning stage. Any changes will need to be reinforced at board level, while it’s worth remembering that buyers will have more power over the process than suppliers.

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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