Today, about 70% of global trade moves through supply chains – making companies highly exposed to hidden risks if they don’t know how to navigate, spot, and mitigate them in time. More and tougher environmental, social and governance (ESG) regulations are being adopted worldwide, setting higher expectations on companies’ transparency. All while the past years have proven that supply chains are extremely fragile, and even the most unforeseen events – such as the COVID-19 pandemic and Russia's invasion of Ukraine – can actually become reality and jeopardize your entire business model.
Companies that conduct supply chain audits will get a better understanding of their strengths and weaknesses in their supply chains. But to get there, companies must first get a clear understanding of where risks may be lurking. While supply chain risk assessment and audits can be costly and administratively challenging, they’re important for companies to gain a true view of their performance and find risks before they become a problem.
So for that reason, we’ve listed four essential steps for you to take to successfully manage risky business in your supply chain, let's have a look!
What is a supply chain audit?
A supply chain audit is an examination or inspection carried out along your entire supply chain to make sure that you fulfill social, environmental, health, and safety requirements. Auditing your supply chain helps you understand whether or not your suppliers comply with social and environmental standards set out for them, such as SA8000, ISO 14000 and ISO 9001.
What are sustainability risks in supply chains?
One common misconception is that companies solely need to focus on environmental risks. While it indeed is a key risk to consider, supply chain sustainability risks encompass a diverse set of aspects, such as:
Human and labor rights
Reassuring human rights are being respected and not violated by any means while working alongside suppliers to enhance safe work, fair wages and hours, and protection from modern slavery.
Ethical
Efficient and transparent governance over the entire supply chain to deter wrongdoing of anything that falls below minimum standards for your code of conduct.
Health and safety
Ensure safety and well-being to the employees, contractors, and those exposed to your supply chain operations.
Environmental
Reduce environmental damage by taking the action needed depending on your business activities. For example, pollution reduction, sustainable sourcing and waste management.
Regulatory
Comply with laws, policies and regulations to protect the organization from fines, loss of critical business operations and licenses, and other penalties.
Reputational & Revenue
Protect a company from damaging its brand image and reputation; attract investors, customers, the best talent, and thereby – stay competitive and avoid financial losses.
4 steps for managing risky business in your supply chain
Until recently it was believed that there was a clear, linear relationship between the frequency and duration of audits and risks. However, this process takes time and drives high costs, and most importantly – it doesn’t identify which suppliers are at higher risks and should be prioritized. This is especially true for companies with large and complex supply chains, and the risk of not identifying the risks and suppliers to focus on in time can become costly.
These days, more companies are starting to realize the benefits of having a supply risk management platform or software in place to adequately monitor the probability and impact of each supplier and risk situation. Below, we’ve listed four key steps companies should take to successfully manage risks in their supply chains:
1. Implement a dedicated supply risk management platform or software
The ultimate goal for managing vulnerabilities and risks in your supply chain is to identify areas of weaknesses in your supply chain and which suppliers need your extra attention. Implementing a supply chain risk management platform or software is a great asset for you to identify and prioritize supply chain risks quicker and more accurately.
2. Prioritize suppliers based on country or industry-specific risks
No company has limitless resources and therefore, it isn’t quite feasible to risk assessing each of your suppliers and sub-suppliers. That is why prioritizing risks is a key step in the risk management process. Prioritizing helps companies determine which suppliers pose the biggest threats based on risks such as their geo-location, industry-specific risks, or raw material source.
3. Risk assessment on prioritized suppliers
Once you’ve identified what suppliers to put extra attention on, follow up with collecting additional data for an in-depth risk assessment so you better understand the likelihood and/or consequence of the risks they’re facing.
4. Audits & follow-ups
The results from the risk assessment help companies to understand the severity and type of risk – and from that decide what action is necessary to take. However, as Henrik Lindholm from ETI Sweden mentioned in our Human Rights Due Diligence in the Supply Chain Webinar, research shows that conventional methods, such as code of conduct, audits, and corrective action plans are not really achieving improvements at supplier-level. Too often, it is a one-size-fits-all approach when managing risks, but with the right measurements in place, audits can be a great tool to minimize and even prevent risks. There are many different kinds of audits, and which one is more suitable depends on things such as the severity of the risk, supplier, resources and the audit process implemented by the company.
Unannounced on-site audits are, as the name gives away, a visit to your supplier with no warning of an inspector coming. These audits are popular as they provide realistic day-to-day insights into the supplier’s culture and operations.
Announced on-site audits are also widely used, as they are still effective and give the supplier time to prepare. On one hand, agreeing on a date ensures that the relevant stakeholders are on site for the inspection and certain important preparations can be done in time. On the other hand, they lack the authenticity of an unannounced audit.
Desktop audits are remotely performed audits, usually used to check suppliers’ documentation and certificates to ensure their compliance. These kinds of audits help you to validate whether or not suppliers are meeting the standards and criteria set out for them.
Essentially, continually evaluating your suppliers is an important step toward reaching a cycle of continuous improvement. When it comes down to it, companies that aren’t taking responsibility for risky business in their supply chain will be held responsible one way or another. Whether from customers, the upcoming tougher ESG regulations or investors’ continuously increased demand on companies.
How Worldfavor can help
Automate your supplier risk assessment in Worldfavor to more accurately and quickly understand strengths and weaknesses in your supply chain. Utilize our standard process to quickly get started – or customize your own suited to your company’s vulnerabilities and risks! Contact us today to find out how Worldfavor can benefit your company.
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