How Due Diligence and Supplier Relationship Management Work Together

If your company participates in global trade, you should be concerned about human rights abuses up and down your supply chain. Not only because of governmental mandates and customer opinion, but simply because it’s the right thing to do.

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The world is experiencing prolonged and continuous unrest. With a war raging in the Ukraine and fears of a global recession, supply chain digitization is essential to gain control of end-to-end visibility. With consumer demand, investor interest and government policies demanding environmental, social and governance (ESG) initiatives, the cheapest options are no longer the most viable. This is especially true when it comes to procurement as forced and child labor is often seen sourcing raw materials around the world.

Despite consumer demands for ethically sourced products, companies failed to respond to this consumer backed interest. In fact, roughly 85% of companies incorporate sustainable procurement practices due to government regulations and policies and the risk of being noncompliant and not in response to consumer attitudes.

ESG Legislative Requirements

A significant due diligence hurdle for global companies and importers to the United States is the Uyghur Forced Labor Prevention Act (UFLPA), legislation that changed policy on China's Xinjiang Uyghur Autonomous Region (XUAR). Under the UFLPA, it is assumed that any trace of material that was sourced or touched in Xinjiang is automatically guilty of forced labor unless otherwise proven and is not subject to import. U.S. Customs and Border Protection (“CBP”) has reported that nearly 2,200 shipments, valued at $728 million and were suspected of containing goods subject to the UFLPA, requiring importers to comply with Withhold Release Orders (“WRO”).  A WRO allows CBP to “detain the products in question until/unless importers can prove the absence of forced labor in their product’s supply chain.”  This can translate into damaging costs like port storage fees while the assessment is conducted, including the seizure of goods if CBP determines there is conclusive evidence.

Some global examples of other socio-economic related legislation include:

  • New York Fashion Sustainability and Social Accountability Act – If passed it will require New York fashion retailers and manufacturers with over $100 million in annual revenue to make required social and sustainability information available.
  • European Commission (EU) Corporate Sustainability Due Diligence Directive – The draft legislation has passed and will require large EU organizations to detect, prevent and mitigate breaches of human rights, such as child labor and environmental hazards in their supply chains.
  • Supply Chain Due Diligence Act – German legislation that took effect on January 1, 2023, mandates that companies with 3,000 or more employees must take appropriate measures to respect human rights and the environment with their supply chains.
  • EU Deforestation Law – This law will mandate selected commodities of imports to the EU to be deforestation-free.

These government measures are occurring around the globe and at an increasing pace. As a result, trade-dependent companies must be prepared by ensuring that they have the right people, processes and enabling systems in place to proactively monitor these measures, together with the capability to provide authorities with the required data / documentation necessary to keep their shipments moving.

Turning Risk into a Competitive Advantage

While COVID-19 certainly represented unprecedented disruption to global supply chains, the growing number of disruptive events prior to COVID-19 clearly demonstrated that it doesn’t take a pandemic to bring a supply chain to its knees. Now, the growing number of ESG requirements present a growing capacity for ‘disruption’ in the form of both physical delays as well as negative consumer support in the form of reduced sales. Together, they now provide an overwhelming case for enhanced risk-modeling as part of corporate sourcing and supply chain planning. But in doing so, it could also provide companies with a competitive advantage by proactively identifying not only risk, but trade-related cost optimization strategies such as sourcing from countries with lower duty & tax rates, and/or transportation costs and transit times.  

Supporting Solutions and Best Practices

One of the first steps in complying with ESG requirements is to approach prospective suppliers at the beginning of the procurement process. This is where Supplier Management software would support this effort by centralizing all data and information shared between companies and suppliers, while maintaining appropriate documentation for agencies like the CBP. Suppliers can more efficiently share ESG information along with utilizing self-service capabilities for invoices, bills of material, PO, invoice information and any other type of document.

The right supplier relationship software solution provider should be able to seamlessly integrate with existing ERPs, regardless of if the manufacturer or the supplier is cloud-based or on-premises. Great software will work as a data poller, pushing data to and from the ERP so that your users can improve decision making. Find a simple solution without needed hardware that is also quick and easy to implement and widely accepted by suppliers. Effectively managing suppliers with the right software offers a plethora of benefits including:

  • Improved ESG compliance throughout the supply chain
  • Reduced lead times
  • Better management of inventory delivery and quality issues from suppliers
  • On-time deliveries
  • Standardization of bar coding's
  • Forecasts and plans communicated to suppliers in real-time

Ensure that your company's supply chain is working with ethical suppliers to remain compliant with ongoing and incoming due diligence legislation. If your company participates in global trade, you should be concerned about human rights abuses up and down your supply chain. Not only because of governmental mandates and customer opinion, but simply because it’s the right thing to do.