Supply Chain Risk Management: How to protect your supply chain from corruption?

How to protect your supply chain from corruption?

In last week`s blog entry “How corrupt is your country“ we gave insight on the “Corruption Perception Index“, which illustrates the current state of corruption among all countries. Today, I want to go a step further and discuss the question why corruption is such an important topic regarding Supply Chain Risk Management, and why assessing and monitoring risks in order to preemptively protect your business against corruption is an absolute necessity.

Supply Chain Risk Management does not only deal about extreme risk events such as natural catastrophes, strikes, fires and explosions or geopolitical risks like war. Securing your supply chains means to be totally aware of economic risks such as corruption or bribery, too. In our blog entry last week we pointed out that many countries have serious issues with corruption and as a result also severe economical problems. Today, corruption is probably the biggest impediment to global economic growth and social development. The effects of corruption are quite devastating: corruption distorts markets, undermines democracy and the rule of law and leads also to increasing costs for global businesses.

 

corruption

corruption

 

What type of corrupt behavior threatens your supply chain the most?

According to the study “Stand Together Against Corruption“ (published by the United Nations Global Compact 2013), the emergence of fraudulent procedures in procurement is one of the biggest risks of corruption in the supply chain. The examples below show which types of corrupt behavior involving suppliers are threatening your supply chain the most:

  • A supplier presents a bribe to government officials in order to receive public permits and/or carry out its business and provide products and services to your company.
  • A supplier provides a small payment to a low-level customs official to speed goods through customs.
  • A supplier presents a payment to a customs official to pass non-conforming goods through customs.
  • A supplier offers gifts to a procurement manager during a bidding round.
  • A supplier provides a bribe to a contract manager to ignore problems with a contract.

Thus, transparency along the supply chain to prevent cases like the aforementioned is an essential need for businesses around the world today. As we know by now, a comprehensive Supply Chain Risk Management approach, including the monitoring of the whole supply chain and all (sub-) suppliers in order to prevent risks like corruption, is the best possible way to gain a competitive advantage nowadays. The benefits for your business include among others:

  • The improvement of brand reputation
  • The reduction of costs related to fraud or legal expenses
  • The improvement of product and service quality.

Nicholas Coward, Head of Baker & McKenzie`s Global Trade and Commerce practice, summed it all up: “(..) As the use of third parties in supply chains increases, companies need to take a closer look at the potential risks involved in taking these partners on and implement strategies for mitigating and managing those risks across borders and business units.

But which measures could you take preventive to protect your company for the negative effects of corruption within the supply chain?

One of the first steps that could already be introduced during the procurement process, is the development of a binding Code of Conduct as well as a demand for defined rights and obligations in regard to corrective actions that possibly have to be taken for all suppliers.

Another measure to prevent corruption is the assessment of corruption-related issues, which should be embedded in the audit procedure. Furthermore, you should also putting a regular conduct of compliance audits, to your list of emergency measures.
Last but not least, it is also recommendable to make sure that an appropriate communications strategy for incidents involving the “Corporate Social responsibility” (CSR) is already in place, before an event occurs.


Sources:

Fighting Corruption in the Supply Chain: A Guide for Customers and Suppliers (Fighting Corruption in the Supply Chain: A Guide for Customers and Suppliers)

Stand Together Against Corruption (United Nations Global Compact 2013)

Heiko Schwarz is the Founder and Managing Director of riskmethods, responsible for Sales, Marketing and Business Development. Heiko has been working in the software business for 16 years, with 13 years in different areas of the strategic purchasing market. He has excellent knowledge in procurement, supply management and risk management and has been successfully helping supply chain and procurement organizations implement solutions to increase performance, reduce costs and minimize risks.

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