INDUSTRY INSIGHTThought Leadership

The increasing importance of supply chain assurance for business growth

By Gareth Adams, a supply chain risk management expert at Achilles

The supply chain and procurement world is moving ahead at pace, driven by evolving and expanding due diligence demands. Stringent obligations are being placed on businesses both due to new laws like CSDDD in the EU, Modern Slavery Acts in the UK, and Australia and UFLPA in the USA, plus governmental strategies such as diversification, Vision 2030 and Net Zero.

A core goal is to promote sustainable and responsible business practices, protect the environment, and create a more diversified, just, and equitable economy.

Current and proposed ESG related legislation

Increased visibility of sub-standard working environments, how industries impact the environment, impacts of rising temperatures and associated climate change are the primary reasons for the new regulation and strategies. For example, in September 2022, the International Labor Organization estimated that there were 50 million people living in modern slavery – a 20% increase in only six years.

Increasingly companies are required to show how they are working toward the national vision and report on the steps they take to be more sustainable in their value chains. With the threat of big penalties such as loss of funding from global financial institutions or loss of future contracts, companies need to understand how to protect their business and take advantage of the new opportunity.

Do not fall into the trap of thinking this is only for big global corporations. While they might be the ones that will ultimately be held to account by the international lawmakers, all businesses that make up the value chain are being impacted by this new era of accountability and transparency; particularly as spend is increasingly directed to more sustainable companies.

Tips for getting started with supply chain due diligence

The GCC is moving to a place where best practice, the influence of climate change and emerging local legislation recommends, perhaps even mandates, the adoption of an ESG due diligence strategy aligned with recommendations by global bodies such as the Organization for Economic Co-operation and Development (OECD) or mandated by global customers and finance markets.

OECD Supply chain Due Diligence Best Practice

While across the GCC, the focus of sustainability may be slightly adjusted from that in Europe or North America, mega projects such as Neom in the region are leading the way, putting ESG principles at the centre of their community and how their business operates.

Getting started with any Supply Chain Due Diligence requirements or enhancing your approach to supply chain risk assurance can be complex and resource heavy, but there are several steps that are aligned to the OECD guidance that companies can take to get started and ensure they are prepared.

1. Develop a due diligence policy: Outline the processes and measures you will take to mitigate risks in your supply chains.

2. Assess your supply chain: Identify suppliers, subcontractors, and other parties you have business relationships with and evaluate their adherence to international ESG standards and regulations.

3. Implement ESG due diligence measures: Conduct risk assessments and audits engaging with suppliers to ensure compliance and implementing risk mitigation measures where necessary.

4. Monitor and evaluate performance: Track supplier performance and conduct regular, ongoing assessments.

5. Publish reports: Include a description of the due diligence processes, risks identified, mitigation measures, supplier engagement, remedy measures, verification measures, grievance mechanisms, transparency, and management approach.

6. Engage with stakeholders: Include customers, investors, civil society organizations, and affected communities. It is important for understanding concerns and expectations.

7. Seek external support: Work with consultants, auditors, and other experts to help ensure you comply.

Challenges and pitfalls

Businesses working toward and achieving compliance with sustainability and supply chain mandate and evolving client demands face some common challenges. These include:

Complexity: Identifying and assessing risks throughout the entire supply chain can be challenging and resource intensive. The complexity can also be compounded by the global nature of supply chains, some operating in hard to reach or hard to access places.

Data collection: The data required often goes beyond regular operational boundaries. Data sources with questionable provenance, accuracy and interpretation often become primary sources of information which undermine the basis for the reporting.

Data veracity: Using web-scraped or AI generated data may at first look appealing, but information about poor working conditions and environmental pollution is rarely found in AI accessible places, so it will lack the scrutiny necessary to fully understand your risks or report with confidence.

Data storage: Data may also be in multiple data formats or silos and there is often an absence of systems to record data in a methodical way that can be used to demonstrate a risk-based approach.

Limited capacity: Many businesses simply lack the resources or bandwidth to undertake such intensive and sustained supply chain risk management.

Time constraints: Companies may struggle to implement effective due diligence processes within the required timeframes of their clients.

Advice for suppliers

In the past, suppliers may have filled in forms relating to things like carbon reduction to tick some boxes, but that is not going to be enough. Your bigger and forward-looking customers will now ask you to provide detailed information about your environmental, social, health and safety, and cyber policies, practices, and processes and request evidence to support what you tell them.

Customers may also want to go further to check your credentials, undertaking a desktop or on-site audits using independent auditors. Your more diligent clients may also insist on worker interviews to check the employment conditions in your offices and factories.

You may also find you need to invest in new systems to enhance transparency and traceability as well as recruit and/or provide training to implement what is required. It is worth considering a third-party solution to help manage the information you need to capture and track.

Summary

There are significant moves locally and globally to introduce reporting and supply chain due diligence mandates to help create a more sustainable economy. As more and more countries consider harmonizing around ESG legislation, it is likely that supply chain transparency and accountability will become increasingly important in many regions, including the GCC.

The good news is, for businesses that do this well, this new era of supply chain scrutiny and accompanying ESG mandates creates opportunities for differentiation, diversification, and business growth for companies of all sizes across the upstream and downstream value chain. By prioritizing the well-being of workers, local content and communities, and the environment, companies can play their part in building a stronger and more resilient economy of the future.