With the increasing complexities of the global business environment, procurement managers face enormous challenges in streamlining their supply chains. This is particularly true for companies with a footprint in developing world regions, where networks and relationships are less formalised and transparent. While traditional supply chain management is an effective model in a well regulated environment it has its shortcomings in emerging markets where the risk of fraud and abuse is far higher.
CLASSIC SUPPLY CHAIN MODELS ARE AN EFFICIENT FRAMEWORK FOR FIRST WORLD BUSINESS RELATIONSHIPS.
In its simplest form, supply chain management aims to organise a company’s resources, logistics and relationships with suppliers in the most efficient way possible.
The elements of traditional supply chain management models and their relationship to each other can be summed up by the following graphic:
If we look at the above model, procurement (sourcing and purchasing) is focused on delivering value to the supply chain operations. This is an efficient model when working with partners in a developed market – where relationships are transparent, formalised and embedded in a stable political and social environment.
Under these circumstances long-term relationships can be formed with a few large suppliers and the job can get done as quickly and cheaply as possible. The procurement role here is subordinated and embedded in supply chain management and the only real risks are financial or operational.
BUT WHAT ABOUT BUSINESS RELATIONSHIPS IN FRONTIER MARKETS?
Unfortunately, the model does not sufficiently account for the risks companies face when engaging with local parties in emerging markets. When dealing with “frontier markets,” additional considerations such as conflicts of interests, political instability, compliance and reputational risks also need to be taken into account. If they aren’t, the procurement process is more likely to lead to fraud, waste, and abuse with the concomitant reputational and legal risks to the entire organisation.
It also fails to cater for growth in an (initially) adverse business environment beyond established relationships with large suppliers. The transparency “rule of law” enforced by good supply chain governance addresses this shortcoming.
INTRODUCING SUPPLY CHAIN GOVERNANCE
The Chartered Institute of Procurement and Supply, a global industry body, defines supply chain governance as: “The system of directing the behaviours and decisions of procurement within an organisation via legislative, executive and judicial processes.”
To implement effective supply chain governance, a company must first define a set of “rules of engagement” with third party suppliers and back this up by monitoring and enforcing these rules.
“Supply chain governance generates transparency in your supply chain to avoid fraud waste and disruptions. This is even more pressing in today’s tough economic environment,” says Paul Ammer, MD for Inoxico. “Companies will go bust or try to cut corners. In such a scenario, good governance protects your bottom line by identifying cheaters and proactively engaging with weak links in your supply chain.”
Because these rules of engagement include legal and compliance issues ‒ some of which may be driven by global and strategic considerations, such as exposure to US or EU markets ‒ they go beyond the scope of the average procurement department. In fact, supply chain governance is often driven from the board level – especially in companies that have been “burned” in other markets.
Typically people in charge of supply chain governance tend to be the chief procurement officer, the master data manager, chief supply chain officer or even chief compliance officer.
SUPPLY CHAIN ANALYSIS AND ITS ROLE IN SUPPLY CHAIN GOVERNANCE
Personnel tasked with the responsibility of supply chain governance have their work cut out for them. In the first instance they need to conduct a supply chain analysis to establish supply chain policy and procedure. This needs to include:
- Rules around conflicts of interest (e.g. Ethics code of conduct)
- Compliance with local law and tax authorities
- Compliance with global and local duty of care requirements (e.g. health and safety standards)
- Compliance with human rights standards (e.g. UN Global Compact)
- Compliance with “global know your business partner” requirements (e.g. resulting from FCPA and UK Bribery Act)
- Treatment of political exposure
- Rules around sanctions lists
Once these rules have been established they need to be monitored to make sure that policy is followed. The personnel in charge of supply chain governance will also need to continually assess and improve the control of supply chain governance trends.