Supplier engagement – What does good look like? | KPMG | AU

Supplier engagement – What does good look like?

Supplier engagement – What does good look like?

Supplier engagement is often an early step in a responsible sourcing program. Having onboard suppliers can help you have eyes and ears on the ground, helping to facilitate the ethical sourcing process.

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Supplier reviewing goods in a warehouse

KPMG and Sedex, a non-profit organisation dedicated to improving global supply chains, hosted a Responsible Sourcing Conference in Sydney in 2017. At a breakout discussion, Aaron Hill, Membership Manager, Sedex; Stephan Gabadou, Risk Assurance Consultant, KPMG; and David Mullen, Supply Manager of food manufacturer Simplot Australia, explored supplier engagement challenges, and shared examples on how to master it.

Stability of your vendor base

Mullen said the objective of supplier engagement should be to take your primary suppliers along the responsible sourcing journey. He outlined that the journey has been a long and gradual one for Simplot Australia.

“Simplot Australia’s vendor base was quite stable before commencing our supplier engagement journey in 2014,” he said. “Now approximately 80 percent of suppliers are on board and we have only just started to see direct benefits of our engagement program.”

Simplot Australia’s process included redrafting their code of conduct and rewriting the supporting guidelines for procurement, with a focus on which standards to align with. Suppliers were asked to read, acknowledge, sign and return the redrafted code of conduct policy forms. Some suppliers chose to ignore this process or refused to sign.

This raised the question, at what point do you stop engaging with suppliers? The panel agreed that answers vary depending on the situation and involved parties, however ‘cutting away’ is not seen as best practice given that the likelihood of continued misconduct is high. Therefore, initial attempts to bring suppliers along that ethical sourcing journey are preferable.

Aaron Hill said: “If suppliers continue to refute any attempts of education or engagement, perhaps a contingency plan should be discussed.”

Simplot Australia received enquiries from about 20 to 25 percent of businesses who were concerned about what the repercussions of this new supplier policy might mean for their business, Mullen explained. Determining the impact demand on suppliers is a good strategy to avoid supply chain reliance.

Mullen added: “Simplot Australia’s approach to supplier security is to determine what percentage of output their business demand is to the supplier. Demand reliance of above 30 percent is considered the upper threshold before other contingencies are sought for supply.”

Where your focus should lie

The amount a supplier spends is not an accurate indicator of risk, the panel explained. For example, often branded goods, such as shirts which display corporate logos or notepads present the biggest reputational risk to your organisation. The medium to lower tier suppliers are more likely to fall into the higher risk bracket, as the larger-spend suppliers will often run their own supplier diligence programs and have supplier code of conduct or ethical sourcing frameworks in place.

The panel discussed that when going down an ethical track, you need to explain the importance of what you’re doing and why you’re doing it, with the objective of exploring further down the tiers of suppliers that are engaged. Historically it is second and third tier suppliers which represent the largest risk to organisations.

Another call to arms was for organisations to know their supply chain. Hill said, “avoid being an organisation who sifts through invoices to figure out where their spend goes”.

Mullen added, “Simplot Australia originally restructured its sourcing team from having a decentralised model to a ‘centre-led model’, so as to regain control of procurement. From this, a step-by-step strategy was outlined with reasonable annual targets over the following years leading up to 2020.”

Education starts in-house

Supplier engagement and education begins internally. The panel discussed that it is critical that buyer teams understand what ethical sourcing is before they approach suppliers. If the procurer has no idea what ethical sourcing is, then the ethical sourcing program will fail. Once this has been established, education occurs collaboratively with suppliers.

This benefit of dual education of procurers and suppliers ripples down the supply chain. An example Mullen shared was running half-day seminars with buyer teams.

More time is often required to engage legacy suppliers, as there could be push-back from the supplier when processes change – particularly in a long-standing relationship. When initiating the process with legacy suppliers, Simplot Australia had found that investing time to explain ‘why’ has been effective.

Stephan Gabadou said: "Suppliers are a necessary party to the ethical sourcing journey as they’re able to feed back information as to what it’s like on the ground. Fostering a strong two-way relationship is critical”.

He added, “It’s also important to be cognisant of the fact that some suppliers will feel pressured to comply, leading to risks of false claims concerning ethical sourcing. A strong open dialogue about the implications for suppliers on changing policies goes a long way to reduce these associated risks.”

Dealing with seasonal workers

Brainstorming between suppliers and procurers is a great way to create ideas around how to make the risk mitigation initiative work for all parties.

“Risk thresholds are important for organisations in determining action. A company must determine whether they’re comfortable with their level of risk and whether they accept or approve known or potential activities along the value chain,” Gabadou said.

What is SMETA and how can it help

SMETA (Sedex Member Ethical Trading Audit) is broadly about continuous improvement of suppliers and trade. Hill explains: “The SMETA process looks at areas which can be improved for suppliers or industries, whilst taking into consideration what members are demanding.”

SMETA has been made publicly available and approximately one in four audits uploaded to the database are conducted by non-Sedex members.

“Companies who utilise SMETA are those who’re driven by quality performance within their organisation and supply chain,” Hill said.

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