Ethics in Supply Chain and The Cost of Compliance…

The Weekly Insights | Issue 9

What’s the Deal?

It’s been more than a decade since the global financial crisis hit that led to a heavily regulated business environment. Adhering to these ever-evolving compliances has become vital to businesses across the world. Organizations need to ensure that their suppliers are not indulging in any malpractices to procure resources and produce goods & services at a cheaper rate.

The US government recently issued a list of goods that are restricted from being imported and it includes Indian cotton seeds, cotton, thread, etc among other commodities. This decision was taken based on the reports published by international NGOs, who cited industries that failed to address child labour concerns.

A virtual seminar was recently organised by the Texprocil, Employers Federation of Southern India (EFSI), Ethical Trade Initiative (ETI) and the Southern India Mills’ Association (SIMA) in this regard, where they stressed the need to remove India’s name from the list.

What Does ‘Ethics in Supply Chain’ and ‘Compliance Cost Mean’?

Freedom of employment, eradication of child labour, safe and hygienic working conditions and humane and non-discriminatory treatment of employees and vendors are some of the basic ethical guidelines that experts focus on.

Compliance Cost on the other hand, is all the monetary and non-monetary cost incurred by an organization to comply with the regulatory requirements.

Some Food for Thought for Supply Chain Heads…

- For any medium or big-sized organization that deals with hundreds of suppliers, it becomes tricky to track who might indulge in unethical practices without the company’s knowledge.

- With an increasing number of morally and ethically conscious customers, following sustainable and ethical practices have become a key criterion for them to buy any goods or services. An ethical supply chain along with an effective Corporate Social Responsibility (CSR) plan helps companies to differentiate themselves from their peers.

- Compliance comes at a cost and many organizations fail to strike the right balance. Decision makers often oblige the need to finance compliance initiatives, but are reluctant to do so by increasing overall expenses. Firms with ineffective compliance programs face legal and financial risk which makes it extremely difficult to attract new clients and employees or even retain the existing ones.

- Modern supply chains are complex, global and multi-layered. Organizations generally use their supply chains to strategically drive their business initiatives and enhance customer experiences. Hence, it’s important to understand the needs and expectations of the customers to deliver in an effective way.

- It can be very tempting to design compliance policies and processes based on the current size of the organization, especially if a company is in its infancy stage. However, it can prove to be very short sighted since the compliance controls which are implemented today might not be scalable to match the firm’s size in 6–8 years. This might result in a complete overhaul of the entire process at quite a significant unplanned cost in the future.

Ways in Which Businesses Can Move Towards an Ethical Supply Chain

- An ethical supply chain entails: Effective planning, streamlining processes and workflow, transparent supplier actions and monitoring environmental risks. Technologies such as blockchain, AI-driven bots and IoT sensors can also help detect potential risks in time, improve efficiency and reduce redundancies.

- A cross-functional, complex affair: The purview of compliance is no longer just the domain of the chief compliance officer or chief risk officer, companies planning to stay ahead of the curve are implementing measures and checks at every level of their organization.

- To meet compliance requirements at lower costs, compliance officers are looking for opportunities to dramatically improve regulatory productivity in both traditional and non-traditional manner. Therefore, it becomes important for companies to implement compliance policies and procedures designed to detect and correct potential issues and also to prevent them altogether in the first place.

- Designing Dynamic Compliance Policies & Procedures: Investing adequately in compliance planning and processes while continuously monitoring the changing nature of risks becomes essential for chief risk officers. Also, implementing technological measures by increasing cyber security and data privacy capability for adequate data protection and process automation can assist in keeping current and future risks in check.

Closing Note…

Altogether, to match the current customer climate where they vigorously demand social responsibility from companies in return for loyalty, it has become imperative for all to undertake steps to ensure an ethical supply chain and have risk control measures at all levels of the organization.

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