As manufacturers aim to increase productivity, lower costs, and remain competitive, risk mitigation in supply chain is now more critical than ever. Managing risks, especially within third-party and supplier relationships, is a vital component of a strong supply chain strategy. In this article, we will explore some practical approaches for monitoring supplier practices, the role of ethics and compliance training, and key risk indicators, in this we will look at aligning with recent guidance from the U.S. Department of Justice (DOJ) on corporate compliance programs and The Corporate Sustainability Due Diligence Directive (CSDDD), the new law mandating large companies in the European Union to verify their supply chains for instances of forced labour or environmental damage, and to address any identified issues.
Aligning with DOJ and CSDDD Guidelines
While not directly subject to these measures, UK-based manufacturing companies should be aware of them as they could well signpost the way for future supply chain monitoring legislation in the UK. This is especially the case if the UK-based company has a presence in the U.S., conducts business with U.S. companies, or engages in transactions in U.S. dollars. If any of these apply, it may fall under the DOJ’s jurisdiction and may also be subject to DOJ measures through the FCPA, which covers acts of bribery involving U.S. companies or occurring on U.S. soil. Similarly, if a UK manufacturer supplies goods or services to an EU-based company, that EU company may require its suppliers to comply with the due diligence obligations of the CSDDD. This would include assessing and addressing risks related to human rights abuses (like forced labour) or environmental harm in the supply chain.
If they wish to maintain business relationships with U.S. or EU companies, compliance with both U.S. and EU standards may become necessary to continue operating within these markets.
The Importance of Risk Mitigation in Supply Chain
So where are we now? Effective risk mitigation in supply chain is a tapestry of risk mitigation, combining rigorous onboarding, continuous oversight, and proactive communication with those third parties to ensure alignment with a manufacturing organizations’ standards and objectives.
Most organisations will already have basic due diligence for third-party suppliers to undergo. This should include (but is not limited to) background checks, assessing financial stability, and verifying credentials. By examining a supplier’s past performance, reputational risks, and compliance with regulatory standards, manufacturers can avoid potential disruptions later. After onboarding, continuous oversight is necessary to track suppliers’ adherence to policies and requirements. This can include regular audits, site visits, and performance reviews. Audits should focus on identifying non-compliance with labour laws, manufacturing environmental regulations, and safety standards. For a more streamlined approach, manufacturers can implement automated tools to monitor compliance data and flag potential issues in real-time. Establishing comprehensive contracts with clear compliance requirements is critical, including contract provisions outlining expectations for ethical conduct, reporting, and quality control measures. Periodically revisiting these contracts to incorporate any regulatory changes or lessons learned from prior incidents helps ensure they remain effective in mitigating risks.
Ethics and Compliance Training for Third-Party Suppliers
But what can manufacturers do to supercharge this process? The answer could be found in comprehensive ethics and compliance training. E&C training is indispensable for creating a shared understanding of a manufacturer’s values, ethics, and regulatory obligations among third-party suppliers. Training programs also help prevent misconduct by educating suppliers on identifying and addressing compliance risks.
Still, far too many companies are using basic Word documents with a signature line for attestation to a summarized supplier code of conduct, or a simple PDF sent out using an e-signature software.
Manufacturers should be looking to develop training that is specific to the roles and risk profiles of their suppliers. For example, suppliers involved in handling hazardous materials should receive specialized training on safety protocols and regulatory compliance. This tailored approach ensures that suppliers are equipped to navigate the challenges of their industry.
Also, manufacturers that rely on suppliers in high-risk regions where modern slavery is more prevalent should implement targeted training programs that align with CSDDD’s requirements. Most mature programs will focus on helping suppliers identify red flags associated with modern slavery, such as passport confiscation, wage withholding, or excessive overtime without consent, but adding training into the mix would cover best practices for ensuring compliance with niche labour laws, training managers on how to recognize potential indicators of forced labour, and informing employees about their rights. Just like the training that we recommend being provided to those using hazardous materials, this training should target individuals directly involved in recruitment, labour management, and operations in these high-risk areas. Supplier staff responsible for hiring could receive specialized training on ethical recruitment practices. A comprehensive and targeted training approach not only raises awareness but also actively involves suppliers in due diligence processes, equipping them with the tools to recognise and report modern slavery risks within their operations.
Third Party Risk Management in the Supply Chain
To maintain compliance, manufacturers must ensure training is not a one-time event, but a continuous process. Annual or semi-annual refresher courses help reinforce ethical guidelines and regulatory updates, such as those highlighted in the DOJ’s 2024 guidance on compliance programs. Regular training sessions also provide opportunities to share case studies of past incidents, enabling suppliers to learn from real-life examples.
The DOJ's 2024 update emphasizes not only the importance of closely monitoring third-party activities, but also the need for businesses to cultivate a compliance-driven culture with their external partners. It encourages viewing third parties as integral extensions of the company’s own compliance framework. One effective approach to strengthening these partnerships is by promoting the adoption of similar training and ethical standards for third parties, aligning them with those expected of the company’s internal employees.
While the DOJ stops short of requiring specific training for third parties, it strongly advocates for ensuring that external partners understand and adhere to the same compliance policies as the company's internal teams. Encouraging third parties to participate in customized compliance training can help create a more unified alignment between the company and its partners.
Certification and Compliance Tracking for Third Parties
Those suppliers should be required to certify that they understand and will adhere to the training received. Implementing a certification process not only formalises suppliers’ commitment to ethical standards, but also enables manufacturers to track compliance across the supply chain. This proactive approach ensures that all parties are accountable for upholding the manufacturer’s values and regulatory requirements.
Being able to collate and assess this data to show completion rates and non-compliance is another way to predict where an organisation’s risk may be. By continuously monitoring potential risk indicators, manufacturers can detect issues early and mitigate potential supply chain disruptions.
Monitoring Manufacturing Quality and Compliance Data
Outside of regularly monitoring suppliers’ financial health, monitoring of non-compliance with regulations (such as manufacturing environmental regulations or labour standards) can expose manufacturers to fines, litigation, and reputational damage. Quality control failures can have significant downstream effects on product integrity and customer satisfaction. Manufacturers should regularly assess metrics such as defect rates, rework percentages, and the frequency of customer complaints related to a supplier’s products or services.
Conclusion
With these strategies, manufacturers can build a resilient supply chain capable of withstanding disruptions, sustaining long-term growth, and adhering to the DOJ’s updated guidelines for risk mitigation in supply chain. This commitment not only protects their interests but also contributes to the overall integrity and success of the manufacturing industry.
