Risk and Compliance: Gaining Trust and Transparency in Global Supply Chains
“Heaven is high and the emperor is far away.” For many, this Chinese proverb perfectly characterizes the workings of the global supply chain of years gone by. When the emperor—or clients—came to town, factory owners rolled out the red carpet. Yet, most of the time, there was a veil of mystery over the broader supply chain since most buyers did not visit factories, but sourced products through importers, agents and other middlemen.
Today, most companies make valiant efforts at transparency by directly interacting with key suppliers. But how well does every brand owner or retailer know every supplier in the supply chain? Probably not as well as they think. This lack of knowledge can be costly: Third-party partners can expose a company to risk. Counterfeits can result in product malfunctions, endanger consumers or negatively impact a company’s reputation. Corruption can result in costly investigations and enforcement actions.
The question for any company working with a global supply chain remains: What is the best way to improve compliance among third-party partners? The following key insights, based on more than a decade of managing teams and investigations in China and across Asia, might help bring the “emperor” a little closer to the people.
China: the Evolving Landscape
China has transformed over the past two decades. In the 1990s, most factories were Sino-foreign joint ventures, and the old state-owned factories were all going bankrupt or being sold off. Then, around the mid-2000s, all domestically owned factories started to export to foreign companies with little to no input from a foreign partner. They became competitive on their own. Today, many Chinese brands are establishing production facilities in more developed countries and buying foreign brands to produce in China for global markets.
Another major shift in China has to do with its domestic experiences. Workers have begun to understand their rights, and there are fewer of them today. Ten years ago, if you went to factory towns such as Guangdong’s Dongguan or Jiangsu’s Changshu, workers would be waiting to find a factory job and hoping to move up to the more technical factories for more pay and better conditions. Now, the factories have to compete to keep workers. Apart from a better salary, perks such as nicer dorms, training and the ability to move up in the organization are all on the table, even for migrant workers. Some factory workers earn more than college graduates.
Experience shows that to improve practices among supply chain partners a collaborative approach is most effective.
There are many other changes happening. People travel more and are interested in experiencing the world and participating in what goes on culturally and in business. The rise of Chinese brands working to compete globally is also driving a shift in perspective. As a result, there is more attention paid to addressing compliance as a key to quality, reputation and secure finances. Much still needs to be done, but the tide is turning.
Lessons learned: Making it Through the Downturn
China’s recent downturn has not only prompted vast swings in the financial markets, but as previous downturns have shown, also is likely to send Chinese companies and factories—if they aren’t well run—to ruin. In the early part of this century, every industry in China was so hot that you could just start a business and it would likely do well. Today is a different story.
To survive, forward-thinking executives are working to improve productivity and efficiency by leveraging management systems, human resource development and process optimization. This approach can and should also be applied to compliance efforts, which are often still only implemented at corporate headquarters.
Improving Compliance Rates with Supply Chain Partners
Experience has shown that to improve practices among supply chain partners—whether it’s for quality management, labor or health and safety—a collaborative approach is most effective. As such, it’s important to not act like the police or auditor. Companies need to work with supply chain partners to create a sustainable future.
With any compliance program in any organization, the full ownership of the program by senior management and middle management is essential. Once managers see how compliance can drive efficiencies and save money, they have an “aha” moment and see it all as a competitive advantage, but at first sight, many compliance initiatives can be intimidating and time-consuming.
It doesn’t have to be boring. Compliance initiatives can be put together in a creative way, like a game. For example, creating a competition between departments and awarding the department that meets compliance goals with an evening at a trendy restaurant or half-day team-building trip.
Supply chain partners need to understand expectations for all types of compliance, and this starts with pre-transaction due diligence and extends to contracts, policies and procedures. By engaging deeply from the start, you will get to know who is in your supply chain, what they are thinking and what questions they have.
How mature are the management systems they have in place to address compliance? Although there is growing sophistication of the importance of business processes to meet a variety of standards, many companies still lag. Understanding what systems are in place and working to improve practices can be beneficial for increasing transparency and trust.
In one example of implementing a multinational’s supply chain security program in support of the Customs-Trade Partnership Against Terrorism, a U.S. Customs and Border Protection program, the suppliers and their factories were at the very early stages and many of them had little knowledge of security or management systems. Through a combination of on-site training, seminars and audits, most factories were able to establish very solid security programs.
Of course, things will go wrong and when they do, it’s important to manage in an honest and transparent but conservative way. Conducting a root-cause analysis and fixing broken processes not only sends a strong message, but also helps to avoid future issues.
Today, companies around the world depend on complex supply chains to compete in the global marketplace. Taking a collaborative approach with partners can not only help to build trust, but it can also create efficiencies and mitigate risks.