Ethics in Supply Chain Management

Most compliance managers in supply chain functions would readily agree that they hold ethical practices in high regard and likewise hold a firm moral high ground when making decisions in the course of their work.

In this article we look at what it means – at least a tactical level, to say that a supply chain is being ethically managed.

1. Vendor selection: Fair and transparent selection process.

   Most companies have supply chains that operate in models upwards of 2PL. As a result, some supply chains have extensive day to day interactions with multiple brokers, freight forwarders and other vendors. Ideally, all relationships with vendors must be managed through documented contracts with validity periods and clear exit clauses. Contracts should not be automatically renewed without first assessing other alternatives, by calling for open tenders and RFQs.

2. Vendor management: Audits & KPIs. 

   Vendor performance must be objectively measured using unbiased KPIs. Vendors must also be audited to ensure they are meeting all legal requirements of the jurisdictions they operate in especially relating to the prevention of unethical practices such as maintaining arm’s length principles where required, not engaging in corruption and/or bribery and retaining all relevant documents relating to financial transactions. Vendors must be taken to task if they are found to be engaging in any form of corrupt or unethical behaviour.

3. Procurement decisions: Sustainable sources, firm stand against child labour or otherwise exploited workforce. 

   Areas of ethical practice in procurement that many corporations do not yet focus on are environmentally sustainable practices and avoidance of engaging suppliers with questionable standards of labour sourcing. Big corporations have a significant role to play in suppressing and discouraging exploitative use of child labour by carefully auditing companies in suspect countries. This includes a need to conduct field visits prior to engaging a supplier and making follow-up visits on a regular basis to ensure that “at-risk” demographics in any country are not being taken advantage of as a part of their supply chain.

4. Keeping updated on regulatory requirements and changes. 

   While organizations may be fully committed to maintaining compliance to regulatory standards, this becomes a challenge if the company does not have a mechanism to proactively stay updated on legislative changes and requirements. In order to maintain a fully ethical supply chain, supply chain managers have to understand and be aware of changes relating to the definition of unacceptable related party practices, bribery and governmental relations.

5. Reviewing compliance practices: HS codes & FTA eligibility. 

   Several activities in a supply chain involve cross border activities. In all cross border movements, common areas of compliance focus are HS code classification and utilization of Free Trade Agreements. These are areas of concern to authorities as they relate directly to collection of duties for Customs. It may be tempting for companies to engage in unethical practices relating to HS Classification and/or FTA utilization as clever manipulation can lower the probability of getting caught. Any ethical supply chain should place special focus on these areas to ensure data submitted to authorities remains accurate and duties paid are correct.

6. External self audits. 

   Any supply chain function that wants to maintain the highest standards of ethical practices must submit itself to an unbiased external audit. After completion of the audit, the function must undertake the necessary steps to rectify any non-compliant incidences found. A follow up audit must be conducted for an assessment of whether all instances of non-compliance have been addressed suitably.

Building an ethical supply chain is not only the responsibility of the ethics and compliance director in a company. All employees have to make a commitment to pursue compliant solutions to issues and establish compliant procedures to execute activities. Moreover, managers also have to keep a lookout for careless or unfocused staff who may make serious blunders unintentionally.