Most businesses are reliant on other organisations to support them in bringing their goods and services to market. Whether you use financial management software, require the supply of parts for the manufacture of goods, or outsource cybersecurity protection, the third parties providing those goods and services are key elements of your supply chain.
If your suppliers let you down, the implications can be far-reaching, potentially resulting in both reputational damage and financial loss. It is therefore critical to protect your business when engaging with suppliers. There are a number of steps you can take to do this.
Initial steps
Before deciding whether to enter into a business relationship with a supplier, there are some prudent steps to take. These may include carrying out credit checks, asking for references, and meeting with representatives to get to know the supplier and understand how it operates in practice. Such steps can provide reassurance that a supply chain partner is reliable and capable of meeting your requirements.
Additional due diligence
If there are particular criteria you need a supplier to comply with, undertaking a procurement exercise may be beneficial, allowing you to exclude any potential supplier that is unable to meet those requirements. Where specific risks can be identified, this also provides an opportunity to seek assurance that they can be appropriately managed by your suppliers.
Aligning requirements
Once you have identified the party from whom you wish to purchase goods or services, it is important to document the basis of your relationship. Any contract should clearly set out delivery timescales, which will need to align with the expectations of your own customers, as well as payment terms. From a cashflow perspective, payment obligations should be structured to fit with when you will be paid by your customers.
Mandating obligations
You may require suppliers to commit to additional obligations, either in relation to statutory compliance (such as anti-bribery, anti-fraud, anti-slavery, anti-facilitation of tax evasion or climate-related requirements) or specific standards covering confidentiality, data protection, information security or cybersecurity. You, whether directly or as required by your customers, may also require suppliers to comply with a supplier code of conduct and may wish to prevent or restrict subcontracting of the goods or services being provided.
Ensuring performance
Contractual terms can also be used to help ensure suppliers meet their obligations. For example, suppliers may be required to notify you if they breach any requirements, and you may wish to include audit rights to check compliance. Where a breach occurs, it can be helpful to set out a remediation process, together with termination rights where a breach is irremediable or not remedied within agreed timescales.
Financial protections
To protect against losses arising from a supplier’s breach, you may wish to require suppliers to maintain specified insurance policies with appropriate limits of cover. It is also important to be clear about the extent of the supplier’s liability and whether any indemnities are required.
Risk management
Taking the time to assess both the risks and benefits before engaging suppliers can pay dividends. Addressing those risks through practical measures and robust contractual terms can be a key differentiator, helping to ensure confidence and success throughout the supply chain and through to the end customer.
If you are looking for support with managing supply chain risk and need advice on supplier due diligence, contractual protections or ongoing compliance, please contact Partner and Head of Commercial, Jenny Wade at jenny.wade@swinburnemaddison.co.uk or on 0191 384 2441.
