Vetting suppliers: avoid introducing risk into your supply chains

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Takata.jpgMany Japanese car makers have recalled whole fleets of models owing to faulty airbag modules

Profit is the ultimate objective of every business operation. However, there are several threats to revenue, including market competition, internal fraud, poor leadership, high expenditure, regulatory obligations and weak links in supply chains, particularly concerning suppliers.

“Working with the wrong supplier could cost you money and a customer’s trust,” Rudi Kruger, general manager of Risk Solutions at LexisNexis Data Services, told SmartProcurement. “Simply put, businesses that receive goods or services from untrustworthy sources run a great risk of failing to meet their own obligations to customers.”

Kruger outlined three serious supplier risks:

Unreliability

“A supplier that fails to deliver on its promise is a threat because their failure can have ripple effects on your organisation if the supplies are to be directed in some way to your customers. And a troubled customer situation is guaranteed to affect the bottom line,” said Kruger.

It is important to ensure that your supplier is in a position to deliver goods or services to the expected quality standard, on time. While this type of assurance can best come from past experience, there are other means in which to determine a supplier’s reliability, including background checks and referrals.

Poor financial health

“Financially-secure suppliers are more likely to deliver effectively and on time, whereas suppliers facing financial difficulties may have to overcome a set of challenges to meet your needs and you never want a supplier to cut corners when fulfilling your order,” said Kruger.

A review of the supplier’s financial status and spending patterns can highlight negative financial facts.

Vendors/employee relationships

RudiKruger_2017.jpg“Fraudulent activities between suppliers and your employees create a host of challenges to the business. Vetting suppliers and your employees is highly recommended,” said Kruger.

Things to look out for within the procurement process include:

  • Pass-through schemes, where an employee or contractor sets up a business, which supplies goods or services to client.
  • Conflict of interest, which occurs when an individual or organisation is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other interest.
  • Shell company schemes, which enable an entity that has no active business and usually exists only in name as a vehicle for another company’s business operations.
  • Tender fraud, where the manipulation of the tender process between employees of the bid issuer and the bidding company leads to bribes and kickbacks.

The best way to protect your business from unreliable or questionable suppliers is to take preventative measures, rather than having to carry out damage control. “Vetting is imperative prior to establishing a business relationship with a supplier because no business is immune to the possible shortcomings of a supply relationship,” said Kruger.

With this in mind, the procurement process benefits from systems that help to identify and prevent fraud schemes. Kruger advised that such systems must be able to identify possible conflicts of interest, pass-through schemes and shell companies; and must enable users to investigate negative and positive news on suppliers and employees (to assist in mitigating reputational risk).

For more information, visit www.procurecheck.co.za

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