Supply chain malfeasance continues to be a vexing problem for organizations.
The vast majority of companies want to ensure their supply chains uphold the ethical and quality expectations of their customers and the public. Yet as we have seen in the headlines recently, doing so is easier said than done.
At best, association with unethical suppliers can create bad publicity that damages reputations. At worst, it can have significant financial, regulatory, or safety impacts. The stakes around ethical supply chains will only increase as governments put more focus on environmental, social, and governance (ESG) standards.
Sadly, there is no single solution for eliminating unethical suppliers. That said, every company has one powerful weapon in its arsenal right now to help combat supply chain risk: its contracts.
This article will discuss some common ways organizations use their contracts to protect against unethical suppliers, and how cloud technology can help operationalize contracts for enterprise-wide impact.
How contracts can improve supply chains
Simply put, contracts are the foundation of buyer-supplier relationships. They set the terms, conditions, and expectations for the relationship. They also distribute risk.
Contracts can establish expectations the buyer has in terms of ethically supplied goods and services. This includes requiring suppliers to state they won’t purchase counterfeit or otherwise compromised goods while fulfilling their contract. They can also require the supplier to “flow down” the requirement to their own suppliers; that is, their contracts can dictate what the supplier’s subcontract says.
Contracts put in writing that there are no “unspoken understandings” about corners the supplier might cut. In this way, compliance flows down the supply chain well beyond the first tier.
While this kind of language alone won’t stop illicit activity, it shifts the risk down the supply chain, increasing suppliers' incentives to do due diligence. It puts in writing that there are no “unspoken understandings” about corners the supplier might cut. In this way, compliance flows down the supply chain well beyond the first tier.
Depending on a company’s buying power, they can also include contract language that requires various forms of compliance verification from the supplier. This might range anywhere from submitting third-party certifications to entitling the company to conduct on-site inspections to ensure ethical practices are followed.
Ikea provides a great example of what this looks like in practice. All suppliers must agree to its supplier code of conduct, which includes the right to audit suppliers to confirm compliance with its lengthy list of ethical requirements.
Contract visibility and control are key
For contracts to be leveraged to their full potential, companies must have control and visibility into what language is included in a supplier contract before they are signed. Then it must track contract fulfillment after they are executed.
For example, a procurement organization, working with its legal department, may draft standard language for its supplier contracts that clearly state expectations around how the supplier will guard against counterfeit parts. But how does the organization ensure that language makes it into the contracts sent out to suppliers, or not taken out during negotiations?
Post-execution, a company may have a commitment from a supplier to provide certification of its carbon neutrality. Yet, again, with thousands of contracts across the organization, how are you checking to see that those certifications are being submitted in a timely matter?
Considering these practical challenges to managing contract language and obligations, it’s little wonder that organizations with good intentions get caught associated with bad actors.
How contract technology can help
This is where cloud-based contract management software comes in. Contract technology centralizes control over contract language, ensuring only the most recent and approved language gets sent to suppliers. As company standards change – for example, perhaps the company's own customers put new requirements into their contracts – procurement leaders can quickly update language, and rest assured the updates make it into all new contracts moving forward.
More advanced contract management technology can also extract and track post-execution obligations. For example, if a supplier agrees to twice-annual site visits, the contract management system can surface that commitment and prompt managers to provide documentation to ensure the visits are happening.
The Icertis Contract Intelligence (ICI) platform delivers the industry’s most advanced applications of contract management software, using technology like generative AI to ensure that the proper controls are included in every supplier contract, and then those controls are complied with in practice.
Axel Yuta Warnke, project manager at auto parts manufacturer Continental, recently noted the importance of contract visibility in today’s regulatory climate: “As legal requirements become more important, the Icertis platform helps us identify those requirements as part of the contract and then fulfill them into the future.”
A Better Supply Chain in 2024
In a world where supply chain malfeasance continues to be a persistent challenge for organizations, the power of contracts cannot be overstated.
If a stronger, more ethical supply chain is a goal of yours in 2024, please get in touch.