Key requirements of a supply chain compliance programme for durable goods manufacturers

May 2021  |  SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS

Financier Worldwide Magazine

May 2021 Issue

The last decade has seen a convergence of two dominant geopolitical trends that have been shaping global trade and international relations over the past 50 years. Globalisation, and the outsourcing of production, has intersected with increased social awareness focused on the rising power of corporations.

The resulting societal and governmental policy shifts have placed increased scrutiny on durable goods manufacturers to add supply chain transparency into their environmental, social and governance (ESG) programmes. From a practical perspective, this supply chain focus is well founded. The largest firms tend to be prime or first tier suppliers. These firms also tend to be sophisticated actors, that are highly aware of regulatory pressures and the associated risks of non-compliance.

Accordingly, many of the highest risk or lowest margin business operations are those that are identified for outsourcing to less regulated and lower cost markets. This sets the stage for the emergence of new transparency regulations against these activities.

Globalisation as a term of art defining the concept of rapidly expanding business operations through outsourcing production steps to less developed nations only gained prominence over the last few decades. The concept has been driven to a large extent by an increase in the cost of production resulting from increases in regulation and wages in developed economies.

The consequence has been the displacement of the traditional manufacturing base to countries with a lower cost of labour and per unit production. Naturally, this loss of manufacturing jobs has caused significant social upheaval, as impacted communities leverage democracy to elect representatives who scorn the behaviour. These elected officials’ policies have taken two dominant forms: isolationism and environmentalism.

Isolationism has driven a series of trade restrictions and a breakdown of historically Western values attributable to a commitment toward free trade and market-based competition. These norm-shifting outcomes are illustrated by recent elections in the UK and the US, prompting the renegotiation of the North American Free Trade Agreement (NAFTA) to the new United States-Mexico-Canada Agreement (USMCA). This shift away from free trade seeks to elevate the costs of non-domestic goods to make it economically disadvantageous to purchase non-domestic goods.

However, these policies have faced a hard reality. Outsourcing and free markets have been so effective that the ability to produce the goods domestically has been largely lost due to a lack of manufacturing operations and an absence of the specialised skills required. Accordingly, firms faced with sanctions, tariffs and duties are now flowing through those costs to customers, which is generating increased costs.

This trend has also resulted in increased environmental regulation, focused on the environmental concerns with manufacturing processes, social supply chain transparency risks and governance risks that exist within an organisation’s supply chain. These policies have sought to flow down the responsibility of Western regulatory policies onto suppliers, while still expecting third world prices for production and services. Similar to isolationism, these regulatory policies also foster unintended consequences.

Specifically, these supply chain ESG policies drive targeted governments and businesses to either incorporate the rules, thus raising prices due to wage and systems investments, or to shirk responsibility, by once again outsourcing to a new low-cost region. Firms faced with environmental-driven market access requirements, supply chain labour practice disclosures, and governance and policy expectations must walk a difficult path between socially acceptable sourcing practices and maximisation of profit.

Responding to this new regulatory framework

In a globalised world, durable goods manufacturers have become increasingly reliant upon a complex web of suppliers located in diverse geographies. Under the policies being deployed, these supply chain networks serve as both an asset and a liability. A well-balanced supply chain will prove resilient to shifts in the regulatory landscape by allowing flexibility to pivot to suppliers that can support regional regulatory requirements.

An unbalanced supply chain will have single points of failure that can cripple an organisation’s ability to deliver goods to key customer markets. The designs and specifications will not account for the diversification of regulatory controls and the consequence will be an oversupply of products that will have been produced for a global market but are only sellable regionally. While the latter can result in cost savings, the gamble of losing flexibility in production and adaptability to dynamic regulations has driven many organisations to re-evaluate their supply chains to incorporate resiliency.

Under the present circumstances, durable goods manufacturers are being forced to adapt and consider the core best practices of implementing a resilient supply chain compliance programme. To begin this initiative, a durable goods manufacturer must first identify which regulations are material and understand the implications of gathering cross-topical data to mitigate the associated risks. A supply chain compliance programme has a wealth of inputs. With such a large number of data points and goals, the effort to build a compliance programme can be derailed by a vocal group of stakeholders.

Accordingly, guardrails and guiding principles should be established to ensure that efforts and investments are driving toward the overarching goal of a supply chain compliance programme and material concerns to the organisation and stakeholders. This goal should always be supply chain transparency. Supply chain transparency equates to having access to knowledge that is needed to be compliant and to engage in meaningful business decision making.

Equally vital to a programme is the ability to extract and report information that is meaningful to management, customers, regulators and other interested stakeholders. Reporting is a significant topic and has been covered in precise detail through the American Bar Association’s sustainable reporting book series, which is recommended for practitioners seeking a resource for reporting activities. Reporting will influence an organisation’s supply chain compliance programme, however other factors must be considered to focus limited resources on the most impactful programmes and projects.

As each new market is evaluated, there will be new regulations that frequently regulate the same materials and substances, countries of origin, classification of goods, and manufacturing and labour practices. Due to the partial, but seldom complete, overlap between like-kind regulations, there is a high degree of risk that a supplier may disclose contradictory information. This risk is exacerbated by siloed decision making within both the requesting and disclosing organisations. Practically speaking, the engineering function that addresses product compliance regulations will often be unaware of what the corporate social responsibility and vendor management functions that are also engaged in supply chain compliance due diligence are communicating.

Key requirements for a successful supply chain compliance programme

There are two attributes to building an effective supply chain compliance programme. First, the programme must be tactically competent, meaning it meets the minimal requirements of the law and customer requirements to process and understand the acquired data. Second, the programme must be executively competent, meaning it must have sufficient management structure to demonstrate and accomplish the business function of sustaining current sales, improving profitability and avoiding business interruption, as well as developing goodwill that will lead to future sales and investments. Identifying the stakeholders and being able to communicate with each is the core skillset required for an individual charged with administering the team charged with supply chain compliance. The following highlights the key requirements to achieve these objectives.

In summary, to build an effective supply chain compliance programme, organisations need to: (i) identify the core stakeholders, engage them early and often, and leverage the group to make key decisions that will impact the business when faced with non-compliance or disclosure obligations; (ii) establish a process and criteria that dictates what constitutes a situation that warrants gathering the stakeholder team for a decision; (iii) train key organisational representatives and supply chain partners on the expectations, standards for disclosure, and regulatory requirements necessary for approving products, parts and materials for markets; (iv) select a manager who has the authority and capability to influence decision making; and (v) decide to either staff a cross-functional team or implement a software system to manage the complexity of the diverse data inputs.

 

Travis Miller is general counsel and director of US operations at Assent Compliance, Inc. He can be contacted by email: travis.miller@assentcompliance.com.

© Financier Worldwide

BY

Travis Miller

Assent Compliance, Inc.

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