Compliance can seem like a necessary evil – one of those things you have to do but which adds little value. Nothing could be further from the truth. Compliance failures can ruin customer relationships, destroy corporate reputations and even lead to criminal prosecution. Compliance could not be more important, and procurement professionals are in the perfect position to help make sure it happens.
The disruption caused by the COVID-19 pandemic generated widespread headaches for maintenance, repair and operations (MRO) procurement. As supply chains were fractured, some businesses found their usual sources for MRO parts had dried up.
That led to a sometimes urgent rush to find alternatives. While the business need for such action is clear, one of the unintended consequences of using new suppliers was that corners were cut on contract and product compliance.
The 2021 Indirect Procurement Report found that ensuring contract compliance was a daily challenge for 45% of members of the Chartered Institute of Procurement & Supply (CIPS) surveyed.
Despite the lifting of many pandemic restrictions in the second half of 2021, problems with supply persist and need to be addressed accordingly. While the earlier phases of the pandemic were characterised by widespread closures, problems are now more sporadic and harder to predict. Labour shortages caused by self-isolation orders, for example, can be triggered without warning, making them hard to plan for.
Avoiding a long-tail of supply problems
It’s one thing to agree a temporary contract variation with customers in extreme circumstances, but constant supply problems are bad for business. If you aren’t able to guarantee that a ready supply of critical parts will be available for your field engineers, what’s to stop them placing ad hoc orders under duress? Or what if the substituted items you supply aren’t up to scratch?
Kate Davies, Head of Global Commercial Services at RS Components, believes communication is the key to ensuring contract compliance. As the owners of the contractual relationships, MRO procurement teams must be the main point of contact for suppliers, he says. Because if procurement teams and suppliers don’t work together, contract compliance can easily slip.
“In these extraordinary circumstances, it’s very important that suppliers keep customers informed about any issues that crop up and have honest discussions with them rather than running into contract compliance issues when things go wrong,” he says.
Where the pandemic has forced suppliers to change their sourcing, it’s vital they communicate this to the customer as it might constitute a breach of contract. It’s equally important that the new source can supply products that meet the specifications in the original contract.
Sticking to the agreed plan
Kate Davies says it’s important for procurement teams to build relationships with other parts of the business to ensure that they understand the reasons why compliance is important.
She says the same is true for suppliers. “One of the key takeaways since the start of the pandemic is that truly resilient relationships allow you to have honest conversations and collaborate to reduce the impact of risks in the supply chain,” says Davies. “You have to rely on transparency and rapport.”
There needs to be an open and honest conversation both internally and externally about contracts, processes and compliance. Suppliers must make sure they comply with the buyer’s requirements and procurement teams need to ensure that the right governance structures are in place for the contract, together with an audit trail.
Not just a standard audit trail, either. Maverick purchases introduce the risk that the supply chain behind the item may not comply with legally enforceable standards such as modern slavery laws.
Reputations at risk
A recent report from PwC finds that there has been an increase in businesses bringing new, and sometimes untested, suppliers into the fold. “COVID-19 has disturbed the steady state of compliance, with rapid onboarding of third parties in the supply and distribution channels, and other flexing needed to respond to increased volumes and demand,” the report says.
Along with the most obvious and visible challenges caused by off-contract buying – cost, quality, admin headaches and so on – in a world where corporate purpose is becoming more important, there are new considerations to bear in mind.
Fraud risk is one area on the rise, according to PwC, which also warns that: “Regulators remain active and there is no COVID-19 defence for regulatory compliance breaches. Those who neglect environmental, social and governance (ESG) responsibilities now may face customer hostility later and find themselves the subject of regulatory investigation when the crisis has passed.”
Patrick Dunne, Director of Group Property and Procurement at Sainsbury’s agrees about the importance of ensuring that suppliers comply with ESG standards. He says that open, honest supplier relationships are the key to achieving effective compliance and high standards.
“I think the grocery sector has proven that with great suppliers, great partners and close relationships you can drive for an ESG-friendly supply chain on a global basis,” he explains.
PwC says compliance must remain “active, visible and assertive to new risks.” The firm urges procurement professionals to do an audit of all their contracts and, if they don’t already have one, to build a database of contacts at supplier firms.
Time for procurement to flex its muscles
Compliance is not just about telling other people what to do. It’s about making sure the right standards and requirements are in place. Then it’s about communicating clearly so that stakeholders understand.
With their view along the value chain, procurement professionals are in the best position to see where potential problems might originate and where they might impact. They are also ideally placed to conduct a deep dive into common contract terms, including interest provisions, break clauses, terminations, notification periods and anti-competitive prohibitions to ensure that they are able to monitor contract compliance. All of which need not be a time-consuming, manual undertaking.
Digital tools like e-procurement platforms with real-time reporting and intuitive dashboards offer a very effective way to monitor compliance and consultants Deloitte urge organisations to use the data already with the purchasing organisation to get a clear picture of compliance across teams and departments.
“Cut through the endless meetings, inquiries and opinions. Go straight to where everything happens, with no filters. Accessing your running platforms is the best way to identify where the real issues lie,” says Deloitte.
Helen Alder, Head of Knowledge for the Chartered Institute of Procurement & Supply, argues that compliance rests on procurement professionals looking at the bigger picture. “You need to understand the whole of your supply chain and to ask yourself if you are doing the right thing,” she says.
If compliance cannot be guaranteed internally and externally, Alder recommends that procurement professionals get ready to stand up and be counted, even if that means taking radical action: “This may lead to rethinking the whole supply chain,” she says.