Supply Chain Management Review: 3 Keys to Managing Supplier Integrity

Originally Published in Supply Chain Management Review | Oct. 22, 2015 | By Audrey Ford

A procurement department’s supplier relationships can vary widely. In some cases, the relationship is strong and productive. In others, the relationship can be tense, fraught with disagreement, or fully dysfunctional.

Among the reasons for supplier-related conflict is the lack of a shared perspective on what types of behavior are appropriate—in other words, different levels of business integrity.

Here are three key strategies to improving supplier integrity and, consequently, the relationship between the supplier and your department.

1. Incentivize Ethical Behavior
A troubled relationship between the procurement operation and a third-party supplier has real consequences. Conflict creates distractions that inhibit other important work, and it can also negatively impact profit. As a result, both procurement leaders and their suppliers have an incentive to minimize friction in the procurement process.

The reality is that suppliers may not be as naturally attuned to the boundaries of ethical behavior as you are. You can help by reinforcing the notion that operating with integrity can potentially help their business efforts in other parts of the market, providing comfort to existing or prospective clients and delivering more business over time. You can also help by walking your suppliers through the practical impacts of ignoring integrity issues, including penalties and an end to good client relationships.

2. Set Standards
A supplier should meet the integrity standards that are set for your entire company. If your suppliers are not operating to meet your standards, your operation’s integrity may be compromised by association. As such, you would be well served by setting clear standards for the supplier relating to expected behavior that mirrors what you expect from your own team.

Consider a recent example demonstrated by Chipotle Mexican Grill, which had set standards for their pork suppliers. In recent months, one of their significant partners stopped meeting those standards. As a result, the company halted its relationship with the supplier, cutting supply of that producer’s pork from hundreds of restaurants.

Setting standards for suppliers has clear advantages for the business. One advantage is that you can create objective measures to assess suppliers and use those measures to dismiss suppliers who operate in ways inconsistent with your brand or expectations.

Another potential gain is staying ahead of the regulatory game by creating rules that accommodate more restrictive government action. Moreover, setting standards for suppliers will minimize the likelihood of guilt by association. You have little control of how news of questionable behavior by a supplier will play in the press and whether you are dragged down if a scandal breaks. It is better to anticipate these potential issues and help your suppliers avoid them.

3. Maintain Control of the Contract
One of the best ways to manage the integrity of a supplier is to weave the elements you require into the supplier contract. With existing long-term suppliers you may need help to weave new standards or expectations into the contract—particularly when it is not yet time for renewal.

In these circumstances, to support your efforts, make the case to the CFO, general counsel, and other key stakeholders in your company for why taking supplier integrity seriously will improve the bottom line—or at least protect the bottom line by avoiding litigation, investigations, or fines. Having their backing allows you to leverage the strength of your entire company to bring change at your supplier, where change is resisted.

The Bottom Line
Procurement departments and their suppliers generally seem to have positive relationships as the global economy slowly gains steam. There is an opportunity for procurement leaders to raise the bar for their expectations of supplier integrity. And by taking advantage of this opportunity, procurement leaders can both help keep their companies out of the press for the wrong reasons and ensure a strong and productive supply chain to support continued business growth.