Understanding your vendors is crucial to efficiently and effectively running any supply chain. The sooner your team can get a handle on vendors’ unique characteristics, the sooner you can maximize the potential of that relationship. If a supplier is not going to cut it for what your organization needs, it’s better to know that sooner than later so you can divest from that supplier and replace them.
Of course, it would be even more efficient to not sign on vendors that won’t be a fit in the first place. Onboarding, when done right, is a lot of detail-oriented setup work, and if you can save your team the trouble of going through that process with a vendor that won’t work out, all the better. Supply chain managers need to be sure they’re properly assessing potential suppliers before signing any contracts, to see what kind of risk there is that that vendor is a bad fit.
How do you know which potential suppliers would put your supply chain at risk for delays, bottlenecks, poor quality deliveries, and other reputationally damaging disruptions? Take the following questions and apply them to the supplier during the research and due diligence process—and only if you’re happy with the answers should you bring them on board.
1. Do they fit your company's mission and objectives?
The values that guide your company don’t cease being important when it comes to your vendors. Ensure that the potential supplier is one that you’ll proudly name on your list of partners, and that can hold up to public scrutiny. Consider adopting a clear policy, signed off on by your company executives, on the type of companies you will work with.
Typical stipulations include working only with partners that have a clear policy against forced labor and human rights abuses, or a sustainability plan (more on why that will come in handy below). Seeking to work only with companies that promote diversity can also be a competitive advantage; studies have suggested that a diverse set of employees leads to better financial performance and innovation thanks to the range of backgrounds and perspectives brought to the table.
2. How flexible are they to long-term global market shifts and short-term disruptions?
Given the increased levels of disruption in the global supply chain we’ve seen since 2020—Covid, wars and their related sanctions, even the occasional ship wedged in a canal—resiliency and flexibility in the face of unexpected difficulties is a valuable trait to seek out in vendors. If your suppliers are able to adapt to changes and keep supplying your company while your competitors’ suppliers are slowed down, there is a real opportunity for you to gain market share. Earlier this year, we saw attacks on merchant vessels in the Red Sea that disrupted trade through one of the most widely used maritime routes in the world. Businesses whose shipments were affected needed to re-source those materials or products quickly—if their suppliers were able to quickly adapt and work to get a replacement shipment on its way, that disruption would be minimized to a degree. Request detailed information from a potential vendor on the upper end of their output capacity, as well as their ability to scale further in times of higher demand.
You’ll also want to assess the ability of a supplier to adapt over time to broader changes. Consumers’ tastes change and the market changes with them; vendors need to be aware of these long-term changes in order to anticipate the needs of the companies they supply a year, five years or longer into the future. For example, if a particular fabric or material is getting more expensive due to a changing climate making that material more scarce or costly to make, a supplier would be wise to begin to build a network to source a replacement material if its clients decide the original becomes too costly in the future.
3. Do they have proper security measures in place?
If a supplier’s system is hacked, it could snag production for days or weeks at a time—leaving your company without the critical supply you depend on. Ask potential vendors what specific cybersecurity measures and protocols they have in place to protect data—both their own, but also their clients’ as well. Ask if they are SOC 2 compliant; in most cases there’s no legal requirement to do so, but if a vendor has achieved SOC 2 certification, that’s a sign that there is at least a solid foundation of information security at their company.
Get as much detail as possible to learn how well-equipped a prospective supplier is to fend off attacks or recover from any that make it past their defenses. Not only could such an attack cause a disruption on your end, but depending on how you share information with suppliers, it could also put your own sensitive company data at risk.
4. Are they a sanctions risk?
The U.S. Office of Foreign Assets Control (OFAC) designates entities that are “blocked” by sanctions, meaning U.S. companies are not allowed to do business with them. Violation of these blocks leads to fines that can be significant: there are financial penalties, plus the reputational damage that can come along with the public learning that a company works with sanctioned companies. Since sanctions are often put in place when an entity has ties to human rights abuses or autocratic governments, those are associations that U.S. companies will want to avoid.
Ask potential suppliers what they are doing to ensure they aren’t working with sanctioned companies or individuals. If they see a fine or other punishment for doing so, that would expose your company to significant risk as well.
5. Can they adapt to new regulations or sanctions and provide transparency?
While we’re on the topic of sanctions, it’s important to note that new sanctions are put in place frequently. All companies should have a plan for monitoring the changing regulatory landscape (which includes sanctions but other areas as well—see #6 below) and quickly divesting from any suppliers that are now off-limits to work with. That goes for your company as well as your vendors. It’s important that your organization has an underlying technology infrastructure that can be quickly updated to identify and address new sanctions or regulations.
What makes this exceptionally tricky is that the ultimate beneficial owners (UBO) rule stipulates that a company doesn’t have to be named on the sanctions list to be considered “blocked.” If an individual or company is on that list, any entity they own 50% or more of is also off-limits. Potential suppliers, as well as all supply chain managers, should build visibility into the UBOs of all companies in their supply chain so that a new sanction enacted in the future doesn’t catch them off guard. When assessing potential suppliers, ask how they gain transparency into their own supply chain, including relevant UBOs and how they plan on extending that transparency to you as their client.
6. Do they have an ESG plan?
The future is filled with regulations around ESG (environmental, social, and governance) activity, and the present is seeing many of these regulations pass as well. ESG policies are a crucial piece in the long-term sustainability puzzle; a supplier that doesn’t have the capability to track their emissions and efforts to limit the environmental impact of their activities represents a risk to any supply chain. This is because many of the new or proposed ESG regulations stipulate that emissions that are tied to supply chain activity, known as “Scope 3” emissions, must also be disclosed.
For example, California’s Climate Corporate Data Accountability Act (SB 253) requires that companies track and report their carbon emissions—not only Scopes 1 and 2 (direct greenhouse gas emissions tied to company-controlled activity and emissions from the purchase of energy, respectively) but Scope 3 as well. Meanwhile, SB 261, the Climate-Related Financial Risk Act, requires a public accounting of climate-related risks a company may face, as well as a detailed description of efforts that company is undertaking to mitigate those risks.
If a potential vendor is unable or uninterested in tracking its emissions and risks, it could be your company that pays the price in regulatory penalties.
7. Do they maintain high levels of quality and operational excellence?
Finally, it can come down to a simple question: does the company deliver what they say they will, and do they do so in a way that inspires confidence in their ability to keep product quality high and operational costs down? Seek out their financial reports, news coverage, and if possible, contacts at other companies they work with. A picture will start to emerge of what the company is actually like to work with (and not just the version of themselves they market) — you want to bring on vendors that take care to maintain high standards across every aspect of their business.
What metrics and KPIs do they use to measure their performance? What a company measures is a telling indicator of what they most value (see #1 on the list above). Are they a reliable, transparent, and proactive partner, or one that is battling off fines, delays, and bad press? Do they appear to have the flexibility to meet increased demand and keep up with quotas? Gather as much data on the company’s performance as you can, both on the operational side as well as their ultimate output, and use that to make your final decisions.
Knowledge is power—the answers to these seven questions will help guide you to the right decision on whether or not to bring on a particular vendor. If you’re able to build these questions into your third-party management system so that both supply chain managers and interested vendors can be prompted to provide this crucial information, all the better. That will lead to more quickly identifying the poor-fit suppliers and go a long way toward speeding up onboarding, as well, since significant information about the vendor is already on hand. The first step in setting any supply chain up for success is ensuring that the key players are good fits for the company’s operations and overall goals.
