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Due diligence is an essential function of major modern business transactions. Fundamentally, businesses need to know who they’re buying from or just who they’re buying. But in an era of growing supply chain complexity, where companies rely on hundreds or even thousands of suppliers, the task of performing due diligence has correspondingly increased in difficulty.
Traditional, manual processes for assessing potential vendors and business partners are costly and often ponderous. Teams of analysts can scarcely keep pace with the preponderance of relevant available data. Typically, due diligence means assessing a partner for things like capacity, resiliency, and the following factors:
Quality – Are you sure you’re receiving what you’ve paid for? Businesses typically rely on their suppliers to accurately self-report on the authenticity of their products. Furthermore, U.S. customs only inspects about 3% – 5% of cargo shipments for counterfeit products. Companies need to know if their end-product contains what it’s supposed to, particularly if they’re selling to a government agency, where counterfeit parts (particularly those of possibly foreign origin) represent a threat to national security.
Ethical Behavior – Both consumers and regulatory agencies have demonstrated increased concern over possible unethical behavior in businesses supply chains. According to a recent survey, 76% of Americans will not buy from a company that they believe to be unethical. Similarly, the EU recently issued a warning to Thailand threatening to bar Thai seafood from the EU unless the country took steps to end the trafficking of migrant workers within the nation’s robust seafood industry. No matter how you look at it, procuring from organizations with ethical liabilities can affect your bottom line from both reputational damages, and the expense associated with discovering and signing a replacement supplier.
Security – Admitting a business you lack total awareness of into your supply chain is a security risk. A 2018 study found that 59% of organizations have fallen victim to breaches caused by a supplier. Growing use of technologies that offer new avenues for cyber-attacks, like Internet of Things (IoT) devices, mean that potential vulnerabilities are only growing. Knowing if a supplier has been hit before that attack has a chance to affect your business could mean a great cost-savings.
Financial Stability – A supplier is only as valuable as they are consistent, and their financial health directly correlates with their ability to deliver promised goods or services. Suppose a 3rd tier supplier suddenly runs out of the capital necessary to run their enterprise. No matter how far down the chain they are, your operational continuity is still at risk.
These aren’t the only benefits to due diligence. A 2016 study conducted by the Columbia School of International and Public Affairs found that proper due diligence confers a host of other benefits, such as:
- Increased total shareholder returns. Companies that consistently measure responsible business activities outperformed peers on the FTSE 350 when it came to total shareholder returns by 3.3% – 7.7% annually
- Reduced Legal costs. Businesses legal costs range from 3% – 10% of annual revenues.
- Lower Turnover. Organizations that are thought to be committed to Corporate Social Responsibility (CSR) are better at attracting and retaining employees, reducing the costs associated with high turnover (training, recruitment, etc.)
But how can you realize these benefits without paying the steep cost associated with hiring a traditional third-party risk assessor? Fully mapping your supply chain is an essential part of proactively addressing risk, but how do you contend with the sheer volume of available data?
Learn how by reading our upcoming whitepaper on the subject and at Interos.net.