Responses from businesses to risks and regulatory requirements have often resulted in assurance activities which are narrowly focused, costly, intrusive and unrelated to value and performance.
We are operating in a challenging and complex market, with companies increasingly focused on cost reduction, so maintaining strong supplier relationships is essential when managing supply chains. Such relationships often help keep costs manageable.
These key considerations can help tackle compliance challenges in supply chains:
1. Pick the right contracts and suppliers
Ensure that all your contracts have a solid audit clause. Focus on those suppliers that have a complex pricing structure and contractual terms, or those flying under the radar with limited controls in place.
2. Get a handle on risk
Identify all possible areas of risk, as well as how to test and monitor them. One of the most successful ways a business can recover costs from their supply chains is by ensuring they receive the full benefit of what was contractually agreed in the first place. Identify all types of contractual risks such as rate, pricing, foreign exchange and inflation provisions, as well as the application of discounts, rebates, mark-ups and pass-through costs. It is essential to enhance third party and supply chain controls and assurance.
3. Be proactive, not reactive
Perform contract compliance reviews at regular intervals throughout the year. These should be part of an ongoing commercial assurance programme which would normally be on a rolling annual basis. However, some organisations wait until problems arise, by which time urgent action may be required.
Organisations that conduct regular reviews find this provides much-needed transparency in the supply chain and helps to maximise operational efficiency. They also ensure that performance is in line with what is contractually agreed, allowing for recovery of any lost profits in the process. The reviews can be a useful exercise to clarify contract language, while also providing a full picture of the supplier and contractual landscape.
4. Transparency strengthens supplier relationships
Organisations are increasingly reliant on third parties to fulfill their business needs and services, making contracts critical to defining relationship terms, responsibilities, deliverables and compensation. If you are operating in a complex supplier network, transparency is key. Some organisations worry whether performing reviews will adversely impact supplier relationships.
However, if performed properly, audits within business supply chains should leave both you and your suppliers with a streamlined business structure, tighter controls, direct lines of communication and an increased level of trust.
☛ Milan Vranic is the director of contract compliance at UK accountancy firm HW Fisher