In this article, we will discuss one of the most important due diligence obligations of the Act - Section 5 “The Risk Analysis” - and its relevance for indirect procurement.
Let’s start with clarifying the difference between direct and indirect spend:
An ambiguity that often arises in connection with the risk analysis obligation is the distinction between strategic and non-strategic suppliers.
Do non-strategic suppliers need the same extent of diligence as strategic suppliers?
One might think that it would be sufficient to focus only on important strategic suppliers with high spend volume. However, the Act makes no distinction in terms of applicability between strategic and non-strategic purchasing.It states:
“All goods that an enterprise purchases to manufacture its products or provide its services are part of the supply chain and are therefore part of the risk analysis. This also applies to goods that enterprises purchase to ensure they continue to exist, but which are not directly incorporated into the final product.”
This implies that goods and service that are not intended for resale, such as office supplies or software systems, are also covered by the law.
So does this mean, that every non-strategic supplier has to be analysed in detail? For some companies, that would mean investigating tens of thousands of suppliers.
The key word is “Prioritisation”
When it comes to the risk analyses obligation, enterprises do not have to consider all risks in equal detail.
They should focus on the most important ones, i.e. prioritise them.
Whether risks need to be prioritised by the enterprise depends on the criteria of appropriateness, in particular on how serious the risks are seen to be and what the enterprise’s potential influence is on effectively countering these risks.
The goal of the whole process should be to sort out non-substantial suppliers where no significant risk could be identified and focus on the higher risk suppliers.
Thus, “indirect purchases still have to be considered when performing risk analyses”, but they can be analysed - under certain circumstances - with less effort.
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In practice, the Risk Analysis process could look something like this:
The regulation prescribes that the analysis has to consider the risks for the affected people and not the risks for your company. For example, a small volume supplier may indicate low financial risks for your company, but can “still have a significant risk of negatively impacting people and the environment”.
Therefore, the risk analysis should not be based on expenditure volume as the only criterion, but should include several relevant risk indicators.
To summarise, implementing the corporate due diligence obligations is an individual, ongoing process that must be regularly reviewed and improved. Most effort and focus will be on the risk assessment of important strategic suppliers. Nevertheless, non-strategic suppliers must at least briefly be evaluated in order to sort out non-substantial suppliers or identify potential at-risk suppliers where further assessment is required.
Apart from the in-house risk analyses, enterprise can also use other external risk data, but should keep a few things in mind. For instance, a self-disclosure statement such as a written assurance signed by a supplier is not sufficient to fulfil the due diligence obligation with regard to that supplier. External sustainability ratings, on the other hand, can serve as evidence within the framework and can be used as important indications of the fulfilment of the due diligence obligations.
Hence, an “appropriate risk analysis and scoring should be a multistage process” and include a variety of risk assessment data such as:
- Internal supplier data,
- External supplier sustainability ratings, and
- Supplier self-assessments.
By leveraging these specialized tools, companies can ensure a more thorough and compliant supplier onboarding process, fostering trust and transparency in their supply chains.
Lhotse offers a holistic intake solution, integrating various tools, including those for supplier onboarding, into a unified workflow. This seamless approach ensures compliance and efficiency, allowing businesses to truly harness the potential of their supplier relationships.
Discover the transformative potential of intake forms and workflows in one of our webinars, and firsthand experience how Lhotse can be an integral part of your interconnected future.
