Step One: Rank and Prioritize Suppliers


Step One: Rank and Prioritize Suppliers

How does a company begin to decide what suppliers and business partners fall within the company s span of ethical supply chain responsibility? The general guidelines for strategic sourcing already call for ranking suppliers according to price, dependability of delivery, or quality of product. Added to this list should be criteria that identify suppliers that are likely to be pursuing social or environmental activities that are illegal, in violation of your company s code of conduct, or are likely to cause damage to the company s reputation.

Generally, these suppliers should also then be prioritized according to the product being purchased, the relative amount of money being spent with them, and the type of relationship that your company has with them. For example, a company would be expected to have much less culpability in the actions of a supplier with whom they dealt only through a spot market, or when buying materials that accounted for only relatively small purchases.

The Global Environmental Management Initiative (GEMI) typically classifies suppliers for environmental, health, and safety monitoring into four levels based on the intimacy and mutual dependence of the relationship between customer and supplier:

  • Level 1. Spot purchasing depends largely on price, and the interdependency between buyer and supplier is minimal.

  • Level 2. Competitive incumbent relationships are in place for a longer period (typically a year), but involve relatively little substantive cooperation between the companies.

  • Level 3. Preferred supplier relationships typically last longer than a year, and buyer and supplier collaborate to maximize value.

  • Level 4. Strategic partnerships involve a mutual investment and sharing of benefits.

Typically, says GEMI, buyers have both more dependence upon their level 3 and level 4 suppliers, and more leverage over them. As a result there are more opportunities to cooperate. These suppliers may or may not expose the company to specific EHS legal liabilities, but any improvements in their financial performance or EHS expertise are likely to benefit the buyer company in the long run. [2 ]

There are certain profiles, says John Brookes, an auditor and CEO of Manaxis, that will enable companies to recognize where their risks are. The buying influence that the customer has over the supplier, the country from which the goods are coming from, and the general sense of compliance of the laws in that country, whether there is corruption, whether it is a locally owned company, or whether it is a foreign investment, how old the facility is . . .

There are all sorts of factors, he contends, that companies have recognized and can actually put figures to ” sometimes arbitrary figures ” but the types of figures that will help them to work out some kind of risk factor . . . That is the best approach for most companies looking at introducing such initiatives into their supplier base. [3 ]

Other criteria for ranking suppliers to consider may be:

  • Could the supplier directly influence final product quality because of their failure to adhere to environmental standards (by, for instance, using banned components or ingredients )?

  • Is the supplier located in a country or an industry known to be guilty of violating environmental or employment standards that may bring either legal penalties or reputation damage to the company?

  • Are they acknowledged or obvious tier -one suppliers, that is, are they providing materials or services that make up a good portion of the value of your product?

  • Does the public ultimately (for whatever reason) expect your company to have influence over these suppliers because of their dependence on your company?

Gap, Inc. for example, with a compliance monitoring team of 90 employees (responsible for inspecting 2,400 factories), has shifted to what they call a variable monitoring program that focuses verification and improvement efforts on suppliers according to:

  • The vendor s and factory s past record on compliance

  • How easily [their] VCOs can obtain accurate data from and effectively communicate with the vendor and factory

  • [Their] ability to obtain and rely upon information and support from sources outside the factory, including market reports , governmental entities and NGOs [4]

Whatever criteria a company chooses, the goal is to be able to create a short list of the most important suppliers on which to focus efforts for monitoring and audit. To create that final short list, it is possible, again according to GEMI, to categorize suppliers into four levels of relative importance:

  • Unimportant (not on our radar screen of risks that regulators, courts, or customers care about). Ignore these aspects of performance for now.

  • Relevant (low liability, low cost, low marketing benefit). An appropriate goal is to have suppliers meet minimum standards, comply with laws.

  • Important (area of significant risk or potential benefit). An appropriate goal is to optimize performance in the supply chain.

  • Critical (high risk issue). The appropriate goal is near-zero probability for major disruption, liability, or public relations crisis [. 5 ]

[2 ] New Paths to Business Value, the Global Environmental Management Initiative at www.gemi.org/newpath.pdf, pp. 14, 35.

[3 ] Interview, August 15, 2003.

[4] See www.gapinc.com/social_resp/sourcing/program.htm.

[. 5 ] New Paths to Business Value, op. cit.