Industry Alert Manufacturing, Supply & Distribution | FTI Consulting

Industry Alert: Manufacturing, Supply & Distribution

Global Risk & Investigations Practice

October 10, 2015

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The Increasing Need for “Know Your Supplier” (KYS) Investigations
Companies that have invested wisely in supply chains have made great strides in managing the quality of their first-tier suppliers and assuring that they meet international environmental and safety standards. However, companies often pay less attention to the deeper levels of their supply chain; in particular their ownership, the supplier’s suppliers and so forth. Lack of visibility and oversight into the depths of the supply chain can put profit and reputation at considerable risk. Businesses can mitigate these risks by developing a disciplined process that delves into the operational and business practices of their suppliers and the complex web of relationships that sometimes exist.

Manufacturing supply chains are often multi-tiered and fraught with conflicts of interest. Suppliers may have collusive arrangements or financial interests in competing businesses which may lead to rigged tendering, conflicts of interest and disputes that can bring a supply chain to a grinding halt. Trouble can start even before suppliers are selected. A procurement team seeking a provider in the market for example, may identify three or four primary candidates and request a bid from each. At this stage, the procurement team rarely probes the business interests of these competing suppliers but unbeknownst to the team, the owner of one of the suppliers may actually have a financial tie to one or all of the others. As such, if your business operates using subcomponent manufacturers or diversified supply chains, you may be exposed to bid rigging, collusive, unethical and illegal practices from those suppliers right from the start.

Building and Safety Risks May Just be the Tip of the Iceberg
The collapse of a decrepit garment factory in Bangladesh that was making clothing bound for Western retail outlets and recent findings that airline products have been manufactured in harsh Chinese gaols were both international stories that have been highlighted as real concerns to Australian consumers. Reports alleged that some very obvious red-flags involving building safety and workers’ conditions may have existed and some basic due diligence, with on-site inspections, may have alerted the clients that the factories may have not actually existed, presented substantial safety, ethical and/or concerns.

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