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Supply Chain Disruption and Onboarding Due Diligence

If I ever told you years ago that the 2021 headlines would be dominated by the “supply chain” crisis, you would have immediately questioned my judgment (and perhaps sanity).  The current crisis reflects the roller coaster economic impact of the pandemic. If there ever was a global disruption of severe magnitude, we have been through it. 

We have all had experience in managing disruptions and significant events, but never one of this type of global impact.  Covid-19 continues to plague numerous countries, especially in those developing economies.  At the beginning, in the US, we faced severe shortages of medical supplies needed to treat those sick from the virus, and it quickly spread to our supply chain for products such as groceries, toilet paper, milk and other products.  In the time of national anxiety everyone reaches for perceived “essentials,” a quixotic mix of products designed to reduce a larger and more pervasive anxiety.

During the pandemic, business organizations quickly identified supply chain weaknesses and scrambled to fill in gaps.  Due diligence onboarding became less important because of the need to provide essential supplies to maintain business operations.  Supply chain management and compliance operated as one function with modified due diligence as appropriate.  Compliance learned to be even more nimble.  Instead of feeling “pressured” to onboard a vendor or supplier rapidly because the business “wanted” to do so, compliance officers faced pressure because the business “needed” to onboard the supplier or vendor immediately to survive.  Compliance officers adapted accordingly and implemented expedited processes in high-pressure situations.

As we overcome the pandemic in the US, we are still facing challenges in global supply chain management because of the uneven and disparate recovery path.  Companies are still filling in supply chain gaps and weaknesses to ensure smooth operation.  However, many companies are now facing severe shortages of goods, including shipping container space, for movement of goods around the globe.  Delays have become the norm and alternative suppliers may become relevant given the rising costs and delays everyone is experiencing.

Vendor and supplier due diligence has to remain nimble and provide the support needed to manage third-party risks while ensuring business access to critical suppliers. The global supply chain crisis quickly exposes weaknesses in a company’s third-party risk management program.  Chief compliance officers face a real challenge in finding the right balance between onboarding critical businesses and mitigating known risks.

In the end, CCOs may have to permit onboarding of new third parties while implementing proactive monitoring, testing and mitigation strategies.  While I have never been a big fan of comprehensive, multi-week audits, the current environment requires careful  balancing of sampling, testing and proactive strategies for high-risk vendors and suppliers to mitigate risk.  While onboarding high-risk candidates may not be the “right” solution in a perfect world, given the business demands, CCOs may need to employ different risk mitigation strategies to support the business and reduce risks.

High-risk monitoring strategies can include a number of tasks, including: (1) regular consultations and check ins with internal business representatives on ongoing business interactions with the recent vendor/supplier; (2) transaction testing to review documentation and verify payments, customs and other regulatory interactions; (3) review of discounts, contracts and other terms to ensure proper, arm’s length arrangements; and (4) remote audits conducted on a regular basis with consultations with internal business representatives to understand relevant transactions and business relationships.

CCOs have to adapt to a higher-risk environment and allocate resources needed to face these important risks. CCOs have to mitigate the risks from these rapid-fire new relationships.  A CCO’s job flows up and down with the business.  Compliance consistency is critical in the face of a challenging environment.  CCOs know the challenges and have to face them to build credibility, cooperation and trust with the business.

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  1. November 17, 2021

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