Due Diligence is key to mitigate Covid's impact on supply chains

Covid-19 is wreaking havoc on global supply chains and firms’ business continuity plans around the globe. Third parties spread across multiple jurisdictions, up and down a company’s supply chain network, are experiencing various levels of disruption.

Despite the efforts of governments to minimise the impact of the pandemic, Coronavirus will have a lasting effect on business’ supply chains for several months, if not longer, as disruption to normal life extends beyond the peak of the virus in different countries.

Considering this unprecedented disruption, companies with global supply chains now face increased pressure to effectively manage their third parties. On the one hand, they need to ensure the resiliency of their supply chain, by rapidly identifying and even onboarding backup suppliers to replace those suddenly side-lined due to the effects of Covid-19. At the same time, however, companies need to continue to minimise their exposure to the legal and reputational risk inherent in relying upon third parties.

In the current climate, what steps can compliance offers take to help achieve both objectives?

Understand your third-party ecosystem

This is a necessary first step to ensure a business has have a good baseline of who the third parties are within a supply chain, and where they are located. Given that some jurisdictions are currently harder hit than others, identifying where third parties are located will help to build in potential redundancies and hedge against supply chain risk.

Identify your critical third parties up and down the supply chain

Not all third parties are of equal importance. Some partners may provide a mission critical material, part or service. It is also important to not only focus on upstream suppliers, but also downstream third parties such as third-party logistics providers, as having the product delivered is of equal importance to getting it produced.

Consider identifying important “fourth parties”

Fourth Parties—essentially the key third parties of your third parties—can become a serious liability if they are suddenly unable to operate. Knowing who these fourth parties are, and where they are located, could help minimise risk, and will ultimately build awareness of how vulnerable third-party suppliers can be.

Conduct proactive due diligence on potential alternate third parties

Screening potential backup third parties could help minimise the time to onboard a new partner, should a key part of the supply chain be adversely affected by the epidemic. It could also prevent the business from scrambling at the last minute should any red flags arise when undertaking the standard due diligence process.

Diversify third parties to minimise over-reliance on impacted jurisdictions

Spreading your supply chain network across multiple jurisdictions could help minimise the impact of major disrupting events such as the Covid-19 pandemic.

Consider assessing third-party business continuity plans during your due diligence process

Ensuring that partners within the network also have a plan in place to minimise any major disruptions will further shore up supply chain resiliency. This step is vital for partners providing critical materials, parts or services.

The reality is that Covid-19 will continue to impact global supply chains for the foreseeable future, even after the pandemic peaks. While there is no silver bullet to avoid these types of major disruptions, compliance officers can proactively do their part to minimise the risk to their firm’s supply chain operations. Doing so will help ensure that business continuity plans remain relevant during this major supply chain challenge.

The author, Daniel Hartnett, is Associate Managing Director at Kroll, a division of Duff and Phelps.

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