Due diligence is the process of detailed investigation and evaluation carried out by a company to analyze the integrity, risks and capabilities of its potential or current suppliers.
This analysis goes through several areas, such as financial, legal, operational and reputational, with the aim of ensuring that the partnership with a supplier is transparent, safe and in line with the company's ethical and regulatory standards, minimizing potential negative impacts on the organization's operations and reputation.
When choosing suppliers, it is very important to pay attention to the reputation of these service providers, since their track record will be linked to your company.
That's why we've prepared the text below to explain to you what due diligence is, the importance of carrying it out, how to apply it efficiently and an enlightening step-by-step guide.
What is supplier due diligence?
Supplier due diligence is a fundamental procedure adopted by companies to carry out a thorough and comprehensive investigation into potential or current suppliers before establishing or continuing business relationships.
This process involves a detailed analysis of various aspects, including the supplier's financial health, legal and compliance history, operational capacity, governance practices, corporate social responsibility policies and overall reputation.
By examining these areas, the company will identify possible risks, such as exposure to legal disputes, unethical practices, regulatory or financial violations, which could adversely affect the quality of products or services, the continuity of operations or the company's image.
A critical step in making informed decisions and reducing exposure to risk, the due diligence process allows the company to choose reliable partners in line with its values and standards.
How important is due diligence?
Around 70% of executives believe that supplier due diligence is essential for risk management, according to a survey carried out by Deloitte. Below are some reasons why applying this process to the supply chain is essential:
Risk identification
Due diligence makes it possible to identify potential risks associated with suppliers, such as financial, legal, compliance or quality issues, avoiding unpleasant surprises in the future that could negatively impact the company's operations.
Reputation protection
By investigating the reputation and track record of suppliers, the company can avoid associations with partners involved in unethical practices, scandals or regulatory violations, thus protecting its own reputation with customers, shareholders and stakeholders.
Quality Assurance and Compliance
Through due diligence, the company can assess the quality of the products or services offered by the supplier, as well as adherence to compliance standards, ensuring that the products or services meet the expected standards.
Minimizing Legal and Financial Risks
Detailed investigation can help identify pending legal issues, such as lawsuits or contractual disputes, allowing the company to make informed decisions to avoid potential litigation or exposure to fines and financial penalties.
Reduction of Operational Interruptions
By assessing the operational capacity of suppliers, the company can anticipate problems related to deadlines, availability of products or services, and avoid unwanted interruptions in its supply chain.
What are the main areas of due diligence?
For the process to be effective, it needs to be applied in all the necessary areas of the supplier company, such as:
- Company History and Reputation
- Product or Service Quality
- Production and Supply Capacity
- Financial situation
- Legal and regulatory compliance
- Social and Environmental Responsibility
- Risk Management and Business Continuity
- Management of subcontractors and outsourcers
- Corporate Governance
- Customer Relations and References
- Risk Analysis
Each verification process is unique, so the importance of each area of due diligence varies. Bear in mind that it will be guided by the nature of the business, the industry sector and the company's objectives when establishing relationships with suppliers.
Now that we know about the main areas that should be covered by the due diligence process, let's understand how you can apply it step by step.
What are the steps for carrying out the due diligence process?
Having a well-structured due diligence process is essential for the company to be able to orient itself every time a new supplier is to be contracted. Drawing up a plan with well-defined steps saves time and internal effort, speeding up the supply definition process. Here are some steps you can incorporate into your business:
Step 1: Define selection and evaluation criteria
Identify the key criteria that are important to your business. This can include factors such as compliance history, product quality, production capacity, financial strength, market reputation, social and environmental responsibility practices, among others.
Step 2: Collect basic information
Request basic information from suppliers, such as company name, location, organizational structure and main contacts.
Step 3: Initial search
Carry out initial online research into the company and its history. This may involve searching for news stories, financial analyses, information on legal proceedings, etc.
Step 4: Request detailed information
Ask suppliers for more detailed information. This can include documents such as financial reports, quality certifications, compliance policies, sustainability reports, etc.
Step 5: Analyzing the information
Analyze the information provided by suppliers in the light of the selection criteria defined. Assess their suitability in relation to your needs and requirements.
Step 6: Checking references
Contact references provided by suppliers, such as previous or current clients. This can provide insights into other customers' experience with the company.
Step 7: On-site audit (if necessary)
If appropriate and feasible, consider carrying out an on-site audit at the supplier's premises. This can help verify compliance with quality standards, production capacity and safety practices.
Step 8: Risk analysis
Assess the risks associated with each supplier, considering aspects such as: legal compliance, financial stability and operational risks. This will help you prioritize suppliers and make informed decisions.
Step 9: Legal due diligence
Make sure that the supplier complies with the relevant laws and regulations, including issues such as labor rights, environmental regulations and international trade laws. According to a survey conducted by PwC, 90% of companies that carried out supplier due diligence reported that the process resulted in a reduction in legal problems.
Step 10: Decision-making
Based on the analysis of all the information collected, make an informed decision about the selection of suppliers. This may include accepting, rejecting or requesting corrective action from the supplier.
Step 11: Continuous monitoring
Once the relationship with the supplier is established, maintain an ongoing monitoring process to ensure that they continue to meet the required standards over time.
As we can see, the due diligence process is full of steps and requires continuous monitoring. Otherwise, problems can arise such as: receiving low-quality products or services, lack of regulatory compliance, ethical or environmental problems, financial instability and interruptions in the supply chain due to unidentified failures.
An insufficient due diligence process can negatively impact product quality, operational efficiency, legal compliance and the company's image, resulting in financial losses and reputational damage.
So if your company is concerned about the reputation of its suppliers and has not yet carried out a due diligence process, you can count on SB, a consultancy specializing in bringing your suppliers into line with ESG (Social, Environmental and Governance) criteria. Click here and schedule a demo!
