The value of the ‘Network Effect’ in supply chain due diligence and reporting management has been reported by Supply Chain Intelligence Institute, Vienna.
Here’s how it works
Many readers of the Achilles blog will be familiar with the concept of the Network Effect. This describes a situation where a product or services becomes more useful and effective the more people that use it. Examples of the network effect in modern times include the telephone, email, and even Airbnb.
Perhaps what might be less obvious to readers, is that the same network effect also applies to supply chain risk management.
Global supply chain risk management often has the same characteristics. This can make it inefficient and less effective than it could be. These characteristics include:
- Being undertaken independently by companies (and even divisions within companies) in a siloed manner, despite commonality across supply chains.
- Duplication of effort on behalf of both companies and their suppliers in completing onboarding assessments and supplier checks.
- Absence of a standard format for evaluating suppliers. This means companies and sectors don’t know how their supply chain is performing
- Manually deployed onboarding assessments, managed in excel and often not updated after the initial supplier onboarding date.
- A lack of clear output or insight derived from the supplier onboarding and management processes.
- Inability to effectively benchmark or monitor the performance of the supply chain as a whole.
- Difficulty satisfying internal and external audit and disclosure requirements.
- Difficulty surfacing meaningful supply chain data to support annual ESG / sustainability reporting obligations.
Leveraging the benefits of the network effect enables buyers within sectors to work together to eradicate these issues and inefficiencies whilst reducing costs and raising standards. Here’s how:
By deploying standardization wherever possible, and sharing non-sensitive, non-competitive information between all parties, duplication and silos are removed.
Central management of supplier assessments by a third party removes duplication which in turn reduces supplier management and procurement costs.
By using the same assessment criteria for all suppliers in a sector, meaningful benchmarks can be established that enable supply chain performance to be effectively measured, tracked and improved.
Supplier benefits
Completing one assessment process to satisfy the requirements of multiple clients simultaneously reduces the time suppliers spend on buyer assessments and meeting bid criteria. They also get independent recognition of their ESG performance and other important credentials as well as access to more clients.
The network approach was recently recognised in a report by the Supply Chain Intelligence Institute, Vienna in relation to the EU’s Corporate Sustainability Due Diligence Directive (also known as CSDDD). They say a market solution can reduce both the costs incurred and the risk of dealing with a non-compliant company. By effectively pooling the costs of due diligence, a positive list approach significantly increases the efficiency of the monitoring system as a whole. It also increases effectiveness because non-compliance by a single supplier leads to the delisting of that supplier for the entire EU market. This multiplies the incentives for compliance.
Many of the industry sectors with which Achilles works operate their supply chain due diligence programmes on such a Network effect basis – effectively pooling the cost of due diligence and compliance and raising the standards for all.
An example of this network effect in action is in the UK’s Utilities sector where some 65 buyers have collaborated with Achilles for over 25 years to share the cost of creating, maintaining and sharing a list of validated and audited suppliers to an agreed set of standards.
The UK utilities sector estimates that as an industry it saves some £22 million every year and each buyer in the region of £500,000 per annum from more efficient procurement processes and higher quality suppliers as a result.
Regulatory Benefits
Achilles acts as a central point of contact for UK utilities suppliers. We support them in providing information that the UK utilities sector needs to make good procurement decisions. Achilles steps in to provide advice and guidance when suppliers fall short of those standards. This enables suppliers to reach the required level and maintain diversity across the utilities value chain. It ensures local supplier sourcing is fully supported by providing much needed support to smaller, less well-resourced SME suppliers.
As regulatory requirements change in the UK, such as with the new UK Procurement Act, Achilles has the economies of scale to adjust supplier due diligence and auditing processes. Analytics dashboards and reporting formats allow UK utility companies to respond seamlessly without adding pressure to limited in-house resources.
With scrutiny increasing from stakeholders and regulators industry sectors have an opportunity to demonstrate their commitment to sustainable, and ethical procurement practices. This can be achieved throughout the supply chain, by complying with emerging legislation and improving operational efficiency across the procurement function.
By adopting a standardized, streamlined approach to supplier risk management, organisations can ensure they are partnering with the right suppliers in an efficient, cost-effective manner. They can work together to improve standards across the supply chain.
Like Airbnb, email and the telephone, the more buyer and supplier participants in a network the more effective… and cost-effective supply chain due diligence becomes.
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