Ethical Sourcing: Go Local to Mitigate Risk in Manufacturing Supply Chain

Kreller Group

Companies in manufacturing sectors are consistently searching for low-cost raw material, domestic or imported. While there are definite advantages to importing goods, including lower labor and resource costs, an obvious risk is involved when dealing with overseas companies in the supply chain. Identifying and mitigating exposure is critical in an ethical sourcing investigation. While SCM (supply chain management) and ERP (Enterprise Resource Planning) software systems are fairly reliable, licensed local representatives are imperative to effectively investigate, report and resolve violations in the supply chain.  An expert in the locality has a comprehensive understanding of the culture, language, foreign exchange rate, regulations, quality, political and economic stability, of the area.

Underage workers
Local experts have access to facilities (unannounced personal audit privilege) and can perform in-factory assessments and disclose records to identify underage workers in contract manufacturing operations. The investigator should also have existing relationships with honest local authorities in the jurisdiction and a clear knowledge of laws and acceptable business practices.

Dangerous working conditions
Local experts have relationships with workers in the community who are willing to identify unsafe conditions without fear of retribution. The agent’s connections should extend into the medical arena, including clinics and hospitals, whose staff have an awareness of or previously treated workers from hazardous work environments. Tribal connections are also essential in some jurisdictions. 

Unauthorized sub-contracting
Local resources have increased capability to expose illegal subcontracting facilities. The representative typically has knowledge of specific goods being produced in the vicinity and has consistent communication with contracting entities. Local sources are also on high alert to increased demand for product output which is often the trigger point for illegal sub-contracting engagements.

Quality Control
Facility access as mentioned above (unannounced personal audit privilege) is imperative to address and mitigate quality control issues relating to raw material substitution. Common examples of this include inferior leather, fabric, raw ingredients or other specified base materials. Local product quality control specialists can conduct spot checks to prevent substitution practices.

Case Study
A global retailer’s ethical sourcing manager (ESM) received several anonymous emails from an informant within one of its international manufacturing facilities. Correspondence alleged employment and abuse of underage workers. The ESM provided available details to the due diligence investigation consultant. He subsequently engaged a team of local agents from that jurisdiction to begin an overt investigation of the facility. One local agent made a discreet visit under the auspices of potential sales interest to conduct an initial assessment. Based on the findings, the ESM authorized further admittance to the facility to conduct an audit. This included photographic documentation of all records and employee interviews. The final report revealed these allegations to be valid, as a result the client took appropriate actions to address the issues in the facility.

About the Author
Tom Engelhart was a co-founder of Kreller Group  in 1988 and is currently a director. Prior to his position at Kreller, Engelhart was an executive with Dun & Bradstreet working in their Credit, Finance, Marketing, M&A and credit investigation and analysis units. Engelhart specializes in consultation with Fortune 100 companies in the areas of FCPA, Due Diligence Investigations, Fraud, Money Laundering, Joint Ventures, M&A, International Information Systems Management, Credit Investigation & Analysis.  He is a graduate of Miami University of Ohio. Engelhart is a featured speaker for Marcus Evans FCPA conferences and the Institute of Internal Auditors (IIA) and is also a member of the American Society of Industrial Security (ASIS). 

About The Kreller Group

For nearly 30 years, Kreller has relied on “extensive boots-on-the-ground” research, conducted by investigators who are well-versed in worldwide military, law enforcement, business and government matters to deliver the concise information our clients need to make decisions.

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