Kreller's Due Diligence Blog
Ethical Sourcing: Go Local to Mitigate Risk in Manufacturing Supply Chain
Monday, September 15, 2014
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.
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.
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.
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.
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.
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.
The Kreller Group was
founded in 1988. The company provides comprehensive due diligence investigation
services for government entities and Fortune 100 and 500 corporations in the
U.S. and abroad. The Kreller Group team
is comprised of a worldwide network of investigators and business analysts with
domestic and foreign expertise in all jurisdictions. For additional information
about the Kreller Group Family of Companies contact Gina M. Martin,
513.723.8902, email@example.com or visit www.kreller.com.
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).