Nature of the business relationship and ability to influence international suppliers
Because a company’s supplier relationships are critical to the continuity of its business operations and its economic success, it is essential for a company to have a thorough understanding of its supplier base. Companies that procure internationally from many different suppliers face the challenge of organising their supply chains in a way that minimises risks.
In order to assess a company’s ability to influence a particular supplier towards responsible management, it is advisable to determine the type of business relationship with the respective supplier. This will in turn affect the choice of tools and methods that can be used.
In a ‘strategic’ business relationship, the supplier makes a significant contribution to the company’s ability to achieve its strategic goals. The supplier has competencies that are not necessarily very important for the company’s current core processes but are expected to become so in the future. The company considers the supplier an important partner because not many potential suppliers have this supplier’s resources and core competencies. At the same time, the company is a strategic partner for the supplier and has a significant influence on the supplier’s ability to realise its own strategic goals.
Close personal contacts and mutual understanding and respect characterise strategic business relationships. They also demonstrate a balance of power, as both partners are of considerable importance to each other. The focus of the business relationship is on strategic development and the achievement of strategic goals. Both partners have a great interest in long-term collaboration, so the loyalty between the company and the supplier and their willingness to invest in the business relationship are strong.
A ‘strategic’ relationship identifies a business relationship in which the following elements apply:
- The company works closely with the supplier to achieve common strategic goals.
- The supplier has a high level of interest in a close strategic relationship with the company.
- The company has a high level of interest in a close strategic relationship with the supplier.
- The relationship between the company and the supplier has a long-term orientation.
- Formal contracts clearly define the relationship with the supplier.
- Close personal interactions characterise the relationship with the supplier.
- Mutual respect characterises the relationship with the supplier.
- Mutual trust characterises the relationship with the supplier.
A ‘leverage’ business relationship exists with a supplier that offers products or services relevant to the company’s core processes but with a low procurement risk and a large supply base. Due to the relatively large number of potential suppliers and the relatively small number of other potential buyers, the two parties experience a clear power imbalance. Typically, the company tries to use its bargaining power in its favour and invests only the minimum in building a long-term supplier relationship. However, the company expects the leverage supplier to adapt to the company’s needs and to offer its experience and competencies, to positively contribute to the company’s competitiveness.
A ‘leverage’ relationship identifies a business relationship in which the following elements apply:
- The company strongly influences the strategic development of the supplier.
- If the company stops buying from the supplier, the supplier will go out of business.
The business relationship with a ‘bottleneck’ supplier enables the company to procure products or services of great importance for its core business. However, a supply-side shortage creates a high associated operational risk. The company depends on the supplier to ensure supply of these products or services. Due to the relatively small number of potential suppliers, a clear power imbalance exists between the two parties. The company has almost no bargaining power vis-à-vis the bottleneck supplier, and the latter is usually not interested in investing in a longer-term business relationship with the company because there are enough potential buyers on the market.
A ‘bottleneck’ relationship identifies a business relationship in which the following elements apply:
- The supplier provides goods/services that are critical to the company’s core business.
- The supplier provides goods/services that are critical to the company’s current day-to-day business processes.
- Increases in the cost of the goods/services have a direct and significant negative impact on the company’s financial performance.
- The supplier’s competencies and capabilities are critical to achieving the company’s strategic goals.
- The supplier has a strong influence on the strategic development of the company.
- The company losing the supplier would cause major difficulties finding a replacement supplier.
- The company losing the supplier would have negative consequences for the company’s business continuity.
- The supplier offers products/services that are scarcely available.
A ‘non-critical’ business relationship is one with a supplier that has a low-level impact on the company. The supplier offers a product or service with relatively low financial value and low operational risk. The product or service is either not significant to the company’s core processes but still needs to be procured, or numerous potential suppliers are in the market. At the same time, the company is a ‘non-critical’ buyer for the supplier because the procurement value is low or numerous potential buyers exist. Little direct contact characterises this type of business relationship. The procurement of the products or services largely occurs via commodity exchanges, procurement platforms or other electronic processes. A balance of power characterises the relationship between the company and the supplier, as neither party has significant influence over the other. Therefore, loyalty between the company and the supplier is also rather weak.
A ‘non-critical’ relationship identifies a business relationship in which the following element applies:
- The supplier is chosen based on price only.
Furthermore, „Other non-Critical“ business relationships are those where none of the elements listed in the previous categories apply to the relationship with the supplier.
ESG risks with international suppliers
In addition to the nature of the company’s business relationships with its suppliers and the resulting ability to influence them, existing or potential ESG risks are another important factor that companies must consider in their international supply chains. Increasing demands from the public and governments impose greater expectations on companies to actively manage ESG risks in their supply chains. While not all risks are breaches of the law (often, there is no legislation in place yet), they can cause significant financial and non-financial damage if they do occur. Therefore, companies identifying, minimising and avoiding these risks as far as possible is important.
Environmental risks result from the negative ecological consequences of business activities. These include environmental pollution (i.e. water, air, soil, noise and light pollution), improper waste disposal (i.e. waste inadequately disposed of or recycled), a poor carbon footprint and high-level greenhouse gas emissions.
Important environmental risks at a glance:
- Environmental pollution: Introduction of harmful substances into the environment.
- Improper waste disposal: Disposing of waste in a manner that is harmful to the environment. Examples include but are not limited to illegal disposal of hazardous waste into the ground or the ocean, poor waste segregation, inadequate treatment of waste and improper recycling.
- Poor carbon footprint and greenhouse gas emissions: Absolute amount of carbon dioxide released into the atmosphere as a direct or indirect result of a company’s business operations.
Social risks refer to social issues, such as compliance with human rights, social justice and labour standards. This category includes such risks as child labour, forced or compulsory labour, inadequate working time, wages below subsistence level, safety and health risks in the workplace, discrimination and harassment of employees, restrictions on freedom of association and the right to collective bargaining and lack of free, prior and informed consent by indigenous and local communities.
Important social risks at a glance:
- Child labour: Exploitation of children through any form of work that deprives them of their childhood, potential and dignity and interferes with their schooling; situations where children are placed in mentally, physically, socially or morally dangerous and harmful work situations.
- Forced or compulsory labour: Any form of work performed involuntarily under the threat of punishment, destitution, detention, violence, compulsion or other forms of extreme hardship.
- Inappropriate working hours: Excessive working hours and insufficient daily, weekly and annual periods of rest and recuperation, as well as paid annual leave, where the limit of working hours is not respected.
- Wages below subsistence level: Payment of excessively low wages below the minimum wage, or payments in kind.
- Occupational safety and health risks: Determinants of worker’s safety and health, including risks for disease, accidents and injury to health in the occupational environment.
- Discrimination and harassment of employees: Employees treated differently or unfairly, based on personal characteristics, e.g. race or gender, as well as superiors, co-workers or other employees creating an intimidating, hostile or threatening work environment.
- Oppressed freedom of association and collective bargaining: The oppressed right of workers and employers to form and join organisations of their own choosing, as well as prohibiting the ability to establish fair wages and working conditions, ensure equal opportunities between women and men and provide the basis for sound labour relations.
- Lack of free, prior and informed consent of indigenous and local communities: The presence of manipulation or coercion of the involved parties, without guaranteeing appropriate time for consultation, and withholding important information.
This category includes risks that relate to the management of a company. Concrete aspects include bribery/corruption, i.e. the abuse of entrusted power for one’s private benefit, anti-competitive agreements between competing companies, the evasion of taxes and social security contributions and the evasion of embargoes and sanctions.
Important governance risks at a glance:
- Bribery/Corruption: Offering, giving, soliciting or receiving any item of value as a means of improperly influencing the actions of an individual or an organisation for private gain.
- Anti-competitive agreements: Agreements between competitors to prevent, restrict or distort competition.
- Evasion of taxes and social security contributions: Deliberate non-payment or underpayment of due taxes and social security contributions.
- Circumvention of embargoes and sanctions: Doing business with blocked persons or entities on sanctions, embargoes or watch lists.