As firms worldwide improve the rigor of their ESG risk assessments and strategies, supply chains, which are included in a company’s Scope 3 emissions, are coming under intense scrutiny. Firms can no longer delegate responsibility for environmental and social issues to vendors — if it’s in your supply chain, it’s your responsibility.
Global supply chains need a new class of ESG evaluations, and this can often prompt difficult conversations with vendors about changing requirements. If they fail to meet these new standards, it’s time for a different kind of conversation, which comes with risks, including financial and legal ramifications.
This article will explore the six key steps to managing risk when ending existing supplier relationships and beginning new ones.
1. Know Your Supplier Data
It is essential to constantly track your ESG data across material issues when it comes to your upstream and downstream partners. Just because a vendor passed your supply chain due diligence at the start doesn’t mean that nothing has changed since. The ESG compliance landscape shifts rapidly and with these shifts come new risks and new considerations. Tracking supplier data in near real-time and also benchmarking vendors across your supply chain, enables organizations to get ahead of risks. This data is also necessary for ending supplier relationships objectively.
2. Know Your Contract
Amanda Russo, founder and CEO at Cornerstone Paradigm Consulting, urges supply chain managers to review vendor contracts carefully and ensure they know the terms. In addition, contracts should include clauses about ending the relationship — otherwise, vendors can charge customers significant fees to terminate the agreement. To avoid fees or legal ramifications, provide documentation around ESG contract breaches, and include terms about ESG-related requirements and termination in future paperwork.
3. Have a Backup Plan
Having a new supplier (with a strong ESG track record) lined up is essential before you initiate a breakup conversation. Although you may be unhappy with an existing vendor’s attention to social and environmental concerns, it’s unwise to end the relationship without a backup plan or rush the vendor selection and due diligence process.
Josh Mellinger, ESG board member and strategic advisor for reThink Purpose, recommends looking for open and frequent communication, transparency, and honest feedback. “High-performing suppliers back up their words with data, mitigation plans, and follow-through, while low-performing suppliers tend to make promises that sound great on bumper stickers but can’t be tied to specific actions,” he says.
Additionally, ensure you aren’t reliant on a single supplier for a particular product or service wherever possible. “Single source suppliers are one of the biggest challenges we are seeing today,” says Russo. “I always recommend our clients have multiple suppliers.” Doing so helps avoid potential breakdowns in your ability to service your market if one supplier fails to deliver.
4. Have the Conversation Internally
Notify all relevant internal teams and staff members of the change in suppliers, particularly accounts payable. Keeping internal teams up to date with vendor changes is easily forgotten and can lead to payments being sent to former suppliers (sometimes for several months).
Update contract records, including details on how the contract ended along with relevant data, letters, and documentation. Input new vendor contracts into your systems and ensure they meet all applicable regulations and ESG requirements.
5. Keep the Breakup Conversation Professional
Conduct breakup conversations objectively and professionally. “Many suppliers are expecting customers to come crawling back or may still have a portion of a customer’s business where they can increase pricing, decrease service levels, or shift product availability to a competitor,” Mellinger says.
Breakup conversations conducted improperly can lead to retribution from suppliers. “With the wrong messaging,” says Mellinger, “a long-term strategic relationship can quickly be turned into a short-term transactional relationship.”
If you work in a small industry, you’ll likely run into your supplier or key contact at some point. “Depending on what industry you are in, a lot of suppliers know each other,” Russo says. Particularly in niche industries, it pays to keep things amicable.
Although you’ll need to send written confirmation at some point, breaking the news via phone is one way to soften the impact. Don’t forget to take responsibility for your role in the relationship not working out. Unless your supplier was completely unreasonable or out of line, it’s possible your firm also contributed to things not working out in some way, such as not communicating your ESG requirements clearly or updating them frequently and expecting suppliers to play catch-up.
“Honesty is the best policy,” says Russo, “but professionalism is key here.” Keep it polite and professional, and leave the door open for future opportunities.
6. Evaluate New Suppliers Carefully
Every supply chain manager has experienced the difference between what a vendor claims they will do when hired, and what is eventually delivered. When dealing with an underperforming vendor or, in extreme cases, a vendor that has been the focus of an ESG scandal, it can be tempting to find and transition to a new supplier quickly, without careful selection. But performing proper due diligence on vendors is extremely important when evaluating suppliers for ESG concerns. Indeed, failing to do so opens your firm up to just the kinds of risks you were trying to avoid.
As well as asking questions about policies and processes, and ensuring a potential supplier’s answers are accurate based on supporting documentation, we recommend conducting independent research into a supplier’s reputation and history. Wherever possible, visit a supplier’s site to assess people and processes with your own eyes.
As ESG evaluations progress, supply chain managers will benefit from developing standardized supplier ESG checklists in conjunction with ESG and sustainability teams to help with the due diligence process.
A Final Word on Ending Supplier Relationships
Although breaking up with existing suppliers and transitioning to new ones comes with its own set of risks to address, it is often the best decision a firm can make in the wake of an ESG controversy or a failure to meet impact requirements. In an age where brands are held accountable for the impact of their entire supply chain, knowing when and how to end vendor relationships is an essential skill.
Why Equilibrium?
As your ESG goals and plans evolve, staying on top of risks and opportunities in your supply chain is vital. Future-proof your organization’s ESG reporting with Equilibrium, a next-gen, end-to-end ESG management solution that helps companies move past static spreadsheets and legacy solutions. Equilibrium’s Supplier Portal makes it easy to collect data, add suppliers, share your supplier policy, and more.
Learn more about how Equilibrium and FiscalNote’s suite of solutions can help you stay ahead of ESG disclosure, sustainability reporting, and climate risk management across your entire value chain.
