Compliance management: How to strengthen trust along the supply chain

Compliance is a key aspect in the logistics environment: It serves to prevent risks and thus to protect companies and their employees. As the topics of sustainability and due diligence are gaining momentum, companies in the B2B and B2C sectors should prepare for increasing transparency requirements along the entire supply chain. We highlight the challenges and benefits of compliance management and explain the technologies that support it.

Content:

1. Sustainability, Supply Chain Act, CSRD – Compliance Management as a Success Factor
2. Compliance as part of strategic risk management
3. Technologies that support compliance
4. Conclusion: Keeping an eye on the supply chain with the help of compliance management

1. Sustainability, supply chain law, CSRD – compliance management becomes more important for companies

Data protection regulations, human rights, environmental protection, tax regulations, sustainability – the demands that companies must meet in their production and procurement processes are increasing. Not least against the background of the Supply Chain Act, which has been in force since January 2023, and the upcoming introduction of the new Corporate Sustainability Reporting Directive (CSRD), the focus has increasingly shifted to compliance. Companies are required to comply with certain laws, regulations as well as ethical standards and they must ensure that their decisions, activities and behaviors are in line with the relevant guidelines. In particular, the inclusion of sustainability aspects such as ESG criteria is becoming an important issue in this context.

Maintaining compliance throughout the supply chain is challenging, as the supply chain often consists of numerous actors spanning different countries and regions. Companies can inadvertently violate ethics and compliance rules, for example, when suppliers or partners violate legal standards in the areas of environmental protection or labor law. To reduce such risks and avoid severe and expensive consequences, strategic supplier management will become essential in the future. In addition, companies must also take into account internationally applicable guidelines in global supply chains and be aware that other regulations are binding in other countries. Violating laws can not only be expensive, but also damaging to a company’s reputation.

An effective compliance strategy brings many benefits:

• The creation of a positive corporate culture: Responsible corporate action with clearly defined compliance standards can help increase employee motivation and retention – interactions within the company are based on transparency, trust and integrity.
• More trust leads to an improved image: Companies that make their compliance efforts transparent demonstrate that they take responsibility and take the guidelines seriously. This can improve their reputation as a player capable of taking action in the economy and strengthen the trust of business partners and investors.
• Competitive advantages: Those that focus on the needs and requirements of customers and operate in an environmentally friendly, sustainable and ethical manner can stand out from the competition, expand business opportunities and position themselves as a trustworthy and responsible organization.
• Avoiding risks, sanctions and fines: If compliance standards are adhered to, companies reduce the risk of violating regulations. They thereby avoid high fines, legal consequences or loss of reputation.

Last but not least, strategic compliance management can increase the efficiency of work processes: To minimize risks, existing systems are regularly monitored according to clear guidelines and procedures, thereby identifying and eliminating weak points at an early stage.

2. Compliance as a crucial part of risk management

Companies need a comprehensive understanding of their own supply chain and suppliers so that compliance can be effective in supply chain management: Not only must they adhere to the required compliance standards – the latter also apply to all suppliers and partners along the supply chain. Therefore, companies should implement clearly defined codes of conduct and contract clauses in supply chain management that cover compliance with laws and regulations relating to environmental standards, data protection, working conditions and ethics.

An effective compliance strategy pays off in risk management: If appropriate standards are established and the activities of all supply chain actors involved are subsequently made transparent, risks can be identified at an early stage. In this context, possible unethical or illegal practices on the part of suppliers must be carefully examined. For example, monitoring working conditions in factories, mines or mining operations from which raw materials are sourced for the further production of goods is of central importance. Other compliance violations may include money laundering, corruption, violation of occupational health and safety laws or data protection, unfair competition or tax evasion.

Outsourcing as an integral part of many supply chains can lead to non-transparent processes and make compliance more difficult. Transparency is a basic prerequisite for checking whether suppliers and business partners comply with legal and ethical regulations. Companies can use modern technologies and tools for this purpose.

3. Technologies that support compliance

Technology is playing an increasingly critical role in the implementation of compliance strategies. With the necessary digital equipment, companies are able to make their supply chain more transparent, engage in data sharing, and address challenges. The following technical solutions are particularly helpful:

• Compliance management software: A centralized platform supports companies in planning, executing and monitoring their compliance activities. Further, risk assessments can be carried out and tasks and measures can be tracked.
• Data analytics tools: These applications help examine large data sets and uncover potential rule violations or risks. They enable organizations to create dashboards and reports, perform data analysis, and detect deviations and outliers in data sets.
• Risk management tools: These tools are designed to identify risks in the companies’ business activities, prepare analyses and reports, and monitor risk indicators.
• Blockchain technology: It is designed to improve the transparency and traceability of processes by enabling a secure, immutable record of transactions. This ensures that all parties involved are trustworthy.
• Artificial intelligence and machine learning: AI and ML identify compliance risks, detect patterns and trends in data, and automatically take action to prevent breaches. The technologies can also analyze unstructured data such as emails, contracts, and documents, and monitor transactions.

The complexity and dynamics of many supply chains require the most complete possible insight into the data of the individual process steps as well as close cooperation with all suppliers and partners. To ensure that sensitive customer data and business information is stored and processed securely in accordance with data protection laws, companies should pay attention to appropriate IT security.

If companies violate compliance guidelines, this can lead to considerable consequences: In addition to high fines, reputational damage and regulatory consequences, disruptions of the supply chain are also a likely scenario should suppliers temporarily fail to deliver due to rule breaches. This shows how important it is to establish an effective compliance management to ensure that all parties involved adhere to legal, social, ethical and environmental regulations.

4. Conclusion: Keeping an eye on the supply chain with compliance management

Compliance management supports companies in reliably keeping an eye on complex supply chains with many players and in creating a common understanding of the coordinated work processes. By disclosing compliance information, companies show employees as well as customers and suppliers that they strive to comply with ethical principles and take responsibility for their actions. This promotes future viability and builds and strengthens trust between companies, suppliers, customers and other stakeholders.