A responsible sourcing guide for SMEs - Mastering supply chain due diligence

22 minutes

Building a responsible sourcing programme isn't easy, especially with less resources or limited in-depth expertise. The good news? You can build a robust, effective programme - without the exorbitant costs.

Our EiQ experts - CEO Kevin Franklin, Head of Channel Partnerships Erin Lyon and Chief Customer Officer Andy Gibbard - break down exactly what small businesses need to know to implement a fit-for-purpose supply chain risk management strategy.

Full transcript:

Andy Gibbard, Chief Customer Officer, EiQ: Hello everyone, and welcome to today's session on how smaller businesses can achieve total supply chain confidence. My name is Andy Gibbard, and I am Chief Customer Officer at EiQ, and I'm here today with two of our experts, Erin Lyon, our global head of channel partnerships, with 20 years of experience in sustainability, building on a previous background in the legal domain, and Kevin joins us again. Kevin, CEO of EiQ, as well as Chief Product Officer of LRQA and a responsible sourcing and data science expert.

Supply chain risk management has long been thought of as the domain of large corporations, but as smaller businesses operate in an increasingly global environment and as commerce playing fields continue to level, these businesses must step up now to the challenges of supply chain transparency and responsible sourcing. So loads of great stuff to dig into today. And Kevin, I'm going to come to you first, please. So why should smaller businesses care about responsible sourcing and supply chain risk management?

Kevin Franklin, CEO, EiQ: It's a great question, and thank you for organising this session Andy. Firstly, I would say there are already a lot of smaller businesses that are EiQ subscribers/members and that are also working with LRQA, and actually they have a lot of positive things to say about having a responsible sourcing programme. Firstly, many of these smaller businesses, which can still be household names, they do often have linked to their brand commitments they've made, which could be ethical commitments or sustainability commitments. So that's point number one. Secondly, these smaller businesses may still be subject to regulatory environments, whether they are Modern Slavery Act requirements in countries like the UK or Australia, or could be even CSRD, so the corporate sustainability reporting directive or equivalent regulation in countries like the US or even in states actually, like California - so they're subject to regulation as well. Thirdly, having a robust responsible sourcing programme can help build deeper, more trust-based relationships with suppliers. One of the great things about smaller businesses is that they often also have smaller supply chains. And that means they can go deeper, they can work more closely with those suppliers, and they can set up relationships linked to responsible sourcing that drive really great, high impact outcomes for suppliers and also, obviously, for the workers involved. It means that they can get closer to things like emissions as well, which can be an opportunity for cost savings. So if you do responsible sourcing really well, it can be a triple win, really, for a small business.

Erin Lyon, Head of Channel Partnerships, EiQ: Maybe we could flip it around as well, because you've been talking about the buy side. If we talk about the sell side, if I'm a small business, and I want to, you know, really speak to and engage with my customers, if I've got a good, responsible sourcing practice that I can demonstrate, evidence, have the data - then I've got a compelling argument as to why you should come and utilise me.

KF: Yeah, that's absolutely right, Erin. so many of these smaller businesses will be in retail stores, right, where those big retailers will have requirements for those brands on the shelves, or actually, they could be sold online, digitally, in a digital marketplace. And same thing, many of those now stores will have sustainability or ethical sourcing requirements in place. So it's a critical part of the customer story as well. 

EL: And they'll need that evidence. Those bigger buyers want you to demonstrate - here's my management system, here's how I'm implementing if you're on the sales side. You get that done pragmatically and quickly- that's a win for you.

AG: The demands are there, the drivers are there, but often the budgets and the resources are not. Erin, for smaller businesses, how can they start to build a responsible sourcing programme? How can they start to enter this space, given their budget and their resource constraints? 

EL: What we often see is double hatting, or people have expanded roles. So you've already got people who might understand the supply chain very well, and they might be looking at a very particular aspect, or sometimes it comes from a quality, health and safety perspective, and then they'll be given additional responsibilities. What they should be saying is, I will accept the additional responsibilities, but I need the tools to enable me to be able to look at this aspect as well - and they're best placed to do that. And they can do it a lot faster than if you're hiring maybe somebody in if you don't have that resource. So we see them utilising tools like EiQ to enable them, because it's looking at that enabling factor, to be able to do that quickly in a smaller business.

KF: I would say it's a bit of a myth that a responsible sourcing programme needs to be expensive, right? If it's well designed, it can be very cost effective. You mentioned EiQ, and one of the elements of EiQ is actually a supplier sharing module. So if you're a member of EiQ, or subscribing to it, a supplier can share its existing audits, its existing risk profile, directly with user smaller business, at no additional cost. Likewise, there are many instances now where companies will ask suppliers to pay for audits, and if they're using audits, like our enhanced responsible sourcing assessment tools, ERSA, then those can also be shared amongst multiple different end customers. So there's audit sharing. There's actually suppliers volunteering information, which could be existing audit reports or risk profiles or carbon data. There's tools like EiQ, which can be implemented quite cost effectively. And then we also have an outsourcing capability where you know, if you're a really small company and you're double hatting, but you need some coordination support, actually, this is something we do a lot of today, and where we can do it very cost effectively and quickly. So you can also do a small, mini kind of outsourcing addendum, if you like, to your existing team.

EL: You can get skilled up quickly as well, right? You can, you can use the training information platforms that we have to skill yourself, but also then others in the organisation and your own suppliers. So there's very easy ways to get up to speed very quickly.

AG: The feasibility is there, and there's a pathway there, and by the sounds of it, is a fairly well trodden pathway already, but presumably somewhere down the line, prioritisation is going to be key, given again, resource limitations. So how do smaller businesses prioritise and how do they identify their most acute risks to address?

KF: I mean, all businesses need to prioritise. They all have constraints around how much they can spend on things like responsible sourcing. And our EiQ platform is really designed for exactly that question and exactly that challenge. In fact, smaller businesses, just like big businesses, need to bring really a due diligence based, risk-based approach to responsible sourcing. So that means looking at your suppliers by country, by product, running them through adverse media scanning tools like our Sentinel tool, and using all of that intelligence to identify which are the highest risk suppliers, where you spend the most money and that are most material to your organisation, and then prioritising your deep dive monitoring and on the ground work with that subset of suppliers. When we talk about smaller businesses, most likely, we're still talking about a company with maybe 100, 200, potentially even 300 suppliers. And that's not a small number, right? It's small compared to a large multinational that might have 10s of 1000s, potentially, or at least a couple of thousand, but we're still talking about managing a few hundred suppliers, and that requires focus, just like everything else.

AG: So Kevin, how can emerging technologies such as AI-driven analytics and risk management platforms level the playing field for smaller businesses?

KF: This is a fantastic question, Andy. We spoke before about kind of the due diligence, risk-based programme design. I think it's inevitable over time, that that entire process will become automated. So as a small business, you probably won't need a team of people to do that. We expect that things like risk assessment, segmentation, even ordering an audit or requesting an audit, can be automated based on some criteria that you put into the process at the beginning. Likewise, scheduling audits. We're actually automating a lot of that work ourselves already, at LRQA, and we think that that trend will continue. Audit report review, receiving an audit, getting all those corrective action plans, deciding which ones to prioritise - that can, over time, all be automated by AI.

So, a lot of the workflow that today might be delivered by two or three people, or if you're a small business and you're double hatting that you're having to do over time to properly deliver, but will become something that just naturally gets embedded into an AI field platform, due diligence approach. What I would also say, and this is going to be increasingly important, is the way you use AI for insights Risk Assessment and Reporting. One of the biggest burdens on businesses is reporting, both internally and externally, and we're looking at using generative AI in EiQ to allow you to ask questions around, what are the key risks in key countries over time, or ask about alternative sourcing locations, or actually what we will even integrate there, maybe, as we move into q4 this year or next year, is an automated external public facing report, so something like CSRD reporting or GRI type reporting against the relevant criteria of those frameworks can all be done through AI over time.

EL: Maybe just to add, I think where that fits in at the moment is for a lot of small businesses, they're looking at cost efficiencies anyway, across everything. But they may not be integrating sustainability into those cost efficiencies. So it's just making sure it's part of the conversation. If you don't have somebody for whom that's their sole responsibility, sometimes it may get forgotten. So it's about making sure that you've got that inclusion when you're looking at your cost efficiencies everywhere else.

KF: This is a great point, Erin. You and I both kind of been in the sustainability space for a while, and we all remember the days of ‘Triple Bottom Line’ reporting, but I think we probably also know that that never really got done very well. But now is the opportunity to resurface that narrative with what's going on around tariffs and trade pressures and everything being redefined, and the need to embed sustainability, which is where you were going with core business decision making, leverage, and use it as part of a transformation process, right? Building it all together, bringing back this idea of like triple bottom line, but really accelerating it and kind of making it be part of the core business. 

EL: And then as an SME, you're ahead rather than you don't need the separate individual, because you already got that embedded.

KF: Right. 

AG: Should smaller businesses implement a phased approach, starting small and scaling up as they gain more insights and resources? And if so, how would they do that?

EL: Honestly, initial reaction is no, don't take that approach. Don't pilot. Don't start small. If you've got the process that you outlined earlier, why would you need to do that? You're just ultimately slowing yourself down. If you're looking at it being embedded, as we just discussed, if you have a clear process, then you don't need to take that small, baby steps approach. You just look at integration and build a pathway through, maybe we start with this set of suppliers, then we expand. But the mindset isn't starting small. The mindset is start with a future integration.

KF: Yeah, it's a good response, Erin. And a lot of that I agree with. I do think that you could come to a company like ours as a small business, we would advise you on how to do that, right? If you came to us as a small company and said, look, we've never done this before. We are needing to actually tackle these internal challenges, get people on board, get our suppliers on board - we could tell you by how to set that up, and we would bring our experience and our history into that process. So in that sort of scenario, I would say, yeah, you could do it all right fairly quickly. You wouldn't roll out 100 audits tomorrow, but you would put 100 suppliers in scope, and you would take them through the risk assessment, and you would start with maybe 10 audits based on risk or materiality, and maybe by the end of the year, you've done 100. So you would look at the whole programme, right.

AG: Okay, excellent. Start big. So, how can smaller businesses go beyond just managing risk, and how can they use data-driven insights, actually, to identify opportunities for innovation within their supply chains?

EL: I think that's the way around that they should be looking at it. Because if you're just doing a risk mitigation, you're playing a whack-a-mole game, whereas if you're looking at it from an opportunity perspective, then you're looking at, where do I spend my time and effort to get the biggest return? And that could be, it enables me to have the information I need to provide to people who are purchasing from me. Or it could be, how can I attract finance? Because I can demonstrate that I'm managing. So if you are looking at it through a risk lens, I don't, I think you might be missing a trick. Whereas, if you're looking at it through an opportunity, and you identify those early, that will also help you prioritise.

KF: Yeah, risk and opportunity are definitely two sides of the same coin, and I think there's some really good examples here on both the social and environmental side. In the environmental space, if you're working to tackle energy consumption and emissions, you're also probably reducing cost. You're also building more resilient supply chains, because in cases where there might be a blackout or some reduced access to, let's say, grid based energy, if you have solar or other forms of energy there, you are going to be more resilient. Likewise, if you're looking at things like physical climate risk, which might seem like a lot, but actually, these datasets are also readily available now, again, you're building a more resilient supply chain, because you're preparing in advance for instances of flood or equipment, sorts of climate eventualities. So there are definitely ways to lean in on sustainability that will drive a lot of innovation, a lot of opportunity, build a more resilient supply chain, and of course, ultimately build a more resilient business. 

AG: Comparing then, smaller businesses with larger businesses. What lessons can smaller businesses learn from larger corporations about scaling responsible sourcing and supply chain due diligence?

KF: Well, I'll give three, and then I'm sure Erin has multiple others. So firstly, I'd say, don't try to do everything, everywhere, all at once, because that's impossible. As a large business, that's genuinely impossible because you have a supply chain of maybe 2,000 direct suppliers and potentially 80,000 indirects that you may not even have in scope yet, right? So they've already made decisions about what they're going to prioritise and where, typically using a risk-based programme design. So that's step number one, first lesson as a small business, same thing. Start by focusing on your highest risk suppliers. Go deeper with your highest risk suppliers. Point number two, I think you need to build and bring the business with you. So large companies typically tend to have quite well set up structures and processes and reporting mechanisms. They work not in silos. So sustainability team will be working with the supply chain team, potentially with legal, potentially with risk, and a small business will probably also do that. It may do that unwittingly, because people are double hatting, but that's actually ideal. It should be the case that you have good interactions internally with your team members across teams, and that you have knowledge sharing across teams, which small businesses often do super well, actually. So those would be two. I'll save my third for after Erin.

EL: I was wondering what you were going to say. I would take the opportunities that you have to move faster, because what you can learn from a big company is sometimes when they're looking to implement a due diligence process, it's hard to move away from that. So you might have a reliance on a particular industry programme, or that's very hard because you're so set up to manage to that programme. You can't move away quickly, even though you need to, because the circumstances have changed. Everything is different. As a small company, you can be more nimble, and you can put in place a targeted due diligence activity. It might be an audit programme isn't fit for purpose. In a new market, you need information faster, so you need screening, and you need information directly from workers. You can go and get that done much more quickly than a large company who's lumbering in a slow process somewhere.

KF: Yeah. My third is kind of similar. Was a little bit about leapfrogging, a little bit about connectedness. I think what a lot of the large companies have done is incrementally add another element, another element, another element, into their programme design. So they may have started with auditing, actually, and then they've gone to risk assessment, and now they're starting to do well, they probably always did corrective action plans, but now they may be doing grievance mechanisms, and they may be doing work surveys, and they may have moved to environment which might not have even been there at the very beginning. Whereas I think, as a small company, you can leapfrog right, you can learn from the lessons that others have already experienced, and you can start to build the relevant layers of that that suit your business and your risk appetite and your consumer commitment and your brand commitment into the programme from the beginning. 

AG: So stakeholder engagement - thinking about internal stakeholders in particular can always be a challenge. And thinking about industries where robust supply chain factors might not be the norm yet, that could be at the sharp end of that challenge. So what are some effective methods that you would suggest for people to engage their internal stakeholders and build the momentum in their programmes?

KF: I think the first one is awareness raising and education. It seems obvious, but it's often overlooked, actually, particularly when people are working in silos. So that's where I would start. I had this conversation with a small business just yesterday, actually, where you know what they're looking to do as a first step is basically to roll out training programmes, digital training programmes, like we have in EiQ our eLearning tools, and they want to roll that out for all of their suppliers and also for their internal buyers and category managers. So I would say definitely start with awareness raising training. Some of that will also be linked to understanding the risk landscape, understanding regulatory drivers, and maybe even some benchmarking against what your peers are doing. Smaller businesses are often in a very competitive landscape, and I think that can be a key driver for onboarding internal stakeholders.

EL: Case studies are really good as well, and one of the trends we see at the moment is also using your investors to help you. If you're a small business, it's likely you've got you may have a really good relationship with your investors who are looking for you to create more value, and they see this as a key value driver. So we're doing a lot of work with private equity, who are also enabling teams internally. That's a big part of their strategy is, how do we enable our internal teams to be able to do this well. So lean on those different resources that are available to you to be able to do that,

KF: You remind me, actually, of a point from earlier. You're right. A lot of small businesses are actually owned by private equity, which is super interesting. And through that lens, they will probably be pushed faster and sooner to integrating sustainability into core business day-to-day decision making. Again, it's another opportunity to leapfrog, as you were saying. 

AG: Can you then share, please, how EiQ has been tailored to meet the needs of smaller businesses?

EL: Maybe just to share a story that I've heard from clients that we work with, that it's not just the system, but it's also the people. It's that customer support that we give so that you're not alone and you've always got somebody there who's advising, supporting and enabling you to use the system and also to learn from best practice from others.

KF: Yeah. 100% Erin, thanks for reminding us that this is a world filled with people, because we all spend a lot of time looking at our screens and increasingly with AI, but people make a huge difference, and leveraging systems, blending with human intelligence, with human understanding, charisma, where they can share case studies with you've mentioned and patience is absolutely critical, because at the end of the day, we want to work with people that we know, like and trust.

AG: Erin, Kevin, thank you for your insights. This has been a wonderful session. Do you have any last thoughts that you'd like to share with the audience before we close today?

KF: I would say small businesses can do responsible sourcing. They can do it really well. Personally, in my couple of decades of experience, as you highlighted, Andy, I see many small businesses be leaders, not just in responsible sourcing, but in sustainability. And I think that's exactly what the consumer is looking for, whether it is your direct to consumer or whether it is your end customer, and if you're in a retail store or outlet, I think responsible sourcing is definitely still for you.

AG: Thank you, Kevin. Thank you everyone for your time, and thank you all for watching today. Please follow us on LinkedIn, where you'll see announcements about further sessions, and please check out eiq.com as well to see everything that we have that's coming up. Thank you very much.