In today’s volatile marketplace, the effects of even a single weak link in your supply chain can ripple across the enterprise. Your vendor due diligence and vendor compliance can no longer just be a checklist item during sourcing and procurements; it is a strategic concern that demands executive attention because problems impact your bottom line.
Supply chain disruptions have a direct impact on revenue generation at 94% of companies. Despite this, just 6% of companies say they have full visibility into their supply chains. If you’re not one of that 6%, you’re putting your business at risk. Vendor due diligence is more important than ever to avoid problems.
Bottom line here? Most companies are flying blind when it comes to vendor risk once they get past initial onboarding. Yet, as supply chains become more complex and interconnected, disruptions can quickly translate into missed revenue targets, frustrated customers, and damage to your brand. For the C-suite, making sure your systems for vendor due diligence and vendor compliance are locked down is critical.
What Is Vendor Due Diligence?
Vendor due diligence is the process of evaluating suppliers for financial stability, compliance with laws and regulations, cybersecurity posture, and ethical standards. However, it goes beyond risk mitigation. The financial health of your suppliers has a significant impact on your core business.
Today, many businesses still rely on credit applications that customers fill out. They may check the credit references listed or add clauses to contracts that include penalties for non-compliance. That’s no longer enough. If a supplier can’t deliver the goods or services you need to run your business, a penalty may not cover the resulting damage.
Robust vendor due diligence and vendor compliance deliver that visibility into your supply chain, helping you make better decisions about which vendors you can trust, which you need to monitor closely, and the ones you need to replace before they disrupt your operations.
4 Steps to Build a Better Vendor Due Diligence Strategy
So, what does it take to build a better strategy to ensure vendor compliance and do your vendor due diligence? Here are five steps you can take.
Step 1: Map and Prioritize Your Vendor Ecosystem
The first step toward stronger vendor compliance is understanding your supply chain. You’ll want to map each of your suppliers, including across primary, secondary, and tertiary tiers, to find where you’re vulnerable.
Prioritize vendors based on criticality:
- Which partners directly affect production or customer fulfillment?
- Which would impact revenue generation the most?
- Which are geographically concentrated?
- Which sectors pose the greatest exposure?
Step 2: Assess Financial and Credit Stability of Vendors
Financial health is the backbone of supply chain reliability. Suppliers under cash flow pressure are more likely to delay shipments, default on contracts, or even shut down altogether.
Suppliers today are finding credit tighter, which is putting pressure on working capital. You need to know when this is happening to your downstream supply chain partners to avoid their financial issues becoming your problem.
You can mitigate this risk through credit intelligence and continuous financial monitoring. Business credit reports provide insight into a supplier’s payment history, borrowing activity, and creditworthiness as warning signs when there’s trouble on the horizon.
Step 3: Evaluate Legal, Regulatory, and Ethical Compliance
Vendor compliance extends far beyond financial checks. You have legal obligations in some areas, internal commitments, or ethical standards that you need to make sure your vendors follow. There’s a long list:
- Anti-money laundering (AML/CFT)
- Privacy regulations like CCPA and GDPR
- Know Your Customer/Know Your Business (KYC/KYB)
- Sanction lists
A supplier’s noncompliance can lead to fines or public backlash that reaches all the way up the supply chain.
Building a strong vendor compliance system requires:
- Automated screening tools for legal and sanctions compliance.
- Regular audits and certifications.
- ESG documentation
- Cybersecurity standards checks
Step 4: Monitor Ongoing Risk and Payment Behavior
Vendor due diligence must be ongoing. Market conditions, credit access, company performance: things can shift rapidly and impact a vendor’s ability to serve your needs, and it goes beyond just your suppliers. Your vendors likely have their own supply chain, and problems downstream can flow up to you.
Suppliers last year were hit with more than $2 billion worth of unpaid bills due to business failures, putting even more pressure on their cash flow. This can hurt their ability to provide you with the goods and services you need. Vendor health can deteriorate suddenly, so ongoing account monitoring and credit portfolio monitoring is critical.
From Reactive Checks to Continuous Vendor Intelligence
The days of once-a-year vendor checks are over. You need continuous insight into vendor compliance and financial health.
Looking to strengthen your vendor due diligence and vendor compliance in your supply chain? Command Credit delivers real-time credit data and monitoring tools designed to mitigate risk and protect your bottom line.
Don't wait for a vendor disruption to expose gaps in your supply chain. Command Credit's vendor risk intelligence helps C-suite leaders identify at-risk suppliers before they impact your operations. Schedule a free consultation to see how proactive vendor risk management protects your bottom line.