Implementing Know Your Supplier (KYS) in Commodity Markets
This is Part Two in a Two-Part Series on Know Know Supplier (KYS) in Commodity Supply Chains
In our last Petrichor Perspective, we introduced the concept of "Know Your Supplier" (KYS), which we defined as a due diligence process that organizations undertake to gather information and assess the reliability and integrity of their suppliers. KYS is part of a holistic risk management framework to mitigate various risks associated with the supply chain, such as financial, legal, operational, reputational, and compliance risks.
Implementing KYS in commodity supply chains requires a systematic approach and collaboration with suppliers. When we work with our customers, we outline some steps that merchants and importers can take to get started with implementing KYS:
Define KYS Criteria
Begin by identifying the specific criteria and requirements that suppliers should meet. Every supply chain is going to be a bit different in terms of complexity and appropriate standards. We can’t look at bulk grain the same way we would look at specialty coffee because the supply chain dynamics are fundamentally different. However, there are some general criteria that business leaders might use in their frameworks. This can include financial stability, compliance with regulations, quality control standards, sustainability practices, and any other factors relevant to the commodity and industry. Clearly define the expectations and standards for suppliers. Most importantly, consult with your suppliers and your industry peers when possible; KYS discussions need to be a two-way street. A major challenge we hear from suppliers is their inability to navigate a maze of different standards and frameworks. Alleviating this friction is key to getting your suppliers bought in.
Supplier Information Collection
Develop a process to collect comprehensive information from suppliers. This can be done through supplier surveys, questionnaires, or standardized forms that capture essential details about their organization, financial health, certifications, compliance history, environmental practices, and social responsibility initiatives. Tailor the information collection process to your specific commodity and industry requirements. Most of this information is already being collected in some form, either through email, your ERP and procurement software, or through the RfP process. What’s important is identifying a way to centralize this information and make it easily accessible across your entire organization. KYS data isn’t just valuable to your risk management and procurement teams. We often find our customers receive requests for this information from their downstream customers. Using a platform like Petrichor helps centralize this information in one spot to save time and resources while improving your customer experience.
Supplier Documentation Review
Request suppliers to provide supporting documentation that validates the information they have provided. This can include financial statements, legal registrations, certifications, permits, licenses, audit reports, and any other relevant documents. Conduct a thorough review of these documents to verify their authenticity and accuracy. This doesn’t just mean capturing this information about the supplier’s enterprise, but also routine data capture at a shipment-lot level. As downstream customers increasingly demand ingredient traceability, having an easy, automated process to link Certificates of Analysis, Phytosanitary Certificates, and other sourcing documents to an individual shipment becomes even more important for merchants.
Supplier Risk Assessment
Develop a framework or scoring system to assess the risks associated with each supplier. Evaluate their financial stability, regulatory compliance track record, operational capabilities, and any other relevant factors. It’s important to think of this not just from a regulatory compliance lens, but also from a quality control and logistics perspective. Your customers want you to deliver a product that not only complies with regulations but also shows up on time and at the right quality. Assessing the ability of your suppliers to support those needs should be a key consideration when putting your framework in place. Assign risk ratings or categories to suppliers based on the assessment to prioritize further due diligence efforts.
Site Visits and Audits
For higher-risk suppliers or critical supply chain tiers, consider conducting site visits or audits. This involves physically visiting the supplier's facilities to assess their operations, quality control processes, environmental practices, labor conditions, and other aspects. Alternatively, you can engage third-party auditors or specialists to perform independent assessments. We find this doesn’t just help with due diligence but also builds two-way trust. By being an engaged partner, it’s easier to get buy-in from your suppliers.
Supplier Verification and Due Diligence
Utilize external resources to verify supplier information and conduct additional due diligence. This can involve engaging third-party service providers that specialize in supplier assessments and verification. They can perform background checks, financial assessments, compliance audits, or sustainability evaluations to provide an unbiased assessment of suppliers.
Supplier Engagement and Collaboration
Establish open lines of communication with suppliers to address any concerns, gaps, or non-compliance issues identified during the KYS process. Collaborate with suppliers to develop action plans for improvement, set targets, and monitor progress. Encourage suppliers to share their own best practices and initiatives related to compliance and sustainability. Your suppliers likely have seen what’s worked and what hasn’t across multiple different requests from other merchants and downstream customers. Hearing and incorporating their feedback will improve the ease of collaboration and information sharing.
Ongoing Monitoring and Review
KYS is not a one-time exercise. Implement a system to continuously monitor and review supplier performance, compliance, and risk. This can involve periodic reassessments, regular communication with suppliers, tracking relevant regulatory changes, and leveraging technology solutions for supply chain visibility and risk management.
Supplier Development and Support
Provide guidance and support to suppliers to help them meet the KYS requirements. Offer resources, training, and tools to help suppliers improve their practices, enhance compliance, and align with sustainability goals. Collaboration and partnership with suppliers can lead to long-term improvements in the supply chain.
Regularly review and refine your KYS process based on feedback, lessons learned, and evolving industry standards. One way to go about this is to have your front office staff aligned with back office teams in procurement and risk. Identifying what your downstream customers’ demands around traceability and data and incorporating changing requirements into your procurement strategy will minimize the risk of surprises or an inability to meet ingredient specifications. Stay updated on emerging risks, regulatory changes, and best practices in supplier management. Continuously seek opportunities to enhance the effectiveness and efficiency of the KYS process.
Remember that implementing KYS across supply chain tiers requires a commitment to ongoing due diligence, collaboration, and transparency. By establishing a robust KYS framework, commodity merchants and their trading partners can build a more resilient supply chain, mitigate risks, and ensure the integrity and sustainability of their supplier base.