Know Your Supplier (KYS) in Commodity Markets: An Overview
This is Part One in a Two-Part Series on Know Know Supplier (KYS) in Commodity Markets.
We often encounter business leaders trying to get a grasp of the different terminology and strategies to better manage their supply chains. A recent trend is the concept of "Know Your Supplier" (KYS), a due diligence process that organizations undertake to gather information and assess the reliability and integrity of their suppliers. Borrowing from the financial industry’s concepts of “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML), KYS is a risk management practice that aims to ensure that the suppliers a company engages with meet certain standards, comply with regulations, and operate ethically.
The primary goal of KYS is to mitigate various risks associated with the supply chain, such as financial, legal, operational, reputational, and compliance risks. When it comes to commodity markets, these supply chains are complex by nature, so staying on top of risks is a company-wide priority. By understanding the background, capabilities, and practices of their suppliers, business leaders can make informed decisions and minimize the potential negative impact that a supplier's actions may have on their own sourcing and trading operations.
The process of KYS typically involves collecting and verifying relevant information about the supplier, including their legal identity, financial stability, operational history, quality control measures, certifications, and compliance with applicable laws and regulations. This information can be obtained through a variety of methods, such as supplier surveys, site visits, audits, documentation reviews, supplier production data, and third-party assessments.
By implementing KYS practices, commodity merchants and traders can:
Enhance Supply Chain Transparency
Understanding the suppliers' operations and practices allows companies to identify potential vulnerabilities, such as child labor, environmental violations, or unethical business practices, and take necessary steps to address them.
Assess Supplier Risk
By evaluating suppliers' financial stability, compliance history, and operational capabilities, organizations can assess the risks associated with engaging with a particular supplier. This enables them to make informed decisions about supplier selection, contract negotiations, and risk mitigation strategies.
Meet Quality Control and Product Safety Guidelines
Commodities, especially food, pharmaceuticals, and other consumer goods, require strict quality control measures to protect consumer health and safety. KYS enables importers and exporters to assess suppliers' quality management systems, certifications, and track records in ensuring product safety. It is crucial to verify that suppliers meet the necessary quality standards and adhere to relevant industry regulations to avoid product recalls, liability issues, or reputational damage.
Ensure Regulatory Compliance
Many industries are subject to specific regulations and standards. KYS helps ensure that suppliers comply with these requirements, reducing the risk of non-compliance penalties or legal issues. This is increasingly becoming a requirement for market access into regions like the United States and European Union, so proactive engagement with suppliers can keep merchants and importers ahead of the shifting regulatory landscape.
Safeguard Their Reputation
Engaging with suppliers who operate with integrity and ethical standards helps protect a company's reputation. It minimizes the likelihood of being associated with suppliers involved in unethical or illegal activities that could harm the company's brand image. Beyond ensuring ethical standards are met, KYS also opens the door to focus on delivering a quality product to downstream customers. Taking a holistic approach means benchmarking suppliers against metrics like shipment rejections, quality specifications, on-time delivery, and other factors. Having your supply chain function smoothly upstream gives you an edge over competitors when in negotiations with your downstream customers.
Promote Sustainability and Better Sourcing
Knowing the environmental and social impact of suppliers allows organizations to align their supply chains with sustainability goals and ethical principles. It facilitates the selection of suppliers who adhere to responsible practices, thereby contributing to broader sustainability objectives.
Enable a Better Customer Experience
As your customers look to deliver on their sustainability commitments and labeling requirements, KYS offers a way to proactively collect data that your customers will request as part of their procurement or contracting process. Getting ahead of this with a supplier engagement strategy functions as a sales enablement tool that builds trust and deepens your relationship with your downstream customers.
Overall, the concept of KYS is a proactive approach to supplier management that emphasizes proactively balancing transparency, risk mitigation, compliance, and ethical business practices. It helps merchants and originators build resilient supply chains and establish mutually beneficial relationships with suppliers that align with their business models, values, and objectives.
In our next Petrichor Perspective, we’ll touch on how commodity merchants and traders can get started implementing KYS across their supply chains.