Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy

9 Tips for Creating a Supplier Compliance Management Process

Developing a comprehensive program for supplier compliance management ensures that suppliers meet the required standards, regulations, and contractual obligations. A well-structured program helps mitigate risks and maintain a strong relationship with suppliers.

Here are some guidelines for developing an effective supplier compliance program:

1. Keep Your Policy and Standards Clear

Develop a comprehensive supplier compliance policy that outlines your organization’s expectations regarding quality, ethics, social responsibility, contractual terms, and regulatory requirements.

Clearly define the standards and criteria that suppliers must meet, including product specifications, delivery timelines, pricing, legal compliance, and any industry-specific certifications.

2. Do a Due Diligence Check

Create a supplier evaluation process that includes due diligence checks on potential suppliers. Assess their financial stability, past performance, compliance history, and adherence to industry standards.

Categorize suppliers based on risk levels and criticality to your operations. High-risk suppliers may require more stringent compliance monitoring.

3. Write a Detailed Contract

Ensure that supplier contracts include detailed terms and conditions that address compliance requirements, performance expectations, quality standards, pricing, payment terms, dispute resolution procedures, etc.

Clearly define the consequences of non-compliance, including potential penalties, corrective actions, and the right to terminate the contract in case of significant breaches.

4. Organize a Supplier Training 

Provide suppliers with clear information about your compliance expectations, procurement policies, and procedures. Offer training sessions/materials on specific compliance topics, such as quality standards, ethical practices, social responsibility, and regulatory compliance.

5. Regularly Monitor and Audit Performance

Implement a system for ongoing monitoring of supplier performance, including regular audits to assess compliance with contractual obligations and standards.

Use your supplier performance management key performance indicators (KPIs) to track critical aspects of supplier compliance, such as on-time delivery, quality performance, and contractual adherence.

6. Determine Corrective Actions and Continuous Improvement

Establish a process for addressing non-compliance issues. Require suppliers to develop corrective action plans when problems arise and ensure they implement these plans effectively.

Foster open communication with suppliers. Build strong relationships based on trust and mutual understanding of compliance requirements. Recognize and reward suppliers that consistently meet or exceed compliance standards to build a positive partnership.

7. Evaluate the Supplier Compliance Program and Refine

Review the effectiveness of your supplier compliance program periodically. Analyze performance metrics, audit results, and stakeholder feedback to identify improvement areas.

Refine the program as needed based on changes in regulations, industry standards, or internal requirements.

8. Uphold Ethical and Social Responsibility

Include guidelines and requirements related to ethical and social responsibility in your supplier compliance program. Ensure that suppliers adhere to labor standards and other ethical considerations.

9. Be Transparent

Maintain transparency in your compliance program. Communicate the program’s objectives to all relevant stakeholders within your organization.

8 Supplier Compliance Management Metrics

Now that we know how to develop a compliance program, it’s time to learn the key metrics to track and measure supplier compliance. These metrics help organizations assess the performance of their suppliers and identify areas for improvement:

1. Contract Compliance

Contract compliance is about how well the suppliers can stick to the agreed stipulations in the contract. When a supplier doesn’t follow these rules and regulations, it can lead to issues in various aspects of their relationship with you, like when they deliver goods or how often they raise prices. 

2. Supplier Defect Rate

The defect rate tells you how good a vendor’s products or services are. You can figure it out by dividing the number of defective orders by the total number of orders you’ve placed with that vendor. Calculating defect rates gives you a clear idea of whether or not the vendor consistently provides good quality stuff.

3. Order Accuracy

Order accuracy KPIs are a quality check for suppliers. You can figure them out by seeing how many times orders were done right compared to all the orders in a specific time frame. The more accurate they are, the better the supplier meets your standards.

4. On-time Delivery

Getting goods and services to customers is important for keeping them satisfied. The on-time delivery KPI helps you see if suppliers are sticking to the delivery dates you both agreed on.

You calculate it by taking the number of deliveries that happened on time, dividing it by all the deliveries, and then multiplying by 100. This gives you the percentage of deliveries that were on time.

5. Supplier Lead Time

Supplier lead time measures how long it takes for your supplier to get your order from when they receive it to when they deliver it. If this time is too long, it could mean your procurement process isn’t working as well as it should be.

6. Purchase Order Cycle Lengths

Purchase order cycle time is the time it takes from when you first request an order until you send it to the supplier. This includes everything in the ordering process, like entering data, confirming the supplier receives it, and waiting for price and delivery confirmation.

7. PO/Invoice Costs

The cost of handling each purchase order or invoice can differ from one organization to another. The key isn’t to eliminate these costs but to know what makes up the total cost. This way, you can see where you can make things better.

For instance, you might think about finding a cheaper supplier or using technology to automate some parts of the purchase order or invoicing process.

8. Procurement Return on Investment (ROI)

Procurement ROI is a metric that helps you evaluate the effectiveness of your procurement strategy. It is calculated by dividing the amount of money saved in a year by the total amount spent on procurement during that same year. This ratio provides a clear and concise way to determine the value of your procurement efforts.

Consequences of Non-Compliance

Supplier compliance management can significantly impact risk and performance in the procurement processes. Non-compliance with agreements and regulations has consequences for the buying organization and the supplier.

These consequences can affect various aspects of business operations, such as supply chain disruptions, legal and regulatory fines, reputational damage, and increased costs. The consequences of supplier non-compliance include but are not limited to:

1. Supply Disruptions 

Suppliers that fail to comply with industry standards are bound to cause supply chain disruptions. These disruptions can spread from purchasing to the delivery of your materials. When this happens, you’ll find yourself struggling to bounce back. Thus, it’s important to evaluate suppliers to know they can comply with your standards.

2. Quality Issues

Another issue that may arise when your supplier is non-compliant is that you cannot make the best quality for your product, especially if the materials sent to you are below the requirements of the quality of materials. When this happens, you will inevitably lose the loyalty of your customers as your products are not as good as before.

3. Financial Impact

Non-compliance can hit not just the supplier, but also the buying organization’s finances. Suppliers that don’t meet the obligations that are set in the contract may face fines and penalties.

Additionally, when the company suffers losses due to the non-compliance of its supplier, it might seek compensation that can cost so much. Thus, evaluating your suppliers if they can comply is a must, because non-compliance can cost you a lot.

4. Legal and Regulatory Consequences

You need to check if your suppliers stay compliant with all the laws and regulations in your industry. When your suppliers fail in this aspect, they might face fines or sanctions imposed by regulatory agencies.

When this happens, it might as well drag the company’s reputation and you may also be affected by the sanctions as you allowed your suppliers to break the law.

5. Reputation Damage

Maintaining a positive brand image is important for every business that wants to thrive and supplier compliance plays an important role in this.

When suppliers do not comply, it can lead to negative publicity, which nobody wants. Being affiliated with a supplier with a bad reputation can also drag your reputation down. So, you must always be aware of the supplier you want to collaborate with.

6. Loss of Business Opportunities

Building strong, long-lasting relationships with suppliers is a cornerstone of successful business operations. However, when suppliers repeatedly fall short of compliance, it can jeopardize their chances of securing future business opportunities with your organization.

7. Operational Inefficiencies

Dealing with non-compliant suppliers can add more extra work as it demands extra time and effort to address issues, correct errors, and ensure everything runs smoothly. All these extra tasks create a heavier load for your team, and that’s not all. It can also cause operational inefficiencies, slowing down your business processes.

8. Ethical and Social Impact

When suppliers don’t meet ethical or social responsibility standards, it can cause public outrage and damage a company’s reputation. People care about how businesses treat their employees, the environment, and the communities they operate in.

So, if you’re associated with a supplier that doesn’t play by these ethical rules, it can trigger negative public perception and even lead to boycotts or protests.

Conclusion

Procurement is not just about finding the right suppliers; it’s about ensuring you find the right suppliers who can maintain the integrity of their products/services and provide your organization with a reliable supply chain. The task is rather a challenge for procurement professionals and organizations.

However, developing robust supplier compliance can promote long-term relationships and operational efficiency through evaluation and collaboration.

Hopefully, this article helps you in taking the necessary steps to ensure your suppliers are compliant and start building strong partnerships for success.