What is Supplier Due Diligence and how do you do it?

Do you need to run Due Diligence on your suppliers before establishing business partnerships? It all starts with choosing the right supplier for a company's success. After all, reliable, high-quality suppliers can play a key role in a business's growth and reputation.

That's where the Supplier Due Diligence process comes in.

In this article, we'll explore what Supplier Due Diligence means and how to carry it out effectively.

 

What is Supplier Due Diligence?

Supplier Due Diligence is an investigation and assessment process that a company carries out before establishing a partnership with a supplier.

The goal is to obtain detailed information about the supplier in question, including its reputation, delivery capacity, performance history, legal compliance, and other relevant aspects. This thorough analysis helps mitigate potential risks and make informed decisions when choosing a supplier.

 

Why does a company need to perform due diligence?

A company needs to perform Due Diligence to ensure that its business partnerships are safe and advantageous.

By conducting a thorough analysis, the company can identify and mitigate potential risks, ranging from financial and legal issues to quality and compliance problems.

Due Diligence provides detailed information about suppliers, enabling the company to make informed decisions, protect its reputation, and build sustainable relationships.

In addition, this process supports compliance with laws and regulations, ensuring the company remains compliant and avoids penalties or damage to its corporate image.

 

What risks are found during supplier verification?

During the supplier Due Diligence process, several risks that deserve attention are identified.

One of the main ones is financial risk, which involves assessing the supplier's financial health, its ability to meet obligations, and the existence of issues such as excessive debt.

In addition, there is compliance risk, related to compliance with applicable laws and regulations, including labor, environmental, and safety matters.

Finally, quality risk is also relevant, requiring an assessment of the supplier's ability to deliver products or services in accordance with established standards.

Identifying these risks during Due Diligence allows the company to take appropriate measures to mitigate them and make safer, better-informed choices when selecting its suppliers.

 

What is the relationship between Due Diligence and ESG?

The ESG approach considers the environmental, social, and governance impacts of a company or organization.

When conducting Due Diligence, the company analyzes aspects related to environmental sustainability, fair labor practices, human rights, diversity and inclusion, business ethics, corporate governance, and other relevant ESG factors.

During Due Diligence, the company can verify whether the supplier complies with environmental policies and standards, whether it adopts sustainable management practices, whether it promotes equal opportunities in the workplace, among other ESG criteria.

It therefore plays an important role in integrating ESG criteria into the supplier selection process, ensuring that the company forms partnerships with organizations that share the same values and commitments regarding sustainability, social responsibility, and corporate governance.

 

How to perform Due Diligence using SAP or TOTVS ERP?

Performing Due Diligence using only the ERP can present some difficulties, since this tool is primarily a business management system that manages the company's internal information. Here are some of the main difficulties:

1. Limited access to external information: The ERP generally focuses on the company's internal operations, such as finance, purchasing, and sales. This means there may be limitations in accessing external information about the supplier, such as market data, reputation, customer references, and regulatory compliance.
2. Lack of integration with other data sources: Due Diligence involves collecting and analyzing various sources of information, such as public records, compliance databases, supplier rating websites, and other external sources. Without supporting tools or integration with these data sources, it can be difficult to obtain a complete and comprehensive view of the supplier.
3. Limitations in qualitative assessment: Although the ERP can provide quantitative information, such as financial data, there may be limitations in assessing qualitative aspects, such as organizational culture, business ethics, labor practices, environmental impact, and other ESG criteria. This information generally requires a broader approach and includes collecting data outside the scope of the ERP.

 

Therefore, it is recommended to use supporting tools and additional information sources to complement the use of the ERP during Due Diligence.

The Partner Portal 4MDG is an application that allows you to register new suppliers through an automated process that eliminates the need for manual forms.

The Partner Portal makes it easy, cost-effective, and secure to quickly onboard new customers and suppliers.

This software lets you seamlessly integrate all approved partners into your ERP with a single click. The technology effortlessly supports tax, court, and credit checks for all customers and suppliers, enabling the implementation of ESG practices.

A company using SAP ERP or TOTVS would need to invest substantial financial resources to implement a supplier approval workflow and automatic, periodic checks with public agencies.

Of course, the user could manually perform each of the tasks below:

• Receita Federal (Brazilian Federal Revenue Service)
• Sintegra (Brazilian state tax registry system)
• Simples Nacional (Brazilian small-business tax regime)
• Credit analysis (e.g., Serasa, SPC, or others)
• Involvement in tax or fiscal crimes.
• Analysis of the company's partners/shareholders.
• Government sanctions.
• Labor and judicial lawsuits.
• Verification of certificates, reports, and documents.
• Economic assessment.

In this case, the user would likely have to use Excel spreadsheets and receive emails from suppliers containing the documents. Managing each document, recording possible expiration dates, and remembering to obtain new versions increases the risks and errors in the process.

 

Which areas are assessed during Due Diligence?

During Due Diligence, several areas are assessed to obtain a comprehensive view of the business, identify risks, and make informed decisions.

1. Financial and accounting: Assessment of financial statements, cash flow, balance sheet, profitability, indebtedness, revenue and expense history, and analysis of profitability and financial soundness.
2. Legal and regulatory: Verification of compliance with applicable laws and regulations, review of contracts, pending litigation, intellectual property matters, tax and labor obligations, licenses, and authorizations.
3. Operational: Analysis of operational efficiency, supply chain, production capacity, product or service quality, operational risk management, and the technology and systems used.
4. Human resources: Assessment of the workforce, employment contracts, human resources policies, benefits and compensation, organizational culture, training and development programs, and talent management.
5. Commercial and marketing: Analysis of the target market, competitive positioning, marketing strategies, customer analysis, sales contracts, relationships with key customers, and distribution channels.
6. Environmental, Social, and Governance (ESG): Consideration of environmental impacts, labor practices, diversity and inclusion, business ethics, corporate governance, and commitment to sustainability and social responsibility.

 

These areas are only general examples, and the scope of the assessment may vary depending on the type of business, the industry in which it operates, and the specific objectives of the Due Diligence.

It is important to tailor the assessment to the company's needs and priorities to ensure a comprehensive and appropriate analysis.

 

HOW TO AUTOMATE THE INTEGRITY AND COMPLIANCE VERIFICATION PROCESS?

A fast and efficient way is to use specialized software for customer and supplier approval.

The 4MDG enables the creation of powerful workflows with a wide range of parameterization rules and automatic data population, fully integrated with your company's ERP and with more than 200 public and private sources, allowing for a secure approval process.

Schedule a free, no-obligation demo by emailing atendimento@4mdg.com.br or talk to our team at +55 (11) 4113-2510.

That's it! Good business!

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