What is supplier due diligence?

You’ve set up a company and now you’re considering which key suppliers you should work with to source those essential products or services you need.

Making sure you choose the right ones is much more than simply finding the lowest price, and getting to know your suppliers before agreeing to engage in business is an important way to reduce the risk to your business.

Carrying out supplier due diligence is just that and involves carrying out some research into a prospective supplier before agreeing a transaction or a contract. Whilst a level of due diligence is appropriate to all parts of your supply chain, the amount of detail you go into and the level of time and investment you make should be determined by how critical the material or service being supplied to your business is. See my blog on better supply chain management for more details on this.

As a starting point, here are some of the key questions you should be considering before engaging with a supplier:

1. How financially stable is the supplier?

You want to find suppliers that are going to be able to support your business as it grows, so it is important that they are financially sound. If your supplier is in the UK and they are a limited company, visit the Company House website. Run a search to check their registration date, office address and download their latest accounts. You can take this further if needed. For VAT registered suppliers within Europe, visit the VIES website to check if their VAT numbers are valid.

2. What quality and environmental management systems are in place?

Many businesses have management systems accreditation in place such as ISO 9001 / ISO14001 or something similar. If the supplier claims to have these standards, check their registration with the relevant body’s website to make sure it is still current. Read up on the key obligations this standard means so you’re aware of the level of service you can expect. 

3. Do they have a Corporate Social Responsibility / Ethical Sourcing policy?

There have been a number of recent examples where high-profile businesses have come under fire because of the dubious practices of some of their suppliers. For example, Apple were publicly criticised for not addressing the poor working conditions that employees of their largest contract manufacturer were subjected to. Your business reputation can be severely damaged by being associated with bad suppliers, so check their credentials.

4. What are their terms of business?

It’s good to have an understanding of how your potential supplier does business. Speak to the supplier to get an overview of their payment, delivery, service level and returns policies. It’s also worth asking more questions about their product or service to find out how well they know their market and why they have the competitive edge – why should you do business with them?

5. They say it best – what do their current customers say?

It’s always good to get feedback from past or existing customers. If information is readily available on their website about who their customers are, select a few to get in touch with. If not, don’t be afraid to ask for references. What has been their experience of the supplier, have they faced any difficulties if so, what did the supplier do to resolve these quickly?

Need assistance?

It’s always good practice to carry out supplier due diligence from the outset. However, if an agreement is already in place and you’re experiencing problems with your suppliers which is impacting your cash flow, our experts are on hand to help. Get in touch with me to arrange an initial chat.