Operational Guidance on:
Supply Chain Management
Purpose & Summary
This Operational Guidance elaborates on the Accountability Framework Core Principles 4, 5, and 6 to provide buyers (at any stage of the supply chain) with guidance on effective supply chain management approaches to help fulfil company commitments related to deforestation, ecosystem conversion, and human rights.
Companies are responsible for ensuring that their entire supply base complies with company commitments. This includes supplies from the company’s own operations as well as those purchased from other entities. This Operational Guidance focuses on the latter, addressing the processes by which buyers can identify the origins of the materials they buy, assess risk, identify instances of supplier non-compliance with company commitments, and constructively engage suppliers in improvement processes towards full adherence to commitments.
This guidance is intended for use by all buyers in the value chain, including processors and traders that purchase directly from producers, as well as traders and downstream companies that purchase raw, processed or finished products at different stages of the supply chain. Companies that are working to fulfil commitments related to materials that they produce themselves may also find certain sections of this Operational Guidance useful.
The following topics are addressed:
- Development of supplier management systems that define policies, procedures, supplier expectations, and supplier engagement strategies at the level of the commodity-buying company or its supply chains
- Supply chain mapping and traceability to identify supply chain actors and supply origins
- Assessment of environmental, social, and legal risks in supply origins – including the risk that company commitments are not being met – and prioritising supplier engagement activities in areas that are not identified as low risk
- Engagement of non-compliant suppliers when environmental and social risks, negative impacts and/or non-compliance with company commitments are detected; this includes the development of supplier implementation plans to address these issues
- Actions of buyers to foster responsible practices in site establishment
This Operational Guidance also outlines how these processes relate to one another and to the monitoring and verification functions as part of a progressive and sometimes iterative approach to assessment, implementation, improvement, and learning.
Effective supply chain management can benefit considerably from pre-competitive collaboration among companies sourcing from the same areas or groups of suppliers, for example, by sharing information related to risk assessments and supplier non-compliance and by working together on capacity-building activities that support supplier compliance. More detail on these collaborative approaches is provided in the Operational Guidance on Achieving Commitments Through Collaboration.
Topics in this Guidance
Following Core Principle 4, buyers are expected to have a supplier management system(s) for all supply chains that are covered by ethical supply chain commitments or otherwise subject to environmental or social risks. This pertains to all buyers – processors, traders, and downstream buyers – whether purchasing from primary producers, intermediaries, or downstream companies.
Supplier management systems specify the company’s own operational policies and procedures as well as its expectations and engagement strategies for suppliers throughout the supply chain. The goal of the system(s) is to align sourcing strategies with supply chain commitments, to proactively minimise the occurrence of non-compliance, and to address non-compliance in a systematic, efficient, and prioritised manner. Key features and characteristics of a buyer’s supplier management system(s) should include:
- Sourcing and procurement policies that serve to operationalise the company’s ethical supply chain commitments. At their core, these policies should specify requirements or parameters regarding the suppliers with whom the company will do business and the considerations that determine when the company may or must add, suspend, exclude, or adjust purchasing terms with a current or prospective supplier. The policies should adequately address the social and environmental risks in the company’s supply chain and should reflect the company’s degree of influence over its suppliers and other issues relevant to the company’s supply chain and business context. Such policies should also consider applicable law as well as expectations related to sectoral or geographical initiatives in which they are involved.
- Companies should clearly communicate to their suppliers that only material produced in accordance with the company’s sourcing policies will be accepted. Where purchasing is governed by contracts, it is generally recommended to incorporate requirements of the sourcing policies into contract clauses.
- Companies are encouraged to use their influence to incentivise and support upstream suppliers to develop comparable and robust implementation systems that apply to the scope of their entire business.
- Targets related to supply chain compliance with company commitments that are specific to each commodity and geography, are quantitative, and can be objectively monitored and verified. These should be derived from the company’s overall time-bound targets (see Core Principle 3.2) and may include interim time-bound milestones for specific geographies and supply chains to facilitate progress monitoring. (See Box 1 for examples of targets and milestones.)
- A strategy and methodology for assessing supply chain risks, if the company uses risk assessments to identify and prioritise interventions. Risk assessments should follow good practice for credibility, transparency, and accurate risk characterisations (see Section 3 below).
- Strategies and procedures for ensuring that direct suppliers comply with commitments.
- Strategies and procedures for ensuring that indirect suppliers comply with company commitments (see Box 2 below).
- Procedures for engaging suppliers in situations where environmental and social risks, negative impacts, and/or non-compliance need to be addressed. These include protocols for managing supplier non-compliance (see Section 4 below), and protocols for supplier implementation plans (see Section 5 below) for resolving non-compliances expeditiously.
- Strategies for ensuring that when direct or indirect suppliers take action to acquire, develop, or expand production or processing operations, such new activities do not proceed without effective due diligence, planning, or stakeholder consultation processes, and that the resulting plans and activities fully adhere to the buyer’s commitments. This will help minimise any future need to address non-compliances incurred at the time of site establishment (see Section 6 below, as well as the Operational Guidance on Free, Prior and Informed Consent and the Operational Guidance on Respecting the Rights of Indigenous Peoples and Local Communities for further elaboration).
- Grievance mechanisms that enable lodging of grievances related to supply chain management and suppliers’ operations and that include procedures for remediation when warranted.
- Requirements for suppliers to report on their adherence to (or progress towards) the buyer’s ethical sourcing policies and supply chain commitments. These may be conveyed through company communication to suppliers, contract and subcontract terms, training, or other means.
- Activities that build and strengthen supplier capacity to effectively implement supply chain commitments, such as training programs, peer exchanges, and support when remedial actions are needed. This is particularly relevant for companies that maintain long-term and recurring buying relationships with suppliers. Support should prioritise engagement with smallholders and others who may require more assistance (see Operational Guidance on Smallholder Inclusion in Ethical Supply Chains for further elaboration).
- Systems and practices for monitoring and verification of supplier control measures, management systems, and performance relative to the buyer’s commitments (including how non-compliance is addressed).
- Supplier contract clauses should be used to help ensure that monitoring and verification are implemented appropriately by upstream suppliers – ultimately reaching the supply base level – and that the company has the right to verify compliance (either itself or through a contractor or third party) as necessary for assurance purposes. This includes access to information on the locations of production units (e.g., farm, plantation, or concession boundaries as well as processing facility coordinates) and may also include other data sources needed to make determinations of compliance.
- Establishment of senior management level responsibility to implement the company’s sourcing policies and other elements of the supplier management system to help achieve the company’s supply chain commitments.
Box 1: Example of targets and milestones for fulfilling commitments
Time-bound target to achieve each commitment (per commodity and sourcing geography)
By December 2019:
- 100% of palm oil sourced from Malaysia will be deforestation-free.
- Grievance mechanisms and remedy plans will be in place for 100% of timber sourced from the Democratic Republic of the Congo (DRC).
Interim milestone (progress) to be achieved relative to each target
By December 2017:
- 100% of palm oil sourced from Malaysia will be traceable to the plantation, with maps of the production areas, and 70% of this palm oil will be verified as deforestation-free.
- Grievance mechanisms will be in place for 80% of timber sourced from the DRC.
See Operational Guidance on Cutoff Dates for additional examples on targets and on how these relate to cutoff dates.
Information on the preceding elements of the supplier management system should be made available to help support compliance assessment and transparency. Specifically:
- Information on key elements of the system should be publicly disclosed following the Operational Guidance on Reporting, Disclosure, and Claims.
- If the supplier is selling products to a buyer who relies on the supplier’s management and control systems to assess and assure compliance, then information on the supplier management systems should be made available to the buyer and to auditors to assess the adequacy of these systems for this purpose.
Box 2: Supplier control mechanisms: A key tool for passing company commitments up the supply chain
Downstream companies – particularly those with supply chains that involve indirect suppliers and where visibility to the supply base level is limited – face challenges in ascertaining that all sourcing complies with commitments. Fortunately, the importance of this problem has inspired the development of various tools and strategies, many of them specific to particular geographic and commodity contexts. At a globally-applicable level, a core strategy involves assessment of supplier management (or control) systems by each actor in the supply chain, whereby:
- The buyer assesses the control systems of its direct supplier to determine their adequacy to ensure compliance either at the supply base level or at the level of the next upstream supplier (i.e., the buyer’s indirect suppliers). Section 2.3 of the Operational Guidance on Monitoring and Verification outlines the key characteristics of effective supplier control systems.
- The direct supplier either monitors environmental and social performance and outcomes at the supply base level (see Section 1.1 of the Operational Guidance on Monitoring and Verification) or it assesses the control systems of its supplier. This process of cascading upstream continues until assessment at the supply-base level is possible.
- If a buyer’s direct and/or any indirect suppliers do not have effective control mechanisms or monitoring at the supply-base level, then the buyer cannot be assured that its supply chains comply with its commitments.
Using this approach, downstream companies work with their direct suppliers to push commitments, monitoring, and supplier engagement activities upstream to all indirect suppliers and spot markets.
When possible, companies should actively engage with their suppliers to support the fulfilment of commitments (or to set appropriate commitments for the supplier’s entire business, in line with the Accountability Framework, if the supplier has not yet done so). Such support might include technical assistance or incentives such as financing linked to improved performance, sharing costs for certain activities, market access, increasing volume purchased, longer-term contracts, and reduced monitoring and verification (M&V) requirements based on performance.
Companies are also encouraged to collaborate with other companies and/or in multi-stakeholder and sectoral efforts to accelerate the progress of suppliers (particularly indirect suppliers) to set rigorous commitments and take effective measures to fulfil them.
 Supplier management systems are also known as (or can incorporate) quality management systems, quality assurance systems, risk management systems, sustainable sourcing plans, purchase control systems, and other similar terms. They may be developed at the company-wide level or for specific commodity supply chains, sourcing origins, or business units.