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Supplier Strategies

Fri 12th Jun 2020: Managing Blacklisted Suppliers

Photo Credit: @jennymarvin

Shhhh! Do you have a Supplier Blacklist? Of course you do. Do you talk about it? Talk about what?

You have a robust supplier segmentation process. You follow it to the letter. You have star suppliers which always perform well, deliver on time, and can be relied upon when you need them. You have suppliers that occasionally miss targets and might need a little development. You have your routine suppliers – the ones you are not betting your business on and in the main can be relied upon for the limited exposure you have to them.

But what about those suppliers you just cannot or will not work with? What do you do with those suppliers? Most companies have a blacklist supplier list – a list of suppliers it will not work with under any circumstances. It may or may not be a long list. It may contain suppliers which for a variety of reasons are blacklisting. There may be only one historical reason for the listing. But it exists.

First, let’s identify precisely what we mean by blacklisted suppliers. These are companies with which your organisation will, under no circumstances whatsoever, do business. They could be former suppliers which despite interventions continually under-perform, former suppliers for which you had to routinely invoke the Liquidated Damages clause in your contracts with it to cover the costs of its mistakes to your business, former suppliers which breached Health & Safety, former suppliers which flouted anti-fraud or child and anti-slavery Labour laws, former suppliers which misrepresented themselves, former suppliers which had undisclosed financial impacts, former suppliers that circumvented their countries’ tax laws. It

The reasons you add them to a blacklist can be myriad. But there are a number of considerations when thinking about blacklisted suppliers. There are business issues and there are operational issues.

First – the rules of engagement. Establish the reasons why a supplier would be put placed on the list. There are obvious reasons such as the breaching of supplier requirements. It might be that the supplier fails a routine financial check or has significant shareholders convicted of fraud. On the other hand there might be less obvious reasons for instance the supplier is ultimately owned by a competitor or even an employee and might cause a conflict of interest.

Whatever the reasons for inclusion, there must be agreement across all relevant functions that a supplier belongs on the list. This becomes relevant especially in the case of a supplier capable of servicing more than one category of spend. Let’s take a fictitious example.

Global computer HAL Industries Inc. supplies hardware, software and services to your company. The poor performance of HAL means that your company has claimed liquidated damages in successive quarters as it failed to deliver a new accounting system on time. Your CEO is very angry that the supplier is costing the company more than it can claim in LD, your CFO is angry that his shiny new accounting system is late and your CIO is angry because he insisted on using HAL in the first place because they offered 1000 free laptops as part of the deal, an offer HAL has reneged upon because the LD clause was invoked.

Seemingly anyone who is anyone at your organisation wants HAL to be placed on the Supplier Blacklist. But wait. HAL Industries Inc. services other parts of the business, providing a range of services include desktop support, HR system software and a whole bunch of peripherals. The company cannot be blacklisted if it’s in use.

Of course, it’s not always that obvious that a supplier is in use. Any supplier big or small may still have an open PO somewhere in your system. So, any supplier being placed on the blacklist needs to have any open PO or pending payments settled, otherwise the eventual payment could trigger a policy breach which would show in an audit.

Whilst everyone might be vaguely aware that there is a supplier blacklist, it might not be something you want everybody to know the detail of or how to get hold of it. The blacklist should be owned by Procurement and/or Legal & Compliance. It should be available only to those who need to use it (Procurement and/or L&C). It should not be editable by anyone outside of these organisations and every entry should be agreed by a cross functional team Procurement/L&C, maybe Finance, in some cases. The use of the blacklist should be backed up by the policy outlining the way suppliers are on boarded and specified in more detail in the process documentation for on-boarding suppliers.

As with most ad hoc checks, supplier blacklists work best when they are systematic, that is your Sourcing software identifies automatically early on in the supplier on-boarding or qualifying process that the supplier is blacklisted.

Breaches of the blacklisted supplier policy and sanctioning would quite easy to find in an audit. A simple lookup of accounts payable and blacklisted suppliers over a given set of periods would show suspect payments. Further investigation would reveal whether or not the check was done and would alert an auditor of other possible deviations from stated policy.