Supplier Codes of Conduct Often Overlooked

Companies devote significant resources in time and money designing, promoting and providing training on a code of business ethics and conduct that establishes the ethical behavior expected of all employees. 

Such a code aims to improve a company’s ability to comply with regulatory and legal standards, and also to underscore the company’s reputation. Companies can, however, spend so much time focused on their internal code that they overlook a large stakeholder community that is integrally related to the company’s reputation and overall compliance regime — their suppliers and subcontractors.

A supplier code of conduct is an important vehicle for integrating principles from a company’s own code into its supply chain relationships, thereby providing a more effective compliance framework and fostering better business relationships. In some cases supplier codes may be mandated, but as explained below, even if not required, an effective supplier code is certainly a best practice.

For a defense contractor, whether it’s a $200 million business or a $50 billion original equipment manufacturer, often more than 50 percent of a company’s revenues derive from items or services provided by others — whether commodities, components, systems, engineering services or consulting. Thus, absent an enforceable supplier code, a company unwittingly may be generating revenues largely based on activities wholly ungoverned by those standards and values embodied in the company’s code.

A supplier code should describe the company’s expectations of all those that intend on doing business with the company. In addition to communicating the company’s values and mission, it should mandate full compliance with all laws and regulations. It also should address the proper handling of intellectual property and other sensitive data, health, safety and environmental concerns, applicable social sustainability initiatives and any other industry specific issues for which compliance should be expected.

Effectiveness of a supplier code depends upon how well it is drafted, how it is trained internally, how it is communicated externally and how it is enforced by the company.

When drafting and training the supplier code, sensitivity to the large number of company employees that regularly interact with supply chain personnel is key. In addition to the procurement and subcontracting teams, company employees from business development, engineering, program management and other areas also regularly engage externally. This makes it important that the supplier code track wherever possible the company’s own code, and hence the one with which employees are familiar.

The company’s internal training plan for ethics should always include familiarity with the supplier code and the importance of clear standards and better communications among the company/supplier teams.

From an enforcement and reputation perspective, the posting of the supplier code to the company’s website is a critical first step in letting both suppliers and customers know the company’s expectations related to the ethical behavior of its supply chain. Also important is consistently incorporating the supplier code into consulting agreements, subcontracts or purchase orders issued to the entire supply chain, the message being that ethical behavior is not a “nice to have” but a “must” when doing business with your company.  FAR 52.203-13, “Contractor Code of Business Ethics and Conduct,” by flow down, sometimes requires a supplier code. Whether or not that is true, sound corporate practice should ensure that all of a company’s suppliers comply with it.

Developing a supplier code benchmarked off of the company’s internal code is also simply good for business. It underscores a common set of shared values that enhances the ability of employees and suppliers to develop mutually beneficial relationships. These relationships allow for more meaningful discussions that provide the basis for engraining ongoing improvement initiatives.  Leveraging the experience of the supplier base on issues addressed in the supplier code can enhance stability in delivery schedules, early flagging of risks, product improvements and shared cost reduction initiatives. Truly partnering with the supplier base engenders an environment in which all parties are comfortable discussing issues that otherwise might not arise or be difficult to address absent a business relationship grounded on a common set of expectations and values. 

In this time of government budget reductions and extremely competitive conditions, every part of a company’s operation must provide value to the overall enterprise. A thoughtful and effective supplier code not only decreases the likelihood of trouble to a company because of its supply chain, but also serves as a foundational tool that provides compliance stability and helps drive long-term success.

Traci Thompson is the senior director of corporate ethics at Elbit Systems of America. She is a certified compliance and ethics professional. The views expressed are solely the author’s.

Topics: Defense Contracting, Defense Contracting