Commercial Due Diligence

What do we really know about our strategic suppliers? There are large organisations entering into administration. A recent one is a company employing 2000 people who had a market capitalisation of £2 billion now reduced to £20 million. If they were a strategic supplier it could cause immediate problems.

There is a logic to conducting due diligence. It can begin at the stage where initial enquiries are being made. The public sector will call this pre-qualification. A scrutiny of what happens is always worth reflecting on. Typically, a complex questionnaire will be issued. This will include key business data, commercial requests, technically based requests and ask for a variety of policies. The greatest condemnation of this process is the ‘tick-box’ mentality, whereby if the information is received the appropriate box is ticked. No follow up takes place. Two examples will suffice. The company registered number is always requested but no check made with Companies House. The VAT Registration number is sought but no check is made with HMRC. Current insurance levels are sought and copies of the policy are requested. No detail is read regarding exclusions, nor is evidence sought of past and recent claims. The directors names are requested but no checks are made on their past history or indeed current status as directors.

 

 

Contracts are placed by many organisations without conducting site visits. Is this good practice? It really isn’t and there is evidence to prove it. We have known advance payments to be made to companies who have not been vetted, their financial position not established and no evidence that they are an actual trading organisation. When we made one visit to an IT software developer to monitor progress on a significant contract, the address was a semi-detached house.

Due diligence should be conducted with appropriate potential new suppliers and existing suppliers. BFL do conduct such due diligence and have checked directors, company finances, quality systems, manufacturing capability, use of sub-contractors, past contract performance, existence of policies and insurances.

One of the greatest needs is to conduct due diligence on the supplier’s procurement operation. There are surprises is store when some checks are made. It is a surprise to some clients when it is discovered that the supplier does not employ a buyer and has no procurement department. It is also a surprise to clients who find out that there is no pre-qualification of their supply chain contractors.

There is an urgent need to conduct due diligence post award of contract. These can be unannounced visits or announced visits. No-one should be surprised when some suppliers refuse entry! That is when the buyer wishes that they had included a right of audit in the contract.

Conducting due diligence is a significant risk mitigation activity and we urge that a review is undertaken to ascertain what degree, if any, of due diligence is currently conducted.

Related Case Studies

A European procurement executive

This executive had made excellent career progress, working for large international organisations. His most recent appointment had been the Head of Procurement for a...
Read more

Furniture manufacturing

This project involved the replacement of an old paint spray booth, now requiring state of the art equipment. The importance of this project was...
Read more

Engineering support services for a Gold Mine

This contract required terms and conditions to deal with external engineering support services to a remote location gold mine. Not infrequently, major equipment required...
Read more

Formulating a cohesive sustainability procurement strategy

  Formulating a cohesive sustainability procurement strategy Most organisations are agreed that sustainability procurement should be on the agenda but are unclear how to...
Read more