Why is Contractor Compliance Important?
Supply chain management no longer simply includes the management of direct spend, those materials and services tied to the creation of an end product, but now includes such indirect spend as operations resource management (ORM), as well as maintenance repair and operations (MRO).
Historically indirect spend and the management of third party contractors, suppliers and vendors was left to operations, or individual site management. The unfortunate result of not including this population in the broader supply chain management process was the hiring of unqualified contractors, suppliers and vendors who potentially put the hiring organization at risk. As a result organizations are now building a contractor prequalification program into their broader supply chain management strategies.
What is Contractor Prequalification?
Contractor Prequalification is the initial assessment, screening or qualification of 3rd parties for compliance to a hiring organization's standards prior to awarding work for hire. This definition extends to and includes suppliers, and vendors – terms that are often used interchangeably in the process of prequalification even though their role is considerably different in nature. Contractor prequalification within the context of supply chain management has undergone a significant transformation in the last decade.
Sophisticated organizations no longer track and prequalify partners using spreadsheets and filing cabinets, but instead implement supply chain management and prequalification strategies using SaaS based solutions such as Avetta’s prequalification software.
Why Contractor Compliance Fails
While the sophistication and scope of interest pertaining to your supply chain qualifications continues to expand, there are still several fundamental reasons why internally managed programs fail. You can improve your contractor management program and ensure success by addressing the following:
1) Lack of corporate commitment
If supply chain qualifications are a corporate objective, do you have the support necessary to achieve success? Has your organization defined the consequences for supply chain members when they fail to meet your criteria? Unless these programs are enforced with penalties for organizations who do not meet your standards, your qualification program is sure to fail. Contractors and suppliers will not participate to the degree necessary unless they understand that their participation is mandatory.
2) Poorly defined standards
Asking for too much or too little can be detrimental to a supply chain qualification program, particularly in the early stages. Asking for too little information does not provide you with the information necessary to make informed business decisions and asking for too much information becomes challenging for those you employ, creating frustration and complaints. Consider creating standards specific to the work your various supply chain members provide.
3) Understanding internal stakeholder needs
How will you define success? As an organization you need to understand the objectives of each department beginning at the Executive level then accounting for the objectives of every involved department including procurement and sourcing, safety, operations, legal and risk. This can be accomplished by a successfully designed program supported with the right software.
4) Need for sophisticated systems
The days of adequately qualifying suppliers and the ongoing management using spreadsheets and filing cabinets has come and gone. With the need for deeper assessments these tools do not adequately support the internal stakeholders or supply chain members. Today's contractor management systems must be capable of making data available to all interested internal stakeholders, continually monitor expiring data points such as licenses and insurance, provide more than a pass fail system, learn more about weighted score cards, provide override mechanisms, support multiple compliance standards and proactively communicate deficiencies to internal and external stakeholders.
5) Underestimating the need for administrative support
As critical as software is, administrative support is equally important. This is true whether supply chains are managed at a single location or around the world, requiring global support. Organizations should plan for 1 full-time employee per every 500 active contractors. That ratio may require more support if adequate software is not in place. Though intuitive software can improve the participation of suppliers and contractors, resources must be available when questions arise or clarification around requirements is needed. Additionally, ongoing support will be necessary throughout the year as data points expire.
6) Contractor Compliance is more than a one-time event
Because compliance is more than a one-time event, it is important to continually monitor compliance data and inform your supply chain about any upcoming data expirations. Software must be able to recognize expiration dates for documents and data and send automatic notifications. Automatic notifications will be helpful for a portion of your supply chain, but you will also need to plan for sending personal emails and making phone calls on an ongoing basis to help them remain compliant.
What are the consequences of non-compliance and who will enforce it? Every organization is different, as are their strategies for enforcement. The most common and recommended approach includes restricting access to sites at the guard gate, simply put non-compliant supply chain members are not permitted onsite unless they are compliant to corporate standards. This requires discipline and partnership with operational sites. Other strategies include tying compliance to compensation and restrictions on future bids.
8) Effective internal communication
Early and consistent communication is key, for both internal and external partners. Too often corporate defines a contractor qualification program but fails to inform interested parties at remote sites. When a contractor becomes non-compliant, and the site they perform work at is not informed of the need for compliance, supply chain members can slip through the gate exposing your organization to risk.
9) Supply chain buy-in
Supply chain members should be treated as an extension of your workforce. In order to achieve optimal results, supplier and contractor participation and buy in is critical. A common concern of suppliers is that they have always done business with a handshake and that the newly implemented program is burdensome. An explanation helping your key contractors to see that the new program is an opportunity that rewards contractors who perform well and have appropriate standards and procedures in place can be reassuring. When they understand that companies who cut corners will not be considered for work, most organizations appreciate this approach as many have lost work over the year to those who have underbid them because they did cut corners.
Explaining the need for change is critical to help supply chain members understand the challenges you face. For them they are one company, for you they are one company out of thousands who put your business at risk each day. As you outsource more, the need for scalable programs is critical to protect not only your business but those you employ.
10) Be fair and transparent
Early on enterprise organizations failed to communicate the contractor’s qualification status to the contractors, for fear they would manipulate the system if non-compliant. However, if treated as an extension of your team, a true partner, transparency is critical. This allows supplier organizations to improve their business and continue to provide critical services to you. It improves their workplace and minimizes the risk to your business.
Improve Your Supply Chain Qualifications
Enterprise organizations seeking assurance they are working with the safest members of their supply chain can avoid common pitfalls of supplier qualification and contractor capability programs by simply planning ahead. When organizations define early on how success will be measured and what the key objectives are of all interested stakeholders, programs can be designed to support those needs. Additionally, proactive communication to internal stakeholders and supply chain members is critical when implementing supplier qualification programs.
As organizations prepare to implement a program it is critical that they consider the tools to be used in the administration of the program as well as necessary administrative resources. Working with Avetta to implement a Saas based prequalification solution as part of your supply chain management strategy can significantly improve your odds for success and mitigate supply chain risk. Avetta can assist you in designing and maintaining an ongoing supplier qualification program using intuitive, patented technology and dedicated support.
Using Avetta software, hiring organizations (clients) and their supply chains interact and exchange prequalification data defined by the client for varying risk levels and work types within their supply chain. Contractors, suppliers and vendors register with Avetta and complete online data assessments. Avetta prequalifies and scores the information provided, then integrates that data into the client’s larger supply chain management process. All results are available to both the client and their supply chain using prequalification software in the form of electronic scorecards or data feeds into existing ERP systems.
Common Qualification Categories: