Knowledge Center

Know Your Supplier (KYS): Definition and Significance

3 min read

Sep 6, 2023 1:45:00 PM

In today’s interconnected business world, reliable supply chains are crucial for a company’s success. Amidst global trade flows and intricate production processes, Know Your Supplier (KYS) offers companies the essential tool to ensure this reliability through profound knowledge and consistent monitoring of their suppliers. It not only serves for risk prevention and compliance but also protects companies from severe reputational damages and legal consequences.

Definition of KYS

Know Your Supplier translates to “Know Your Supplier.” It is a measure of risk prevention and compliance that companies undertake to verify the reliability and integrity of suppliers. This protects the company from fraud, money laundering, and other illegal activities, as well as reputational damage. To implement KYS, companies must collect, analyze, and evaluate information about their suppliers. This includes aspects such as the supplier’s identity, financial stability, reputation, and sustainability. Ideally, this process is ongoing, ensuring that the data is always accurate and up-to-date.

KYS represents the process that enables companies to inspect production standards and detect violations promptly. The standards to be checked include environmental compatibility, remuneration, human rights, and the health and safety of the supplier. It’s also crucial to verify their business integrity to ensure they aren’t involved in shady business practices like money laundering, fraud, or corruption.

KYS is particularly relevant for industrial and trading companies, especially those importing raw materials and products from abroad. By thoroughly checking their suppliers, companies can guard against allegations that they disregard lawful working conditions or violate human rights.

Significance of KYS for Businesses

From raw material to the final product, it’s a long journey. In the globalized economy, many suppliers from various countries and continents are involved in the supply chain. This creates supply chains that are sometimes hard to control. The legal situation can vary considerably. Cooperation from suppliers cannot be assumed to the same extent.

With the emergence of regulations like the Supply Chain Due Diligence Act (LkSG), there is an increasing emphasis on enforcing standards regarding environmental compatibility, remuneration, and health and safety at work. KYS provides the necessary tools to ensure the quality of one’s production and minimize potential liability risks.

What is the Objective of KYS?

KYS aims to ensure the quality and safety of supply chains. This is done by a company identifying, assessing, and mitigating the risks of its suppliers according to KYC, AML, and ESG parameters. A KYS process can help the company gain a holistic view of all types of risks and develop an appropriate framework for risk management. It can be part of a financial report review to assess the relevance and accuracy of the supplier’s financial information.

Benefits of KYS for Businesses

In our globally connected business world, collaboration with suppliers is essential for numerous companies. KYS offers several advantages. The most significant include:

Increased transparency in the supply chain through gathered information about the origin, quality, and safety of products or services.
Supplier risk assessment by identifying potential threats such as money laundering, terrorist financing, fraud, or corruption.
Ensuring regulatory compliance by adhering to legal requirements and standards regarding taxes, duties, sanctions, or environmental protection*.
Protecting one’s reputation by avoiding negative impacts on the brand, customers, or stakeholders.
Promoting sustainability and responsible purchasing by considering ethical, social, and environmental criteria when selecting suppliers.
Better customer experience due to high-quality and reliable products or services.

*It’s especially essential to consider the Supply Chain Due Diligence Act (LkSG) that intensifies the due diligence obligations of companies concerning their supply chains from 2023.

How to Implement KYS in a Company?

To successfully implement KYS in your company, consider the following four steps:

Understand supply chain partners: It’s essential to know the suppliers, their business values, and models to minimize potential risks that could harm the business relationship.
Check purchased goods thoroughly: Companies should ensure that products or services obtained from their suppliers meet the required quality, safety, and sustainability standards.
Monitor the supply chain: Regular control and evaluation of the entire supply chain are vital to detect and address potential problems or deviations early.
Utilize support from external partners: External partners like consultants, technology, or data providers can assist in optimizing and automating KYS processes.

Don’t worry. Specialized tools can simplify the KYS process. For instance, Pythagoras Solutions offers a professional tool that enables automated monitoring of suppliers. Get in touch and ask about ESG Management.