Use penalties sparingly and responsibly

Unfair use of penalties and post-agreement discount requests are commonly reported by suppliers. Power imbalances often prevent suppliers from challenging these practices.

Problematic purchasing practices—such as delays in approvals, unreasonable lead times, or late specification changes—can lead to production delays and quality issues. If purchasing practices aren’t tracked or considered as a potential root cause, suppliers may be unfairly penalised. Many report penalties being imposed without evidence of damage or fault.

While some companies may view penalties as necessary, they must be applied fairly. The Purchasing Practices HRDD Framework sets out clear expectations:

• Penalties or deductions must be clearly defined and mutually agreed in advance.
• They must be based on clear evidence of supplier fault.
• They must be proportionate to the supplier’s fault and the resulting damage or problems caused to the buyer.
• They must not be applied when delays are caused by the purchasing company.

Penalties are not appropriate when issues arise from factors outside the supplier’s control, such as natural disasters or political unrest.

In this video: Bo Duijvestin, CSR Specialist at Zeeman

Bo shares how the company applies fair practices:

• Payment terms: 14 days after shipment, paid directly to the factory, even when using an agent.
• No penalties for late deliveries.
• Quality management: Zeeman hired a quality manager who works directly with factories throughout production. This shared responsibility helps prevent issues rather than just inspecting at the end.
• Root cause analysis: If a quality issue arises, Zeeman conducts a full analysis, including a review of purchasing practices.
• Improved outcomes: Over time, this approach has led to fewer quality penalties.

Continue improving your contracts and payment terms 

Contracts and payment terms are a critical part of responsible purchasing. Suppliers often have limited ability to negotiate these terms individually, so it’s your responsibility to ensure they are fair and reflect your commitment to equitable partnerships and shared responsibility for workers’ rights.

As you gather feedback from suppliers and assess how your purchasing practices may contribute to risks in the supply chain, you will need to regularly review and improve your contracts and payment terms. This includes:

• Identifying clauses that may create risk or hardship for suppliers.
• Ensuring terms reflect your commitment to responsible purchasing.
• Updating contracts to address emerging risks and supplier feedback.

Continuous improvement means treating contracts and payment terms as living documents—not one-off agreements. They should evolve as your understanding of supply chain risks deepens and as your relationships with suppliers grow.