Reputational
Companies that are concerned about protecting their brand against negative publicity need to make sure they have full visibility throughout their supply chain in order to identify and act on any suppliers that may be engaging in illegal or unethical activities. Customers are increasingly looking for assurance that the materials or products they buy have been extracted and produced in an environmentally and socially responsible manner.
Problems in long, complex supply chains can hit businesses in many ways. For instance, many businesses saw their brand reputation damaged in 2013 as a result of the horsemeat scandal, caused by insufficient oversight of supposedly trustworthy suppliers. The Rana Plaza factory collapse in Bangladesh exposed questionable practices tolerated by many high-street fashion retailers, while electronics companies such as Apple and HP have also been forced to deal with allegations of poor conditions at Chinese supplier Foxconn.
Chain of Custody practices and traceability measures are essential. Traceability is the ability to identify and trace the history, distribution, location, and application of products, parts, materials, and services. A traceability system records and follows the trail as products, parts, materials, and services come from suppliers and are processed and ultimately distributed as final products and services. A study conducted by Oxford University’s Said Business School stated that increasing traceability in a firm’s network of suppliers is a key first step towards reducing a firm’s exposure – “In a traceable system, firms are able to identify materials and products, track their locations, and account for any supplier processing that has occurred prior to the item’s arrival at their doors”.
The study notes that, in the past, it was believed that ‘one-up, one-down’ tracking – that is, knowledge of the immediate past owner and immediate future owner – was enough to guarantee sufficient information to track the history of a product. However, in today’s more complex environments, this is often not enough. If just one link in the chain fails, the consequences can be far-reaching, so it will be increasingly important for companies to develop their knowledge of distant parts of their supply chain – so-called “Tier-2” suppliers – that would have in the past gone unnoticed.
Knowing who is part of the supply chain is critical to mitigating risk, and the most proactive customer-facing companies are already implementing policies designed to improve the transparency and accountability of their supply chains. Consumer demand for verified responsibly sourced products has become the new normal, according to a study conducted in 2013 – 87 percent of global consumers are “very likely” to consider a company’s social and environmental commitment before deciding what to buy and where to shop, and 90 percent of global consumers want companies to go beyond the minimum standards required by law to operate responsibly and address social and environmental issues. In fact, the Said Business School study notes that the failure to adopt a robust system for traceability is becoming a source of reputational risk in and of itself – after Walmart denied awareness of a Rana Plaza contractor’s role in its apparel production, activists criticised the company not just for using the contractor, but for its lack of knowledge about its own supply chain.
For any company that relies on a complex global supply chain, the risks that suppliers face on a local level can have a knock-on effect until damage is felt further down the chain, such as in boardrooms thousands of miles away. That could mean reputational damage, such as Apple experienced when it was claimed workers in a Chinese factory, which manufactured some of the company’s products, were working in substandard conditions, or it could mean having to raise prices, as was the case for various international electronics manufacturers after the 2011Thai floods. Around the closing months of 2011, consumers were hit by unusually high prices for computer hard drives. The rising prices were a direct result of devastating floods in Thailand, caused by an unusually severe monsoon season, which in turn was attributed to climate change. Along with the loss of more than 800 lives, the floods cost the country an estimated $45bn and severely affected Thailand’s electronics manufacturing industry. With two of the world’s largest hard-drive manufacturers being heavily reliant on Thai suppliers, costs skyrocketed for global companies that included Hitachi, Dell and HP.
In fact, companies are becoming increasingly exposed to risks across their supply chains by disruption resulting from climate change, as well as reputational damage. Not only are companies increasingly faced with the fact that consumers are increasingly seeking out products that have verified and respectable environmental and ethical credentials – but on top of this, the diverse, unpredictable and potentially catastrophic effects of climate change could well physically threaten their existing supply chains or production base.
Environmental
According to Dexter Calvin from Carbon Disclosure Project, an organisation that motivates governments, cities and companies across the world’s largest economies to measure and disclose their environmental information, there are many reasons why businesses should be looking at the climate credentials and sustainability of their supply chains.
Mr Calvin was speaking to Business Green after CDP released a report showing that some of the world’s largest companies have insufficient awareness of the climate risks in their global supply chains. After working with 75 multinationals representing more than US$2 trillion (£1.4 trillion) in procurement spending, the CDP revealed that 49 per cent of the almost 8,000 key suppliers that had been asked to provide data on their carbon emissions and climate risk strategies failed to do so. Nearly three-quarters of the suppliers that did disclose information said climate changed posed risks to their business operations, revenue or expenditure.
Mr Galvin points out that supply chains generally account for the majority of corporate emissions. “Essentially a lot of big purchasing organisations around the world have effectively outsourced their emissions to their supply chains … We think one of the solutions is to get more and more companies to start measuring, managing and disclosing their carbon emissions”. Visibility of the carbon footprint of a supply chain is becoming more and more important. It was also noted that the high carbon impact of supply chains could represent a big opportunity, as well as a significant risk. Major global businesses like Coca-Cola, Wal-Mart and L’Oreal have committed to collecting data from their suppliers – those that don’t follow suit risk being left behind.
Another concern is that regulation is lurking around the corner. Companies that don’t act swiftly to improve the green credentials, and the measurement of the sustainability of their supply chains, risk getting caught out by incoming regulation. Following the 2015 Paris Agreement many countries are already beginning to take action on carbon emissions. In January, China announced that the list of industries set to be covered by its national carbon market will include petrochemicals, power, construction and steel, and even aviation – a sector also covered in The EU Emissions Trading System, but not currently covered by any comprehensive international emissions regulation. All this means companies that fail to plan ahead for the future of supply chain management may find themselves disadvantaged down the line. Focusing on reputational risk is essential, but environmental risk is becoming increasingly important too.