The reputational risks lurking in your supply chain

As H&M, Mattel and countless other companies have shown, a dodgy supply chain is one of the surest ways to a reputational meltdown, writes crisis management expert Tony Jaques.

Many organisations have major risks lurking in their supply chain – often unrecognised – like potential land-mines waiting to explode. But supply chain risks seem to remain a seriously under-rated source of reputational crises.

The notorious Rana Plaza collapse in Bangladesh in 2013 was a wakeup call for fashion brands produced in dangerous conditions in pursuit of cheap labour. Yet just last year angry workers demanding better conditions and benefits destroyed the production line of a Chinese-owned factory in Myanmar making clothes for Swedish apparel-maker H&M.

The 2013 Rana Plaza collapse. Source: Wikipedia

Although H&M is widely regarded as a leader in promoting workers’ rights and fair wages, recent human rights violations must raise fresh questions for any foreign company doing business in Myanmar.

And supply chain risks are certainly not confined to the textile industry. Consider the famous “Toxic Barbie” crisis, when a Chinese supplier permitted lead paint to be used on Barbie Dolls and other toys, resulting in a massive reputation hit for Mattel. Or when it was revealed that iconic Australian Sherrin footballs were being hand-stitched by 10-year-old girls in India for as little as 12 cents a ball. Or when contaminated berries from China were linked to an Australian outbreak of Hepatitis A and critically damaged the Nanna’s brand.

While reputational vulnerability in the supply chain is most often seen affecting such consumer-facing brands, more and more businesses are exposed. As KPMG’s Peter Liddell recently wrote: “Traditionally, supply chain risks have been a concern for manufacturing, distribution, retail and agriculture, but they now extend across all sectors, including financial services and government.”

However the capacity to manage supply chain risk seems worryingly low. For example:

A European study of small to medium businesses found one in ten could not identify their key suppliers, and 70% lacked visibility over their entire supply chain.

A recent report on American use of conflict minerals from Africa showed 80% of companies admitted they didn’t know their raw material’s country of origin.

A survey of supply chain executives and finance managers at large global organisations across a wide range of industries found almost half said they lacked the resources needed to assess risks at supplier sites, and nearly 40% said they lacked the leverage needed to force suppliers to develop adequate risk management processes.

An Australian Human Rights Commission report concluded businesses have the aspiration and commitment to address human rights impacts in their supply chains, but many lack clear strategies and processes to trace, monitor and address such risks.

Meantime, with companies relentlessly chasing lower costs, the possibility of poor ethical or environmental practices in the supply chain increases, and with it increased risk of reputational damage and a growing role for issue and crisis managers. Moreover social media has dramatically increased the likelihood that dubious practices will be exposed, the speed at which word will spread and the impact of reputational damage.

Crisis management experts know that most crises are preceded by red flags, or warning signs, and social media intelligence can provide valuable early insight into many problems in the supply chain.

Issues around ethical behaviour are often driven by concerned individuals or groups who generate conversations on social media. And NGOs and campaigners are increasingly sophisticated and active on-line identifying and taking action on supply chain issues such as child labour, unfair pay, slavery and animal welfare.

Effective issue management demands proactive planning to scan for potential risks, including systematic social media monitoring, and your supply chain may prove a rich vein of possibilities.

This piece appeared in Tony Jaques’ Issue Outcomes newsletter. You can subscribe here.


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