Corporations face a giant hidden risk in globalisation. The opening of global markets has forced firms to generate competitive advantage by sourcing products from manufacturers based in lower cost countries. As a result, supply chains are now more extended and complex than ever before, with commensurate risk attached. The role of supply chain management and procurement has therefore never been more vital to business sustainability. An unreliable or unethical supplier could cause a product re-call or a vast churn of customers. Stock prices and reputations can take a long time to recover.
The fundamental challenge for supply chain directors is first, ensuring that the corporation has standards that all its suppliers must meet. Second, they must have the systems to monitor these suppliers’ adherence to those standards. But the second requirement is a major stumbling block for many organisations as they don’t have a centralised view of all of their suppliers. This often arises where organisations have bought in IT software solutions that typically focus only on the top 20 per cent of suppliers, ignoring the possibly thousands of suppliers that make up the remaining 80 per cent. This can lead to procurement teams spending a disproportionate amount of time trying to manage the supposedly less important suppliers. The situation is compounded when organisations have numerous incompatible back office systems so data can’t be stored and shared. The result can be not only increased risk through lack of understanding of the supply chain but also a vast waste of resources and duplication of work. I know of one major oil company that pre-qualified the same supplier 14 times in a year because it didn’t have the management tools.
Understanding and monitoring the standards and ethics of suppliers across the world is clearly a complex task. In many industries, this issue is exacerbated by a dwindling number of suppliers closer to home, having the double impact of forcing organisations to extend their supply chains further afield and absorb increases in prices. European utilities are a good example. It is not long ago that the UK had numerous suppliers of electrical cable; now there is just a handful, with the result that prices for many key products are rising, and there is a danger of supply scarcity.
Legislation presents a further area of risk. Keeping on top of ever-changing European procurement law complicates the task of managing global supply chains. And the proposed European Union version of the US Sarbanes-Oxley corporate governance rules will mean senior directors will be expected to have more detailed knowledge of the policies and practices in use in their companies’ operations – including their contractors. Institutional investors too are taking as keen an interest in companies’ ethical policies as in their environmental credentials, and some governments are starting to ask questions about CSR before awarding contracts.
The call to action is for organisations to start the process of mitigating their supply chain risk by reviewing their supply chain standards and their contractor management tools. Ignorance is no excuse, nor can buyers try and exclude risk by putting compliance with CSR issues as a contractual requirement. Monitoring is essential and to do this effectively, companies need to work together.
Colin Maund, Chief Executive, Achilles