Supplier risks affect your corporate reputation

The majority of companies today rely heavily on suppliers and contractors for the provision of goods and services as well as outsourcing parts of their supply chain. Suppliers are spread across regions, continents and the globe, crossing cultural and language divides. Many companies have limited and antiquated knowledge of their suppliers and the environments in which they operate. This limited and outdated knowledge acutely affects these companies’ ability to successfully manage the dynamics of their supply chain, which has introduced substantially more risk in business.
The global financial crisis, recent natural disasters, fluctuating commodity prices, exchange-rate volatility, lean-business practices, bribery and corruption (coupled with South Africa’s unique regulatory environment and the Mining Industry Charter) has added complexity to the management of supplier risk.
The range of supply chain risks extends far beyond just the financial stability of suppliers, as shown in the figure below.

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Figure 1: Range of Supply Chain & Supplier Risks

With increased regulatory scrutiny, continuing cost pressures, active investors, and a vigilant public, businesses today must have a clear understanding of the risks that are inherent in external business relationships. By recognising and proactively addressing these third-party issues, business leaders can reduce exposure to risk and achieve stronger relationships with service providers, suppliers and delivery partners. The end result is a nimbler, more responsive, and more profitable operation.
In South Africa, over the past 20 years, the regulatory and legal responsibilities have increased significantly with the introduction of new statutes, charters, codes of practice and guidelines. The minimum requirement for suppliers to be able to conduct business today includes, to name a few: a valid original BB-BEE certificate, valid original Tax Clearance Certificate, COID Certificate, proof of UIF registration and proof of Company Registration.

The evolution of statutes passed by the South Africa Parliament since 1994 is shown in the figure below.

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According The GIBS Guide to Sustainability 2012, responsible and ethical Corporate Social Investment is increasingly relevant both globally and in South Africa, where the impact of the King Codes (King Report on Corporate Governance) is particularly significant. The King Reports I, II and III urge companies toward embracing the triple-bottom-line as a business imperative; balancing social responsibility with shareholder return. It’s a delicate balancing act, where corporate reputation is critically important.

For those companies on the wrong side of corporate governance the reputational risks are plentiful and the effects of bad press can linger for years. In 1996, sports brand Nike was publicly accused of using child labour in its offshore factories. This criticism continued until 1998 and only abated after the company announced long-term measures to improve conditions.
Nike is not the only one to suffer. The recent oil spill disaster in the Gulf of Mexico involving British oil company BP is another example, as is Coca-Cola’s overexploitation of scarce water resources in India, or criticism of Nestlé for selling baby milk powder in countries without reliable access to clean water.
The following questions should be considered regarding your corporate reputation risks:
• Can your reputation and brand tolerate being connected to your suppliers’ ethical and compliance mishaps?
• Are you confident about the ethics and compliance of your suppliers’ suppliers?
• Are your suppliers prepared for conflict minerals regulations?
• Is your supply chain prepared for a government coup?
• What happens to your supply chain if one of your suppliers can’t ship their product due to a natural disaster?
• Do you know if your second tier (and beyond) suppliers follow the sustainable initiatives that your organisation promotes?

Companies should be mindful of the key issues and areas of concern related to sustainability along their supply chain, as shown in the figure below.

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Figure 3: Managing Sustainable Global Supply Chains: Framework and Best Practices (Source: GIBS)

As a result of the global nature of the economy, and the complexity of business relationships, businesses’ risk-management efforts must be more comprehensive than ever. The risks that require monitoring and managing range from financial, operational, legal, and regulatory concerns to environmental, reputational, and technology related risks.
Organisations must have a clear understanding of the risks inherent in their business relationships with outside parties. To address these risks, companies must implement programmes using non-adversarial third-party risk management strategies that benefit all parties.

Contributed by: Andrew Hillman is Managing Director of Bespoke and Publishing Editor of Bespoke Procurement Bulletin


Article first appeared in Bespoke Procurement Bulletin: