14 www. bus- ex. com November 09 T he growing complexity of modern supply chains, with extended lines of supply from distant locations, greater use of outsourced manufacturing and services, together with an increasing dependence on suppliers, has contributed to an unprecedented escalation in the levels of risk experienced within corporate supply chains. Companies are now vulnerable to supplier failure and external sources of risk as never before. The trend over recent years to outsource ever more sensitive functions has also significantly increased a company's exposure to risk. Over the same period, reputation and the value of the brand have grown in importance too, a combination that has placed a heavy emphasis on the impact suppliers have on the reputation and performance of the enterprise. Dangers now exist in the form of a supplier's compliance and commitment to health & safety regulations, legal and statutory requirements, corporate social responsibility ( CSR) policies, environmental and quality targets, data security procedures, as well as the ability to supply goods and services to required levels of performance, and in these hard economic times, the financial strength necessary to stay in business. To mitigate these risks, buyers are looking for properly evaluated and qualified information on their supply base, and given the global nature of business today, are looking for this on an international basis. In the age of the internet, what companies do in one place can no longer be divorced from how they are perceived in a different market. In areas such as health & safety supplier failure can be enormously damaging, not only in terms of reputation, but also in terms of cost and exposure to possible litigation. An accident is a hugely expensive, disruptive event but companies can no longer exonerate themselves by relying on a contract that abdicates responsibility to the supplier. The changing attitude of those in authority is that buyers should be active in monitoring and checking that suppliers are compliant. Conducting regular audits of suppliers, and having detailed and up- to- date information on suppliers, is the only way of mitigating this risk and of demonstrating to the authorities that a company is diligent and responsible. Increasingly the burden for compliance is being shifted from the provider of goods or services to the procurer as demonstrated by the new European Directive on chemical safety which clearly shifts responsibility to the buyer. One emerging concern that is likely to grow in importance is data security. This is an area of particular importance to government departments and financial institutions following a number of high profile lapses in security, but increasingly corporate bodies will be required to sharpen their practices too. Companies may have very strict processes in place for how their staff handle sensitive data- blue chip companies are very well thought of in this regard- but then all too often a supplier or contractor is called in to undertake IT work and the buyer of those services fails to check that the contractor has similarly rigorous terms in place in relation to their subcontract employees. The danger is that a breach in security, with sensitive data being taken off- site, lost or misused by a supplier, could have a serious negative impact on a company's hard earned reputation. Greater scrutiny of a supplier's contractual arrangements with its staff and subcontractors is essential in mitigating this risk. Damage to corporate reputation and brand are central concerns for businesses operating in a global market. How a company behaves in one part of the world can have huge ramifications on how its reputation and brand are perceived in another. And nowhere is this more important than in how an enterprise sources its products and services. Being absolutely certain that suppliers, wherever they may be in the world, are compliant and responsive to a buying organisation's corporate social responsibility ( CSR) policies is now considered critical to protecting the brand. The risk to brand value from a supplier, or a sub- contractor to the supplier, using child labour, for instance, is immense. However, many companies perceive this risk as one primarily affecting the retail sector, following coverage in the press of incidents with suppliers to Primark and Gap, for example. Few outside of retail consider the damage that may ensue from, say, the discovery that a boiler suit used by a major oil company was produced using child labour, or that a hose component sourced by an engineering company was manufactured under appalling working conditions. No company can divorce itself from the errant policies and practices of its suppliers. As those in the retail sector have determined, ethical audits of suppliers is a necessary process for reducing exposure to this potentially highly damaging source of risk. It is important that other sectors recognise the importance of monitoring suppliers in this way. Undertaking a proper ethical and social audit is a highly skilled activity requiring knowledge of the process, of CSR issues and of good auditing priorities. In particular, many suppliers will be adept at presenting only that which they wish to be seen. For instance, there have been cases where several sets of books have been kept, giving very different perspectives. Sending a buying team in to a supplier with no particular training in this area could be more damaging than not sending one in at all- at least by not sending a team in you are not under the impression that you are protected.
Supply chain management November 09 www. bus- ex. com 15 title clauses can make for complex situations that may become very messy. If a supplier is vulnerable it is worth knowing about it in advance. That way an alternative supplier may be sought, or if the supplier is a single source for a vital component or service, action may be considered to help that supplier. Either way, predictive financial tools and up- to- date credit ratings on suppliers is the only way of reducing exposure to this very real and growing risk. In any organisation the focus is always on the biggest suppliers, the most critical, but when it comes to risk, dangers are equally likely at any point in the supplier base, large or small. Whole production lines have been brought to a standstill by the failure in supply of a seemingly insignificant component. However, most companies, even the largest companies, do not have data on their smaller suppliers; they tend to concentrate on their top quartile, leaving 75 per cent or more of their suppliers completely off the radar. If buyers are going to manage the growing and complex matrix of potential risks effectively, visibility of appropriate, accurate and verified information is going to be essential, across the full spectrum of the supply base. Gaining a clear view of your supplier base, with access to pertinent information that has been qualified, evaluated and monitored, need not be as complex and stressful as it might seem. By working in collaborative communities within industrial sectors, much of the work associated with updating information and monitoring suppliers can be undertaken by just one independent organisation that is specialised at the task, to the betterment of the entire community. Furthermore, tools and processes for identifying and ranking supplier risk in the supply chain can be used to understand and manage the risks in a controlled way. Mitigating risk is all about understanding your supply chain. Companies that manage risk successfully will continue to reap the benefits of low- cost country sourcing; companies that mismanage it will either fail or will become reluctant to source from distant locations, and in doing so will make themselves less competitive. One source of risk that threatens to play a significant role in the near future is a supplier's commitment to reducing carbon emissions. Buyers are starting to be tasked with finding suppliers that fall in line with their company's policy on carbon reduction. Many companies are looking beyond their own walls with regard to their impact on the environment and are looking for suppliers that are active in monitoring and reducing their carbon footprints. Soon, the risk of carbon complacency may be one of the most significant for suppliers as buyers pursue a policy of reducing the carbon footprint of their supply chains. However, suppliers, and buyers alike, are perplexed by the range of emerging standards, measurement techniques, reporting tools and management methods available and suppliers are challenged by the complexity of presenting varying data to many organisations. Clearly, establishing an environment in which practical progress can be made requires a collaborative approach by an industry on a collective basis so that the challenges of interpretation and implementation can be clearly understood and used to develop best practice methodologies that may be shared throughout the community. Research has already demonstrated the inaccuracy of ' carbon calculators' for instance. After all, it makes little sense for suppliers to work independently, each measuring in their own way and coming out with very different figures. By working together they can ensure that buyers are offered a true comparison and, what is more, the cost burden can be shared. But importantly, this process needs to be properly audited and suppliers certified to a common standard. Perhaps the greatest risk facing the supply chain at this time of commercial strife is the financial security of suppliers. Volumes of business have diminished, credit is less easy to get hold of, and payment terms are much harsher. Buyers now face the escalating risk of a supplier going under, raising the prospect of interruptions or failure in the supply of critical components and services. Even worse, if a supplier goes bust, who owns the part completed or fully completed goods? Retention of " An accident is a hugely expensive, disruptive event but companies can no longer exonerate themselves by relying on a contract that abdicates responsibility to the supplier. The changing attitude of those in authority is that buyers should be active in monitoring and checking that suppliers are compliant"