Image courtesy: pixabay
To create a competitive advantage for consumers and defend their market shares in highly competitive markets, many large companies have created supply chains that sprawl across continents. Companies are increasingly procuring from emerging or untapped markets that offer advantages such as lower costs, wage arbitrage and exclusive raw material in some cases. However, the benefits of these global supply chains can be reversed if the buying organisations lack adequate supply chain visibility.
Buying organisations need to take responsibility of their entire supply chain
However, the past few years have witnessed several incidents where big and highly competitive brands and companies have been accused of irresponsible behaviour when it comes to managing their supply chains. Brands selling gadgets, frozen food, cars, jewellery, bed linen, apparels, shoes, and many such consumables have come been in the limelight for many wrong reasons.
These controversies have negatively impacted the competitive position of these companies. While that is the most evident impact of such failures, the real impact is far more long-term, and wide-spread for these companies.
- Customer attrition: Brands lose customer loyalty due to bad word-of-mouth, leading to lower demand for their products.
- Customer compensation: Companies might have to compensate the customers or issue refund for inferior products.
- Litigation, financial claims, product recall: Companies might face litigation or financial claims from its end-customers, and might have to recall their products.
- Disruption in supply chain: Company might not be able to supply the products on time to customers due to quality issues in their supply chain.
- Regulatory scrutiny and penalty: In some cases, such issues can lead to regulatory scrutiny and even financial penalties or restrictions.
Lack of supply chain visibility is at the crux of these issues
A root cause analysis of the various supply chain controversies cited above point to the following two commonalities:
- Unethical conduct on part of the suppliers – either immediate or n-tier suppliers.
- Inability of the buying company to detect this unethical conduct.
Both the points above are inter-related and are caused by lack of supply chain visibility on part of the buying company. Buyers in many cases do not map their entire supply chain and fail to institute processes that ensure that suppliers are maintaining high ethical conduct. This enables some suppliers in the supply chain to compromise on quality of product or safety of employees, and breach environmental / labor laws and regulations to serve their short-term objectives.
With global and multi-layered supply chains, a proactive approach to procurement is a must
In most cases, once the problem with a supplier is discovered the companies tend to react by severing ties with the supplier and initiating industry level dialogues to prevent such issues from occurring again. While this might recover some lost reputation for these brands, re-occurrence of such issues can only be avoided when the companies start acting proactively and taking ownership of their supply chains.
We believe that in order to prevent the immense and widespread negative impact of such supply chain disruptions due to unethical conduct in their supply chains, procurement teams at buying organisations should take the following steps:
- Map their complete supply chain: Buying companies should proactively map their entire supply chain down to the nth-tier supplier. This process can be started by asking their first tier supplier to map its supply chain, and then move downwards with an objective to establish inter-dependencies among suppliers.
- Establish criticality of suppliers: Once the supply chain has been mapped, buying companies should profile each supplier to establish how critical they are for the operations as well as for the reputation of the company.
- Assess critical suppliers regularly: The company should conduct a 360-degree assessment of its most critical suppliers, to understand not only the financial health of its suppliers but also uncover market related, regulatory, macroeconomic, environmental, and ethical issues which can put the supplier at risk.
- Conduct ongoing monitoring of supply chain: In addition to periodic assessment of the critical suppliers, the company should also identify key supply chain risk indicators which should be monitored on an ongoing basis to ensure that the company is able to identify any early warning signals and take corrective action, before the issue snowballs.
Once the above process is instituted and implemented, buying companies will be able to mitigate any risk emanating from the supply chain. At the same time, they will also be able to strengthen their supplier relationships and gain useful strategic information and feedback from its supply chain, which can act as a source of competitive advantage in the long run.
Sumit Kumar is the Head of Sustainability Research at Pure Research Private Limited, a procurement intelligence firm. Sumit helps buying organisations build sustainable supply chains by understanding the sustainability performance of their suppliers, and recommending corrective action based on category specific best practices.