Wednesday 7 October 2015

Risk Management in the Supply Chain: Reputational Risk

In many organisations, procurement is beginning to see risk as one of their responsibilities, second only to savings. With Risk Management so high on procurement's agenda, we've been taking a look at some differing types of risk and their impact on the organisations in question.

We start today with child labour issues and how they can hurt your reputation and brand.

Primark, an Irish clothing retailer with revenues of approximately £4.3m, is a subsidiary of Associated British Foods. In 2006 Primark joined the Ethical Trading Initiative (ETI), a collaborative organisation bringing together businesses, trades unions and Non-Governmental trade Organisations (NGO) to work on labour rights issues in their supply chains. ETI members commit to working towards the implementation of a code of conduct based on the International Labour Organization's core conventions.

In 2009, Primark was exposed in a BBC documentary for using child labour. It was a PR disaster for Primark. Michelle Min Hwa Lee, Journal of International Management said, “many consumers, upon hearing the firm’s bad reputation for disregarding business ethics, opted for boycott or turned to rival retailers.”

The Child Labour Facts 

Leesa Soulodre of RL Expert Group noted, “today 168 million children worldwide are in child labour. Frighteningly, this accounts to almost 13 per cent of the global child population (ILO, UNICEF 2015). Children in hazardous work that directly endangers their health, safety and moral development make up more than half of all child labourers (85 million!).” 

Emily Holbrook wrote, “for the most part, a company never anticipates its suppliers will be using child labour to provide a product, but for many large corporations with production facilities or suppliers in poorer countries, that is exactly what is, and has been, happening. And the reputation damage inflicted by accusations that a company uses child labour to make a profit, even if unaware, is devastating.” She goes on to call it a “Reputation Armageddon”. 

Recently in the US, new legislation has been introduced on slavery and human trafficking. If the legislation passes, businesses with over $100 million in global gross receipts will be required to report to the SEC as part of their annual filings what policies they have in place to ensure their supply chains are free of slavery and human trafficking violations. Disclosures will need to be prominently posted on SEC and company websites for public access. 

The Good, the Bad and the Ugly 

While Primark was exposed in a BBC documentary for using child labour, the story was subsequently challenged in court and found to be incorrect. BBC issued an apology and Primark has detailed information on its website. Though Primark struggled to regain its footing, in 2011 Primark achieved ‘Leader’ status in the ETI. This put Primark in the top 5% of all ETI members, a position that has been upheld to date. 

Obviously good supplier relationship management practices are required by all companies or it can wreak havoc on your reputation. Transparency and internal accountability are crucial to managing a businesses reputation. Increasing supplier visibility is crucial to supplier relationship management. 

We'll be discussing Risk in much more detail at our webinar on 4th November, click here to register. Stay tuned for more on Risk coming up.

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