Supply Chain: The New Frontier for Sustainability Risk
An estimated 3,200 companies will feel the effects of The California Transparency in Supply Chains Act of 2010 which entered into force on January 1, 2012. The law requires retailers and manufacturers with annual worldwide gross receipts that exceed USD $100 million and doing business in the state of California to provide information regarding their efforts to eliminate slavery and human trafficking from their supply chains. Furthermore, the U.S. Securities and Exchange Commission is expected to adopt the final rules of Section 1502 of the Dodd-Frank Financial Reform Act covering the requirements for managing conflict minerals in the supply chain.
For a significant number of companies in the U.S., there will be challenges in adapting to these two recent pieces of legislation addressing supply chain operations.
Picture the likes of Nike, Levi’s, HP and Disney with their established supplier management programs, their risk mapping, their audit programs and the resulting increased levels of transparency that are the inevitable outcome. For companies such as these, overlaying the supply chain risks emerging from these recent regulatory requirements (of higher immediate consequence and probability) on existing supply chain risk analysis will pose considerable challenges and dilemmas.
It is increasingly clear that the roles of sustainability and supply chain officer are co-dependent. In some cases, the sustainability officer may own the risk whereas the supply chain officer will address the control of the risk. This, in itself, raises a barrier to implementation.
In implementation, aside from the risk ownership and control, addressing sustainability risks throughout the supply chain already poses interesting dilemmas. These risks can be at odds with traditional procurement risks of cost, availability, lead times, quality and aspects of business continuity. Is management adequately equipped with the resources to balance these risks in an increasingly constrained supply base?
If we highlight the electronics industry as an example, with its deep-dive into the supply chain beyond Tier 1 to control a myriad of risks, no less the risk to innovation, the term co-dependency is never truer. Circumstances have already manifested where the provision of certain vital components are constrained to less than a handful of possible suppliers; none of whom have emerged unscathed by risk on the supply chain dashboard. The efforts and direct costs of controlling these risks are often omitted from compliance cost estimations and the cost of alternative sourcing is hardly ever factored in.
Our fear is that the lack of a clear supply chain risk profile will lead to trade-offs. Certainly, this will be the case should the sustainability officer and the supply chain officer work in risk silos. However, we also see a clear opportunity, if done well, for these two functions to ensure that their organization’s supplier risk profile is complete, credible and accountable to itself, not least to the wider stakeholder community.
We also see that this will bring additional opportunities for early warning, where effective tools will allow a proactive approach to controlling the risks. Early and staged intervention may be required at some established suppliers, and engagement and enablement may be more appropriate in other instances where suppliers may have to be qualified.
But all this, as said, is applicable to the larger companies with established supply chain management programs addressing sustainability risks through voluntary social responsibility and environmental efforts. For the vast majority of the 3,200 companies affected by the California law, as well as those companies (and their suppliers) affected by the conflict minerals legislation on a national level, these new laws are likely to be a rude awakening.
Initially, to the majority of affected companies these laws may be considered purely compliance issues, but it is expected that such increased transparency is likely to be thin end of the wedge, exposing not only the companies themselves, but also their suppliers to greater scrutiny and oversight. Will these companies be far-sighted enough to prepare for this? We hope so.