The Hidden Costs of Rusty Links in your Supply Chain

ISSUE #58 – A robust supply chain risk management programme must tackle operational risks, but also include sound counterparty integrity screening.

Control Risks - Siamsquare_anti_thaksin_protesters

WHEN THE CHAIN BREAKS

Intel lost USD1 billion in the last quarter of 2011 when it bitterly acknowledged that most, if not all, of its hard drive suppliers had facilities within a narrow radius in Ayutthaya Province, Thailand. After the province was hit by decennial fl oods, the production of Intel computers worldwide came to a halt because of a prolonged interruption in the supply of Thailandmade hard drives.

Another illustration of big brands exposed to vulnerabilities in their supply chain is the consumer outcry and boycott  campaigns following the collapse of apparel sweatshops at the Rana Plaza in Dhaka, Bangladesh in 2013, in which more than 1,100 people were killed. Social media campaigns were launched against brands such as Benetton, urging them to reveal their “true colors” and be more accountable regarding their sourcing activities.

Conducting risk assessments of one’s key suppliers can be vital to safeguarding a company’s reputation

THE BENEFITS OF ONGOING RISK ASSESSMENTS

The two examples above demonstrate that conducting ongoing risk assessments of one’s key suppliers can be vital to safeguarding a company’s reputation and ensuring undisrupted operations.

Responsible companies operating in Southeast Asia must, from operational, regulatory and reputational perspectives, conduct screening into counterparties (third-party agents, vendors, suppliers, distributors) across their supply chain.

There are several benefits for doing so:

  • Guarantee operational continuity: robust business continuity plans identify and address single points of failure in the supply chain (or external dependencies), such as overreliance on certain key critical infrastructure. Illustrating this point, the seizure of Suvarnabhumi Airport by the “yellow shirts” in Bangkok in 2008 caused air traffic on Thailand’s international routes for cargo and passengers to come to a complete standstill for a week. This halt to air cargo caused USD93 million in losses to high-tech electronics manufacturers. Some businesses coped by rerouting air cargo through Kuala Lumpur and Singapore, which increased costs dramatically, while others were left with few options due to the limited capacity offered by freight forwarders;
  • Mitigate exposure under anti-corruption legislation: vetting and assessing your network of vendors, representatives or affiliates for compliance with your own code of conduct is not only best practice – it is now a requirement in the UK Bribery Act (UKBA). Having entered into force in 2011, the UKBA stipulates the offence of “corporate failure to prevent bribery”. Under Section 8 of the act, commercial organisations can be found guilty if bribery is carried out by an employee, agent, subsidiary or another third-party. Therefore, companies, especially those with intertwined networks of suppliers and contractors, must ensure they have put in place the necessary internal mechanisms to prevent bribery;
  • Manage and enhance your reputation: after your people, your company’s reputation is its most valuable asset. Demonstrating how well you manage the complexities of your supply chain can be a unique selling point, while simultaneously strengthening your operational resilience and integrity.

Systematic and robust management of supply chain risk can mitigate the threat of fraud and business disruption. Based on the valuable insights thus obtained, counterparties who initially appear high risk may upon further review be found to have solid commercial reputations.

 

By Jeremie Duthel, Associate Director, Control Risks

 


PHOTO: The 2008 “yellow shirts” protest in Bangkok caused air traffi c on Thailand’s international  routes for cargo and passengers to come to a complete standstill for a week

 

Article published in the FOCUS Magazine “New Links in the Supply Chain” – September 2015