Don't Allow Supply Chain Growth to Increase Reputational Risk

May 9, 2016
An increased reliance on contractors  brings a heightened responsibility  to closely vet and monitor supplier performance.

Retailer Target Corp. and wholesaler Associated Wholesale Grocers Inc. discovered late last year their Parmesan cheese brands labeled "100% grated Parmesan cheese" contained absolutely no actual Parmesan, based on findings by the Food & Drug Administration.

According to Bloomberg News, the well-known brands instead contained a mix of Swiss, mozzarella and white cheddar cheese "as well as a heaping dose of cellulose."

While the breaking news launched widespread internal investigations, it simultaneously brought to light the increasing responsibilities of today's chief procurement officers (CPOs) and their staffs, which now have influence and responsibilities that go far beyond cost containment. According to CAPS Research, in 2015 a whopping 83% of all corporate spending went to hundreds of thousands of global suppliers—with only 17% going toward corporate manufacturing plants, personnel and operations infrastructure. And, over 80% of CPOs are required to report directly to their CEOs.

A lean, agile supply chain network is important in the hyper-competitive global marketplace, but this increased reliance on contractors and their subcontractors brings all kinds of increased risk and with it a heightened responsibility to closely vet and monitor supplier performance and behavior.

Fortune 1000 firms face real complexity in protecting their ethical imperatives, image and standing, when they can have as many as 10,000 or more suppliers under contract. How those contractors behave while doing work can make or break multibillion dollar corporations. Government regulation enforces social responsibility, and consumers punish companies that don't handle themselves responsibly, as we have seen in recent headlines.

Volkswagen is expected to lose billions of dollars and significant market share because of ethical lapses. But what about suppliers? Nike has come under scrutiny over the years for its suppliers' alleged labor exploitation around the world. Tesco is one of the food manufacturing companies that in recent months were adversely impacted by horse meat found in its products.

What's more, consumers are now demanding country-of-origin information on shrimp in restaurants and stores after a recent investigation by Associated Press revealed that shrimp peeled by modern day slave labor in Thailand is making its way into the U.S., including through major food stores and retailers such as Walmart, Kroger, Dollar General and Petco.

Among suppliers (and their own subcontractors), poor working conditions, loose financial transactions, skirting of environmental regulations, or substandard quality in parts or materials can all turn into scandals that affect the contracting organization. As a result, corporations must constantly vet and monitor supplier performance and behavior.

The Institute for Supply Management (ISM) has created formal guidelines in these areas. When followed, they uphold ethical behavior and reduce the chance of high-risk lapses occurring. Following are some of the principles:

  • Do not tolerate corruption in any form. Employers are urged to implement clear anti-corruption policies for employees, suppliers and the extended supply chain to follow. Employee training should be included to support the implementation of these policies.
  • Promote diversity and inclusion throughout the organization. Diversity continues to be a hot-button topic for good reason. Fostering a diverse group of suppliers, employees, external partners and affiliates will create a culture of inclusion, not exclusion.
  • Support environmental precaution and promote environmental responsibility. Organizations should strive to comply with, and whenever possible, exceed compliance with all applicable environmental laws, regulations and protocols. We suggest providing all employees with the training and resources needed to make environmentally conscious decisions.
  • Value, respect and enforce human rights. Human beings have universal and natural rights and status regardless of legal jurisdiction and local factors. Organizations should not use suppliers who violate these rights.

The path to sustainability and social responsibility is not an overnight process but a journey to continuous improvement. The stakes could not be higher.  

Thomas W. Derry is CEO of the Institute for Supply Management (ISM). The ISM2016 show is held May 15-18, 2016, in Indianapolis, Ind.