‘Pay Now or Pay Later’ to Mitigate Supply Chain Risk: Q&A with Marianne Voss at Sedex
Q: Marianne, what are the key takeaways from your panel presentation and what insights have come to you in the months since attending SPF Americas?
First, there’s the importance of technology. Integrating social, governance and EHS principles in supply chain management is complex. Ethical sourcing, a growing concern for every company’s supply chain, is impossible without technology. Considering the array of issues and the range of suppliers involved in any extended supply chain, meeting the challenge and getting to scale absolutely require technology.
Then there are partnerships. From climate change to corruption, and human trafficking to child labor, many of the issues which businesses face in their supply chains are so complex that it’s not possible or sensible for them to try to tackle them alone. There’s a growing openness among companies to not go it alone, but rather to collaborate with suppliers to address ethical sourcing issues. There’s also an understanding to move away from strict focus on policies and audits toward identifying root causes and building capacity to address labor and social risks.
Finally, there’s transparency. Companies that are creating, managing and reporting data are moving past “checking the box.” Now we have sufficient data to do meta-trend analysis across industries to really understand how a company compares to others, what endemic and systemic issues there may be, and what opportunities are available. Modern technology provides us with better, more accurate and timely data, covering a broader geographical range. But perhaps even more importantly, technology helps us to make sense of all this data and turn it into actionable results that can be used across commodities and supply chains.
Q: What is the greatest challenge or pain point that you’re seeing regarding EHS, Risk, Supply Chain, Sustainability or CSR?
Supply chains continue to be one of the most important levers for business to create positive impact in the world, with an estimated 80% of global trade passing through supply chains. Yet, most of the risks and impacts are in areas of the company’s supply chain that they don’t know. For a long time there was an ability to say that there is not a direct relationship, but now there’s an expectation that companies do due diligence down to the ingredients. In fact, there are legal and purchasing consequences to not doing it.
It’s getting to the point where it’s no longer sufficient to say it’s too complicated and difficult. If you don’t do it, government will eventually regulate you.
Q: What is the challenge that many companies face today but that they do not fully appreciate?
According to a 2013 study by PwC and MIT, only a third of companies globally are actively seeking transparency below tier-one in their supply chain, at scale. However, Sedex data shows that both the number and criticality of risks increase the further down the supply chain you go, so many businesses have no idea what risks may be lurking beneath the surface of their supply chains.
Focusing on first-tier suppliers only is not enough. For example, food and agricultural companies have faced significant challenges with child labor on farms, which they rarely buy from directly. And the electronics industry is struggling with mining in conflict zones for the minerals that go into their products. Other factors affecting security of supply include climate change and water scarcity.
Q: What does a comprehensive approach to risk management for supply chains entail?
What gets measured gets managed. A comprehensive risk management approach involves identifying, quantifying, prioritizing and mitigating risk. However, the challenge of doing this is two-fold: 1) to measure and manage metrics of sustainability risk and performance and 2) to quantify the value of sustainability initiatives and more sustainable business models to the company, as well as to track their impact on the communities in which they operate.
Q: How can the EHS system mitigate risk and support more ethical sourcing?
If you’re still using paper or spreadsheet-based processes to map the supply chain, record incidents, perform audits and inspections, or create dashboards, chances are you’re wasting time and effort and you are not getting a clear picture of risk. Software programs are mandatory for giving companies access to necessary intelligence as well as the capabilities to apply it. Collaboration platforms also allow companies to benefit from the due diligence efforts of others, breaking silos of information to collectively understand trends and create predictions on future risk.
Q: How do you convince an executive to invest in an EHS or GRC software platform (or other IT tool for risk, compliance, supply chain, CSR, etc.) in these times of budgetary restrictions?
Pay now or pay later because you’re going to pay eventually. Outsourcing manufacturing to China and other countries around the world can be a cost-effective move, but if companies are not aware of the inherent EHS risks, that move could end up costing more than the anticipated savings. Key vulnerabilities such as different ethical standards and out-of-sight operational misconduct can bury a business in legal, ethical and operational problems.
For example, Costco Wholesale was sued in a California court in August 2015 for purchasing and then selling to consumers farmed shrimp from Thailand, which are fed a diet of cheap fish caught at sea in areas where there have been media and NGO reports that unpaid forced labor is widespread. While we cannot say it is directly a cause, Costco fell more than 1% in Nasdaq ratings right after the suit and resulting press.
Also, the lawsuit seeks an injunction to prevent any further sales by Costo and compensation for purchasers of the shrimp products. Can you imagine pulling all that product from shelves and figuring out how to reimburse customers? Can you imagine the potential fallout of such widespread market failure?
There is no way to assure an ethical supply chain without a database. Any product now has multiple touch points in the global economy. Supply chain vulnerabilities need to be identified and addressed on an ongoing basis at all these touch points.
Q: Fast-forward 10 years from now. When we look back at our present time, is there a specific business process that we will look back upon and say “I can’t believe we used to do it that way!”?
Compliance auditing has long been a first line of defense in managing and controlling potential liabilities for non-conformance with social, governance and EHS principles in a supply chain. But there is little evidence that it alone has led to sustained improvements in many issues, such as working hours, health & safety violations, or social issues such as freedom of association.
Audits can be a useful tool for identifying problems but, if used alone, they don’t necessarily create the change needed to ensure sustainable improvement to practices. Leading companies are increasingly focusing on a two-track process, integrating the important diagnostic aspect of audit where due diligence of supplier performance is needed, with a growing emphasis on programs that enable and support change at the local level, with one process informing the other on an ongoing basis.
Look, I get it. It comes down to what are the right KPIs for a given company. If you look at CSR reports, it’s often all about what percentage of suppliers were audited for EHS risks. Compliance audits are an easy thing for a company to do, and they are a scalable and replicable tool. I am not saying we should stop audits; audits will always have a role. But in 10 years audits could be used as a checkpoint, as a baseline, and not as the main tool for assessing, remediating, managing and driving EHS performance.
As due diligence processes are evolving, companies will also gather a wider series of indicators to inform the impact of their programs, not just their level of performance. We have already seen advances in the way companies work with suppliers, moving from focusing heavily on auditing towards using new technologies such as worker surveys over mobile phones, and collaborative efforts at online training to engage suppliers and workers in participating in a more equitable approach to find joint solutions.
Leading brands and retailers will need to increasingly develop innovative approaches to managing risks within their supply chains and promote sustainable improvements in performance
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SPF Americas 2016 will take place on October 4-5 in Chicago, and will bring together more than 500 EHS, Sustainability, Risk and IT professionals from the world’s largest corporations. Register today and don’t miss out on 50+ sessions and countless opportunities to network with your peers.