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Risky business: The issues with supply chains

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United Kingdom

The supply chain is often a key risk area for businesses and following COVID-19 and even before, businesses were seeing more scrutiny from customers and regulators alike. Businesses are likely to see a confluence of challenges across the next 12-24 months, with new risks arising around Brexit and supply chains coming to terms with the supply-side and demand-side shocks of COVID-19.

These problems are likely to converge to exacerbate existing issues within already stretched supply chains. As recent media investigations have highlighted, some businesses may already be pushing the boundaries of legal and ethical practice. So how can businesses protect themselves from supply chain malpractice?

Legal requirements
 
There are clear legal requirements that businesses demonstrate what it has done to check its supply chain, its employees and how it avoids and/or deals with any adverse instances of dubious practice.
 
In short, businesses have to demonstrate what it has done to check its supply chain, its employees and how it avoids and/or deals with any adverse instances of dubious practice.
 
These regulatory laws include;

 
Additionally, internationally focused retailers have to comply with many other regulations including recently updated California legislation such as Proposition 65, which regulates the use of certain materials in consumer products. Further to this, depending upon the outcome of the trade talks between the UK and EU, it is possible that UK retailers may have to comply with additional layers of regulation in order to continue to do business with EU member states as 'third country' trading partners. Especially as the EU is currently consulting on industry standards for ESG.  
 
The Trust Test
 
Furthermore, in light of COVID -19, many believe that there will be a sea-change in customers behaviour and customers will want a business that has a supply chain they can trust.  We had already seen a growth an interested in Environment, Social and Governance (ESG), but as part of the 'trust' that customers are looking for,  ESG must be considered by businesses as in increasingly complex supply chains . Many ESG factors can impact corporate supply chains, including environmental practices, energy usage, social responsibility, human rights, child labour, trade security, anti-bribery, health and safety, conflict minerals, and product quality assurance. Risks might impact companies across industries and geographies, or they might be industry- or country-specific.   Some of these are not simply legal requirements are reputational risks to an organisation too.  And businesses must look at these in detail to protect themselves both legally and commercially in the future. I have no doubt that businesses caught in the crosshairs of governmental investigations of facing the ire of concerned investors will change and adapt their processes but key to this will be long term industry wide change.
 
Conclusion
 
Some investors have until relatively recently been focused upon EBITDA at all costs, with some notable exceptions; with many prepared to ride the wave and deal with the supply chain issues that might extend to slavery or environmental abuses as and when they arose. Many businesses, investors and now ratings agencies have pivoted and see a real value in investing in ESG, not merely for the 'sake of it' or as a box-ticking exercise but taking a multi-stakeholder approach with a focus on a legal and longer term ethical responsibility. Businesses and investors should be commended for putting this first and designing supply chains around these issues in a similar way that many leading data-led businesses have structured their privacy controls, that is, by design. By building in these controls from an early point, businesses can maintain margin growth whilst avoiding the need for heavy capital expenditure on reversing procedure or retraining. Personally, I disagree that a government mandated licensing scheme is a simple or suitable resolution to this. Business should take responsibility for its supply chains and compliance in both a legal and moral setting. This way, consumers will vote with their feet and as the issues of equality and environmental protection grow in the minds and behaviours of shoppers, those businesses with strong track records will prosper.

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