Reputational Risk Management in Contemporary Procurement Operations
Becoming more diligent regarding the business practices of your customers is rapidly proving to be an incredibly important part of procurement operations. With supply chains stretching the breadth of the planet, brands need to be confident their reputation isn’t at risk through association with an unscrupulous supplier.
Bad news travels fast in the modern world and, thanks to the 24/7 news cycle and social media engagement, a brand’s reputation can be dragged through the dirt in a matter of moments should they fail to adequately manage supply chain risk. This kind of reputational damage can often be unbelievable hard – or even impossible – to fix once it’s been suffered, so there is a real palpable need to nip it in the bud.
Customers are becoming increasingly interested in the ways the products they purchase are made and supplied and are gravitating towards those brands which are transparent and open regarding their supply chains and their efforts to combat unethical or illegal practices within them.
Customers
The customer can often seem far removed from the procurement department as they rarely, if ever, have to deal with them directly. However, they are your organization’s most important stakeholder and should be in your thoughts when vetting suppliers and deciding what is acceptable or unacceptable.
When it comes to purchasing products, ethical customers are typically asking themselves who made these products, where were the materials sourced from, and does the manufacturer share my own values when it comes to sustainable and ethical practices? Research tells us that the modern customer does not want their money to, either directly or indirectly, support companies which harm the planet – whether that be through greenhouse gas (GHG) emissions, human rights abuses, habitat loss, and loss of biodiversity – and are even happy to pay more if it means guaranteeing this to not be the case.
"Specifically, consumers want to know that their purchasing power is helping to reduce GHG emissions, support water access, availability, and conservation, support safe working environments, protecting sensitive forests and ecosystems, and supporting products free from human rights abuses such as those associated with the utilization of child labor,” reports the BDO Alliance US.
And, should customers discover a brand does have this kind of red in its ledger, they will not hesitate to shout it from the rooftops, either through social media, via news outlets, or by reporting them directly to regulatory bodies. As we’ve already said, once this kind of news breaks, it’s impossible to get the toothpaste back in the tube, and reputational damage such as this has meant the end for many companies.
Reputational Risk Management
The best way to avoid the risk of this kind of reputational damage is to adopt the same mindset as our hypothetical customer when purchasing products or materials for your organization.
Do you know who your suppliers are? Do you know and understand their values? What regulatory and cultural differences might they be subject to? Does your organization have a robust system in place for investigating and vetting suppliers?
If you have answered no to one or more of these questions, then your organization is undoubtably at risk of doing business with a supplier which fails to meet acceptable ethical or legal standards and opening yourself up to serious reputational harm. The time is now to put policies in place to vet all existing suppliers and identify those which pose such a risk.
The reach of this policy will depend largely on the size of your supplier network – larger organizations will tend to have many more links in the supply chain they need to comb through. When risky suppliers are identified, most organizations will simply cut ties with them. However, many choose instead to work with those suppliers to help them come more in line with expectations and thus continue doing business with them.
Your ability to do so will depend entirely on the resources you have available to you.
"Companies with only a few suppliers often have an easier time discussing reputational risk as a part of their commercial success,” continues BDO. "However, companies with numerous suppliers and complex value chains will often find it challenging to analyze their procurement process to better understand their suppliers, sourcing locations and issues. A thorough assessment of a company’s suppliers can help reduce risk, plan for contingencies, build resiliency into its supply chains, and above all - protect its brand.”
Final Thoughts
Reputational risk management is becoming increasingly crucial as customers turn to ethical consumption in ever greater numbers. Those procurement teams which want their parent organizations to thrive in this environment need to ensure risk is being responsibly managed and suppliers are thoroughly vetted on an ongoing basis.