Ethical supply chains – investigation and risk prevention

Ethical supply chain: investigation and risk prevention

As companies chase better costs to remain viable, the possibility of building a supply chain with poor ethical practices increases. They must balance opportunity with deep analysis of their suppliers to avoid reputational and financial risks.

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Human rights, child labour, environmental impacts and health and safety practices are just some of the ethical issues that organisations must consider when building their supply chains, especially when they extend beyond their own borders and into emerging markets. If they execute bad judgment in just one aspect, their reputation and financial future could be promptly shattered.

“If you look at the major risk surveys conducted around the world, you will find ‘threat to reputation and brand’ is usually the number two or three risk,” says Greg Daniel, Partner, Social Media Intelligence Group, KPMG.

Robin Tarr, Director, Forensic, KPMG, says in addition to financial loss, rapid decline in consumer confidence can often be “coup de gras” for a non-ethical supply chain.

“There is the potential for regulators to place significant fines on organisations that are found to be involved with corrupt activity,” he says. “There could also be the costs associated with dealing with the matter, for example engaging legal teams, bringing in investigators and other specialists, not to mention the non-financial costs associated with reputational damage which can sometimes be the death knell for organisations caught up in a bribery scandal.”

Competition leads to risk

In today’s competitive and technology driven business world, the pressure to move quickly and cut costs means companies are seeking cheaper and more flexible suppliers, explains Richard Boele, Partner, Human Rights and Social Impact, KPMG.

“That has introduced a range of risks, new jurisdictions and new challenges, and you need new capabilities within your procurement functions to manage these,” he says.

Boele says the term ‘ethical supply chain’, or ethical sourcing, generally refers to labour practices and how workers are treated in terms of conditions and pay. Environmental impact is a large aspect, while ethics, such as bribery and corruption, are also linked. These issues are not restricted to overseas suppliers, with many Australian businesses recently coming under fire.

“In the last 2 years the Fair Work Ombudsman (FWO) has had a very strong focus on raising public awareness of poor labour practices in Australian supply chains. They’ve done that by targeting major retailers, especially around services like cleaners, trolleys, security guards and agricultural labour,” Boele says.

He says the triggers of poor practices are usually illegal, and can stem from many countries.

“Certainly the cases of overseas-based organised crime sending people to Australia to pick fruit and vegetables shows that any Australian business can be exposed to ethical supply chain risks,” he says.

Taking control of the supply chain

With the potential damage to reputation and finances vast, companies must act to ensure their supply chain processes are ethical at every touch point. Tarr says to do this, they must know as much as possible about their suppliers and third-party intermediaries.

“It is about undertaking adequate and effective risk-based due diligence to reach a level of comfort with regards to the integrity of suppliers, contractors, agents and other intermediaries in the extended supply chain,” he says.

Tarr says many companies grapple with sourcing enough detailed information about suppliers to reach that level of comfort.

“That’s a complex challenge, particularly when suppliers have origins in foreign jurisdictions or developing markets where information may not be readily available to a business in Australia,” he says.

As discussed in Supply chain risk – a global perspective, having sound supplier management processes is one way to take control. In the case of unearthing ethical issues, forensic integrity due diligence intelligence services, forensic technology and social media intelligence monitoring can also help.

Forensic approaches

Engaging forensic experts and forensic technology such as an automated due diligence intelligence monitoring platform may sound complicated, but Tarr says it is relatively straightforward.

“At KPMG our integrity due diligence team has access to a vast array of publicly available databases to have a look at a supplier’s corporate structure, who the beneficial owners are, if they are exposed to sanctions issues or associated with politically exposed persons, for example,” Tarr says.

He says this can help to establish an up-to-date “rich and broad level of detailed information” to inform a decision on whether to proceed with a commercial transaction, or engage with a business or third-party intermediary.

A social media sweep

In a similar way to forensic tools, exploring social media intelligence can provide useful information on a supplier’s behaviour. Daniel says there is often a “long trail of conversations taking place in the world of ‘unstructured data’”, that can now be captured and analysed.

“A lot of issues around ethical behaviour are driven by individuals who have conversations on social media,” he says.

He says it is possible to track and analyse relationships between people that are otherwise deliberately disguised, or to uncover undisclosed business activities.

“Social media intelligence can also help with financial due diligence. We can look at what staff are saying about a business such workplace practices, bullying, and other activities that may not be evident in a normal financial review,” he says.

Monitoring the social media discussions of human rights and environmental activist groups can also raise flags about potential ethical issues in companies or countries.

Dedicated ethical sourcing advice

In addition to gaining knowledge, engaging forensics and reviewing social media, Boele says an overall risk governance and management approach is critical to keeping on top of ethical sourcing risks. He says these are best integrated or retro-fitted into existing procurement approaches.

“Our specialist ethical sourcing team is focused on designing and building risk governance and management solutions for this specialist area. We are also very engaged with leadership buy-in to the level of risk. Their appetite to manage issues like child labour and modern slavery needs to be tested and established,” he says.

Ongoing benefit

Taking control of ethical risk in a supply chain takes a multi-faceted approach. Everyone from Boards through to procurement and the people dealing with suppliers need to be on the lookout for issues.

Tarr is optimistic that despite the complexities, organisations are putting ethical supply chains higher on their agendas.

“As regulators increase investigation and enforcement activity which has the potential to impact the bottom line, the penny is starting to drop for these companies,” he says.

More on Supply chain risk and opportunity

As companies link to countless suppliers, they are increasingly exposed to a myriad of risks that could severely damage their finances, reputation and future competitiveness. Find out more in Supply chain risk – a global perspective.

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