The tragic meltdown at Japan’s Fukushima nuclear-power plant in 2011 had an unexpected but dire impact on car factories all over the world. Near the plant was the only factory in the world that made Xirallic paint pigment, a magical material that gives our cars a unique glint; it shut down. Subsequently, production in many car plants around the world ground to a halt as the brutal reality of third-party and supply chain risks hit home. About a decade later, China’s policies to combat covid triggered a significant migration of supply chains from there to Vietnam, Bangladesh, India and other countries. This diversification process paradoxically creates new risks as global companies seek out new and untested supply centres and partners.
Supply chain risk is a modern day reality and can emanate from a variety of sources, ranging from natural disasters to government policies and a host of other unforeseen events.
CDP, a global non-profit organization that runs one of the world’s leading environmental disclosure platforms, reported that companies face up to $120 billion in costs from environmental risks in their supply chains between 2021 and 2026.
I recently met a senior leader at a major retailer in West Asia who said he was having sleepless nights since many of his key garment suppliers were based in Sri Lanka, a country rocked in recent times by political instability marked by widespread rioting and protests. He wondered if there was an efficient way to monitor the on-the-ground situation there.
In an era of climate change, political upheavals and simultaneous pressure to adhere to Environmental, Social and Governance (ESG) norms and United Nations Sustainable Development goals, this risk coverage needs to include several dimensions in order to be effective. To begin with, companies are investing heavily to monitor key nodes of their value chains. Asian Paints’ Board Risk Management Committee, for example, monitors “material availability and inflation” risk as part of its core mandate. Documented processes are triggered in the event of a disruption, so as to ensure that production is not impacted and business revenue is protected. ESG and UNSDG goal monitoring has rapidly moved from a box-ticking exercise to a genuine effort within many organizations that are keen to do “good” business.
But how does a company track what its supply chain partners are implementing? Whilst much of the measurement is through internally generated data, certain external content can be leveraged too: a leading retailer from the UK engaged an outsourcing firm to study transport facilities around the factories of its key suppliers in a few countries. This retailer recognized that these facilities constitute important social infrastructure, especially for the safety of their women workers. The output of the study is expected to feed decisions around how much business to do with which supplier, and indeed if there is a case to co-invest with any supplier to strengthen transport facilities for factory workers.
It is important to remember that risk management has to be part of the relationship design, not an afterthought. Progressive companies have well established processes that include:
One, screening all new partners to ensure they are not on any law enforcement watch-lists or have not been sanctioned by any government or the UN. Artificial Intelligence models are playing an increasingly important role in this screening process and will probably be automated entirely in 18 to 24 months.
Two, should the initial screening process throw up any red flags, companies look towards specialist risk consultancies such as Integrity Risk International or Aperio Intelligence to do a deeper dive as part of a diligence exercise, so that an informed ‘go’ or ‘no go’ decision can be taken with respect to doing business with the particular partner.
Three, once a partner is onboarded and initial diligence and compliance exercises are completed, it is advisable to switch on a monitoring process to stay ahead of any emerging risks. These monitoring systems cover at least geo-political risks, environmental risks, key person risks, catastrophe related risks (such as floods) and, of course, financial risks.
There are several risks that can and should be managed appropriately and continuously by companies. Monitoring the ecosystem around a remotely located factory, or the news around a politically connected supplier is relatively easy to do, thanks to the data and content platforms of companies such as Dow Jones’ Factiva or Rzolut’s ContentStream.
It is widely estimated that approximately 80-90% of an automobile’s value comes from the assembly system’s supply chain, given high levels of outsourcing. Maruti Suzuki, thus, would be sourcing almost ₹70,000 crore worth of products from third parties; this includes various components such as transmission systems, power-trains, electrical systems and several parts that are sourced globally. In addition, the supply chain is multi-tiered. Even if a Tier 3 supplier gets disrupted, such as the Xirallic pigment company in Japan, the entire industry can grind to a halt. Managed badly, supply-chain disruptions can strike a lethal blow to the organization. Managed well, however, it can become an important source of competitive advantage.
