What sort of fallout can you expect to see from a supply chain scandal? What should you do when a risky event takes place? Tune in to today’s podcast on risk in procurement and supply chain, featuring ISM CEO Tom Derry and Procurious Founder Tania Seary.
Today we’re faced with complex supply chain challenges. In fact, it’s hard to think of an area of the business that modern procurement doesn’t touch, ranging from employment law, to climate change, to human rights.
As the complexity of supply chains continues to increase, so too does the number of issues we need to deal with, which is why supply chain disruption is often quoted as the number one concern of CEOs. They know that supply chain failures can have a dramatic impact on their public reputation – and their company share price.
ISM CEO Tom Derry joined Procurious to discuss how a supply chain disruption can damage an organisation, and what can be done to mitigate the risk.
What kind of fallout is a company likely to see as a result of a supply chain scandal?
Tom: From a Board and CEO point of view, there was an academic study written by a professor out of Georgia Tech a few years back that revealed that if there’s a publicly announced supply chain disruption, that company will experience a lower stock price for at least five years after the event. We’re talking about a catastrophic destruction of market cap and value for companies that experience disruption.
The other fallout is a permanent loss of sales. My 21-year-old daughter makes decisions about the products she buys based on what she knows about the company’s social and sustainability practices. If she hears something about a company that she doesn’t agree with, that company has lost her business for the rest of her life – that could be as much as 80 years of lost sales!
On the other hand, companies that have built up good social equity because of their CSR and sustainability practices don’t tend to suffer the same kind of heavy damage.
What are the common-sense steps to take to ensure your risk management is in order?
Tom: The first thing to understand is this doesn’t require an expensive consultant to run 10,000 Monte-Carlo simulations, give you a probability assessment or sell you a 2×2 matrix.
For procurement and supply management professionals, it’s important to look beyond the first tier of suppliers to where your organisation is really vulnerable – three or four levels down.
You should know every single-source supplier in your supply base, and you should have plans in place for immediately dealing with an issue with one of those sources.
You need to beware of geopolitical risk. If something changes – if an industry gets nationalised or if someone unexpectedly wins an election or referendum – what will your answer be if a scenario like that develops?
Look at the other side of the company. What are the products and services you’re selling, and what in your supply base could put that at risk? We should understand how the activities we are performing help support the business in making its money, and look there for risks that could really disrupt the business.
How do you minimise fallout from a risk event taking place?
Tom: Wait. In the heat of the moment, it’s a natural human feeling to get defensive when you’re being criticised. An immediate instinct might be to get out there and say that the fault lies with someone else, but that would be a mistake. Don’t give into that instinct to blame, deny and defend. Instead, take a measured view of what’s going on, then accept ownership and responsibility. People will give you a lot of credit for being open, straightforward and transparent about a mistake. If you try to dodge it, it’s going to get worse before it gets better.
Part Five of Tuesdays with Tom is available now. Click here to sign up and hear ISM CEO Tom Derry discuss what sort of fallout you can expect to see from a supply chain scandal and what should you do when a risky event takes place?