How can Reputational Risk Originate in Your Supply Chain?
Reputational Risk Management in Procurement
It might seem as if the worlds of Procurement and Supply Chain are vastly different from reputational risk management. What would a back-office function such as Procurement have to do with an organization’s brand or public image? If this question was asked 20-30 years ago the answer would have been ‘very little’, however, times have changed.
Even though Procurement is often the last thing on the minds of many members of the public, according to Costas Xyloyiannis, CEO of HICX, the events of 2020 showed how fragile and dependent large organizations actually are on their supply chains. “People saw how something unexpected somewhere could just make these massive organizations suddenly come to a standstill.”, Costas adds.
Similar to the blockage of the Suez Canal in early 2021, major supply chain failures like these can have a major knock-on effect to a company’s reputation.
Business leaders are aware of the importance of reputational risk:
- ‘Damage to reputation/brand’ has been ranked as 2nd on the list of Top 10 Risks in Aon’s 2019 Global Risk Management Survey
- Deloitte’s Global Survey on Reputation Risk revealed “on average, more than 25% of the company’s market value is directly attributable to its reputation.”
- The same study concluded that “87% of executives rate reputation risk as more important than other strategic risks
- Lastly, “41% of companies that experienced a negative reputation event reported loss of brand value and revenue”
This article will focus what exactly reputational risk is in the context of Procurement and Supply Chain and how to mitigate it.
What is Reputational risk?
Investopedia has provided a good definition of reputational risk:
“Reputational risk is a threat or danger to the good name or standing of a business or entity. Reputational risk can occur in the following ways:
- Directly, as the result of the actions of the company
- Indirectly, due to the actions of an employee or employees
- Tangentially, through other peripheral parties, such as joint venture partners or suppliers
In addition to having good governance practices and transparency, companies need to be socially responsible and environmentally conscious to avoid or minimize reputational risk.”
Key words to focus on from the definition, if you are in a procurement or supply chain industry, are likely to be ‘suppliers’ and ‘governance’.
For example, an aerospace and defense company, a car manufacturer, and a large government department are all likely to be sourcing parts or services from a large number of suppliers, who are probably based in different locations, often internationally. Due to the nature of the supply chain industry, the organization is likely to be exposed to risk in one form or another. For instance, they could be sourcing from suppliers who conduct their business using modern slavery, damage the environment, mishandle sensitive data, or use components which are susceptible to government interference.
The importance of reputational risk
Although risk has always been a factor organizations must consider, it has never before had the chance to inflict as much damage as does today, especially so quickly. In the past, if a company made a mistake, the public relations and marketing teams would have had the time to prepare for when the news went public and release a statement in order to try and mitigate the damage.
In 2021, that is nearly impossible as the immediacy of news and publishing, largely attributed to various social media platforms, means it is difficult to stem the tide of public opinion, and prevent news from travelling instantly. This increases the potential of reputational damage occurring very quickly.
Many businesses, especially large corporations, must be wary of such damage due to the way their value is assessed:
- Market valuations derived from ‘assets’, such as brand equity and intellectual property, are at risk of damaging situations which could weaken the brand they have spent time building. This is largely attributable to such valuations being difficult to quantify.
- Research shows “intangible factors account for 81% of a public company’s market value”. Such market value can easily drop in the case of scandal and can have a negative (financial) impact on the company.
Mitigating Reputational risk
It is essential therefore to establish a reputational risk management framework in order to manage any potential risks due to the suppliers you are collaborating with. This is especially important as companies grow and expand their operations, as, in such cases, it is likely that reliance on key suppliers will then also increase.
Naturally, management requirements will also increase, as well as the need for relevant supplier data which can be used to identify and then reduce exposure to reputational risks. It is vital to be proactive rather than reactive. Do not wait for risks and threats to come to light before dealing with them. Otherwise, rather than reputational risk management, it becomes crisis management.
Article updated September 2021