How can Reputational Risk Originate in Your Supply Chain?
Table of Contents
Reputational risks to organizations include threats to their business reputation and credibility within the market that can impact revenue generation and the long-term sustainability of the business.
What is reputational risk?
Reputational risk refers to potential harm to an organization’s name and credibility, negatively impacting its revenue. It can be challenging to measure as it can manifest in various forms. It can occur directly through actions by the organization itself or indirectly through the actions of an employee or employees. It can also be through associations with third-party businesses.
It can cause significant disruptions to the organization, damaging its reputation and requiring the organization to invest finances and resources into repairing its standing. With the ever-increasing complexity of global supply chains, one area that organizations are vulnerable to is reputational risks that originate in their supply chains.
The importance of understanding reputational risk
Although risk has always been a factor that organizations must consider, it has never had the potential to inflict such profound damage as it does today, especially in such a short timeframe.
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 to try and mitigate the damage.
The immediacy of news and publishing, attributed mainly to various social media platforms, means it is difficult to stem the tide of public opinion and prevent news from being published and read in a far shorter timeframe. This significantly increases the potential of reputational damage occurring expeditiously.
Many businesses, especially large corporations, must be wary of such damage due to how their value is assessed: market valuations derived from ‘assets,’ such as brand equity and intellectual property, are at risk of damaging situations that could weaken the brand they have spent time building.
This is mainly attributable to such valuations being challenging to quantify. Research shows that “intangible factors account for 81% of a public company’s market value”. Such market value can quickly drop in the case of a scandal and can have a negative financial impact on the organization.
What are reputational risks in supply chains?
Organizations must be aware of several reputational risks in the supply chain, especially concerning Environmental, Social and Governance and achieving sustainability. Failure to consider and prioritize these reputational risks can profoundly impact the organization’s longevity.
Organizations that neglect to research suppliers properly run the risk of forming relationships with those that engage in practices that cause direct harm to the environment.
This could include using harmful chemicals or illegally dumping waste; either of these situations would have a detrimental impact on businesses in a range of industries and lead to negative publicity and decreases in revenue from end consumers.
Human rights abuse
As with environmental violations committed by suppliers, human rights abuse can be equally devastating for unsuspecting organizations. This can take various forms, including child or forced labor, both of which are exploitative and equate to forms of modern slavery.
Product quality & safety
Issues can occur when suppliers source and provide products not adhering to relevant industry regulations. Failure to identify these issues before embarking on a relationship with the supplier can cause problems related to product safety, leading to products needing to be recalled and directly harming the organization’s end customers.
Ethical violations in supply chains relate to instances of unethical practices, including collusion, corruption, and bribery. These could include cases of kickbacks to award a supplier a contract or goods or services being misrepresented.
Organizations should be aware that these practices are relatively common and even acceptable in some parts of the world.
In instances of corruption, this can also lead to environmental violations and human rights abuses. Once corruption in an organization’s supply chain becomes public knowledge, the repercussions from the perceptions of end customers and suppliers can wreak havoc on the business’ reputation.
Mitigating Reputational risk in supply chains
It is essential, therefore, to establish a reputational risk management framework to identify and resolve 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 critical suppliers will then also increase.
Naturally, supplier compliance 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.
Supplier reputational risk frameworks
Organizations should refine and adopt supplier reputational risk frameworks to reduce or eliminate the threat of supplier reputational risks. A set of criteria should be in place to evaluate the supplier’s reputation and identify any issues that could threaten the organization and impact its reputation.
These should vary according to the needs of each organization, but the following provides guidance on what needs to be considered as a basic framework for supplier risk management.
Ensure that suppliers’ reputations in the market are thoroughly researched and analyzed. This should include an analysis of their industry reputation and how they are perceived in the media. Organizations should also assess how the potential supplier is viewed by fellow businesses and their satisfaction levels from their existing business relationships.
Gaining insights into a supplier’s financial stability should be a key consideration and provides a clear insight into their viability as a long-term partner for your organization. This ensures that the supplier can fulfill its contractual obligations and reliably play its role in your supply chain.
In addition to obtaining insights into suppliers’ financial viability, organizations should evaluate suppliers’ ability to maintain operations, outline and implement quality control processes, and meet the required standards to provide goods or services to the required timeframes.
Compliance with regulations
Detailed checks should be undertaken to ascertain whether the supplier fully complies with laws and regulations and whether there have been previous instances where regulations have been broken.
While assessing the supplier against laws and regulations in its jurisdiction is important, organizations should also ensure that the supplier holds up against scrutiny related to broader ESG concerns to ensure that reputational risks are minimized.
Environmental, Social and Governance
This analysis of ESG standards should include more than just compliance with regulations; organizations should perform detailed assessments for various other concerns. This should include research on problems with the supplier’s record related to human rights, labor practices and its broader environmental impact.
Article updated September 2023