What happens when there is a failure in your supply chain? I recently had the chance to visit with Jared Connors, Senior Subject Matter Expert, Corporate Social Responsibility at Assent Compliance on that topic. We considered what the impact is on organizations that have a supply chain compliance failure and what should your response be going forward.

We began with a review of some significant compliance failures in the area of Corporate Social Responsibility (CSR) and in the product regulation arena. Connors related that a very well-known case study in the CSR world that involves Nestlé S.A. and their shrimp boat fleets near Thailand. In this is a situation Nestlé found labor rights violations on commercial shrimp boat fleets. The company came forward and determined it had to address these issues into its supply chain, even though it was not the company’s Tier One suppliers that had this issue. Nestlé moved to create a program to address these issues, gain transparency within their supply chain and make their supply chain aware of their expectations to comply with labor laws locally. Obviously, this was in the context of modern-day slavery regulations but the company recognized it had a problem. To Connors, it is “a great example of a company who did the probably the best possible job they could with addressing the risk issue because they, they opened their own kimono. They were willing to talk about what was going on. They were talking about what they needed to be able to do about it.”

The second example Connors cited was in the area of product recall. In 2017, Performance Designed Products, LLC, maker of Energizer-branded chargers for gaming console controllers, recalled 121,000 of its Xbox One 2X Smart Chargers after receiving reports about overheating devices. This story is not as widely known, “but for those of us in the materials compliance space, many of us probably recall this story a few years back where an organization had to go through a massive recall because of a substance violation.” He said the problem was in the product material which went into the console. He said what the fallout “really taught us was while an organization may have been gathering information from their suppliers, they may not have been gathering enough information or the right information. It was a wakeup call for companies in their materials compliance programs to say, what’s the right information I should be chasing and how should I be evaluating this?”

Connors said both examples spoke directly to questions such as “What are you trying to get out of your program? What do you view as successful? Is it simply just checking a box and having that response from a supplier that may not necessarily be validated? Are you actually trying to walk the talk here of what your Code of Conduct says?”

Interestingly, Connors pointed to the area of conflict minerals for another example of the direction ethical sourcing is taking. He noted there is a legal reporting obligation for conflict minerals to do with the sourcing of tin, tantalum, tungsten and gold. However, he has seen organizations go beyond what the regulation requires. This means they are going beyond these four minerals and saying to their suppliers they want fuller and more robust disclosures to help protect themselves and more fully fulfill their ethical obligations. A key reason is what Connors termed “the name-shame game” and companies want to get ahead of the curve now by putting in procedures to help control this issue and manage this risk.

We next turned to what a compliant process should look like. It begins with a risk assessment to see what your organization has in place or what it might need. Does it have a conflict minerals program, a human trafficking and slavery program, or a product regulatory program? From there it moves to a gathering of information on your suppliers in terms of their policies and procedures  and gathering substance data from your suppliers.

You should move to have a management procedure in place, which lays out what you are going to be doing throughout the year. It also sets the next steps of the workflow, which could be either data collection or data analysis depending on how you gathered the data, whether it is directly or indirectly from your suppliers. Next, how is your organization going to set expectations for corrective actions, both inside and outside the company? What will the expectation look like and what will your company to report on? Connors said, “These are really important aspects to understand, so you start with your management procedure. Go through your data collection analysis and your corrective, remediation phase. From there move into your reporting.”

We concluded by looking at what some supply chain compliance program reporting might look like. Connors began with some basic questions such as: “What does my reporting look like? What kind of KPIs am I going to try and set?” He then provided an example of a company which set an expectation that it was going to report on the results of its CSR survey. In this company’s opinion the results came back very poorly, however because it was the first year of the survey, many suppliers were only just learning of the expectations. Here the answer might be rather than setting the expectation right off that your organization is going to publish KPIs on everything you gather from your suppliers; the focus should be on “planting the seed with your suppliers. Then ramping them up and helping them walk the path, holding their hand and taking them down the road to make these expectations are to make these changes. And that’s what’s really important for those in the most effective programs.”

The failures of supply chain risk management are becoming more costly in the realm of public reputational damage. The response is more efficient and effective risk management.

Check out the five part podcast series I am running this week on Supply Chain Risk Management, sponsored by Assent Compliance by clicking here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019