Publication
International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
Global | Publication | February 2016
More than ever, businesses are using global supply chains to remain competitive. Often this involves businesses transferring parts of their supply chains to developing nations to benefit from reduced costs, particularly labour costs. At the same time as supply chains are becoming global and unwieldy, the community, regulators and NGOs are holding businesses accountable for all parts of their supply chain. This poses real challenges for businesses, whose reputations are now reliant upon the conduct of disparate suppliers, over whom they have traditionally sought to have little control.
What follows is a summary of some of the different ways that a business’s supply chain can impact its reputation. In short, supply chain management has become an essential element in minimising a fundamental brand risk. We finish up with some thoughts about managing that risk.
As a critical threshold issue, a business needs to be able to rely upon a supplier to provide products or services of a consistent quality and safety.
The recall of frozen berries sourced from China earlier this year demonstrated the supply chain risk for businesses in the food and retail sector, even in circumstances where it is denied that there was a link between the berries and the hepatitis A outbreak. Supply chain risk is also substantial in the construction and extractive industries. These industries engage numerous contractors and subcontractors on projects, all of which have the ability to impact upon the reputation of the head contractor. A major concern for many mining companies with projects in developing countries can be the behaviour of the private security firms engaged to protect the mine sites.
One substandard element of a supply chain can cause substantial reputational damage. Although supplier selection is often focussed on this issue, processes need to be adopted to routinely review the performance of suppliers.
Supply chains can cause extreme bribery and corruption risk. There are a number of core bribery and corruption (BAC) supply chain risks:
The BAC legal and reputational risk arising from supply chains can keep you awake at night if you do not have a robust compliance program. Such has been the impact of bribery allegations upon a brand that companies have been known to rebrand following bribery allegations.
The last few years have seen a global trend of businesses being held responsible, at least by NGOs and consumers, for the human rights impacts of their entire supply chain.
The Guiding Principles on Business and Human Rights were unanimously adopted by the United Nations in 2011. They have produced an expectation about how businesses will manage their impact on human rights. Human rights due diligence is a core element of the Guiding Principles. The Principles provide that prudent corporations ought to identify and assess actual and potential human rights impacts throughout their entire supply chain. Businesses should then seek to prevent or mitigate those impacts, using whatever leverage is available to them where that negative impact arises from part of their supply chain. The Guiding Principles have become a new global norm.
We are seeing increasing activism in relation to human rights. In Australia, NGOs and the media have recently focussed upon supply chains in industries such as agriculture and food, timber production, mining, fashion and banking. Brand protection requires businesses to be ready for questions about the human rights impact of their entire supply chain, so you should not to wait until the questions are asked before you consider their impact upon human rights.
Popular opinion is also holding businesses accountable for the environmental impacts of their supply chain. Manufacturing, extractive industries and agriculture all have the potential to cause a significant detrimental environmental impact.
Environmental issues are increasingly being viewed as overlapping with human rights. For example water pollution may impact upon the right to life if the pollution prevents local access to clean water. Environmental issues can also impact upon product quality in some industries such as agribusiness, expanding the reputational risk substantially.
Various Australian businesses have introduced Environment policies that extend to supplier selection and continuous review. Most Australian banks have adopted the Equator Principles, which provide a risk management framework in relation to their projects, as well as in connection with their internal environmental and social policies. All of these measures reflect an awareness of the potential impact of environmental impacts upon brand.
Businesses seeking to manage their supply chain risk need to start with a review of their relevant policies and procedures. This should include a gap analysis that will identify the areas for improvement and an audit which tests the effectiveness of existing processes. Areas of focus when considering supply chain risk are highlighted below.
Although inserting appropriate contractual terms requiring suppliers to manage the risks described above is important, it does not provide a complete answer. Businesses cannot rely upon these contractual obligations for legal or brand protection. Other strategies to manage supply chain risk include those outlined in the sections below.
Businesses should make their commitment to human rights, environmental sustainability and zero tolerance for bribery explicit, both in their advertising and in requests for tender. Requests for tenders should state that tenderers are expected to similarly commit to these principles and will need to demonstrate that they are not aware of any breach. This commitment ought to be included in the express selection criteria. Draft contracts presented to suppliers should enshrine these principles.
The most critical element of a supply chain management program is the selection of suppliers. Businesses need to conduct due diligence into their supply chains. This is the primary means by which businesses can control all of the brand risks described in this paper.
The due diligence conducted needs to be responsive to risk. A pragmatic supplier due diligence program ought be developed that focuses resources on high risk suppliers. There is no substitute for visiting suppliers as part of the supplier due diligence.
Supplier due diligence may involve the following steps (and more):
Finally, there are a few other ways of managing the risk posed by existing suppliers. Consider the inclusion of a right to audit in supplier agreements to permit ongoing assessment of risk (and exercise that right!) Adopting a regular program of testing and auditing could have assisted in the horse meat scandal in 2013.
Introduce regular certifications for all suppliers in relation to BAC and other risks. External certifications can be useful to provide peace of mind. At the very least, this demonstrates that the issue remains front of mind for your business.
Consider rolling out training to suppliers as well as your own staff. Hopefully this will stop your suppliers engaging in conduct that can impact adversely upon your brand.
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In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
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