The recent Patties Foods frozen berries scandal is a stark warning for directors about supply-chain risks and the role they play in managing those risks, writes Louise Pocock from our Centre for Governance Excellence and Innovation.
Patties Foods recently recalled frozen berries potentially contaminated with Hepatitis A. Poor hygiene among workers and contaminated water supplies are suspected to be behind the contamination.
In the wake of the crisis, the Australian Institute of Company Directors’ Centre for Governance Excellence and Innovation spoke to Dr Richard Welford, chair of consulting firm CSR Asia, about supply-chain risks and the role of directors in managing those risks. Dr Welford has more than 20 years’ experience working in the fields of social responsibility and environmental management. He has worked with companies on developing their corporate social responsibility (CSR) strategies and on policies and implementation plans covering a range of issues including governance, supply-chain risks, human rights, community investment, poverty alleviation, conservation and biodiversity.
Company Director: How have the supply chains of Australian companies changed in recent times, particularly with regard to the influence of Asian labour markets?
Richard Welford: Like all companies, Australian businesses have to compete in a global marketplace which is ever more competitive. In an attempt to source from lower-cost suppliers, many have turned to Asian markets in order to maintain their price competitiveness. That brings with it risks associated with poorly enforced labour laws, poor health and safety practices, and even potential human rights abuses. The reputation and brand risks of being associated with breaches of basic labour rights in developing countries can be enormous. The media is now more and more interested in exposing poor practices of large brand name companies and consumers are increasingly willing to punish such companies through their purchasing decisions.
CD: Do the external factors that expand supply-chain options for Australian companies, such as the globalisation of labour markets, actually increase risks for those companies?
RW: Yes, it is now pretty much possible to source from anywhere in the world. Logistics have improved and we have found innovative ways to package and protect products, but the biggest driver for outsourcing remains low wages. Companies in developed countries have been seeing more and more outsourcing to low-wage economies for the last two decades. But as some of those economies have developed and wages have started to rise (for example, in China) then businesses have had to look towards even newer markets where wages remain low. This has often led to accusations of exploitation of labour in the least developed countries. It has also led to accusations that large sourcers have paid scant regard to the environmental impacts of their purchasing decisions.
CD: What are the key supply-chain risks for organisations sourcing materials from Asia?
RW: There are emerging risks associated with accusations of using “modern-day slavery” in supply chains in Asia. These risks are hard to manage since they exist not in the first tier of a company’s supply chains but often deep down the supply chain which traditional compliance auditing fails to address.
CD: Does corporate Australia have appropriate risk-management frameworks in place to deal with supply-chain risks? What sectors handle it the best and which ones have the most room to improve?
RW: I have been surprised to see how unsophisticated many Australian companies are in terms of their supply-chains management and identification of their risks. I did not expect to see so little action on supply-chains issues in a global environment where consumers are becoming more aware of issues and scandals involving labour abuses, poor health and safety and growing environmental concerns.
Some Australian companies have good systems in place to audit their direct first-tier suppliers but increasingly this is not where the risks are. Emerging concerns about human rights abuses in seafood, in extractives and agriculture more widely is where some key risks exist and I am seeing a lack of action in this area from many Australian brands.
CD: What can boards do to better manage supply-chain risks, especially as supply chains continue to increase in complexity?
RW: The starting point is to examine carefully what potential risks face the company and how those risks could damage reputation, image, trust, brands and ultimately profitability. This requires supply chain mapping and risk assessments based on research and stakeholder engagement. While it is impossible to identify all risks, we know about certain risks that are inherent in some industries and risks that can often be country-specific. Investing in a better understanding of the supply chain and managing relationships will significantly reduce the potential for bad publicity, supply chain failures and campaigns against brands.
CD: How should boards balance the growing pressure to reduce costs while also ensuring quality assurance, control and health, safety, and environment standards are maintained?
RW: The question assumes that there is a trade-off and I do not necessarily agree with that premise. Experience has shown me that investing in improvements in quality, productivity, health and safety, and labour practices along the supply chain, will actually make that supply chain more secure, more productive and ultimately more competitive. It is poor supply-chain management and a lack of engagement with labour, health and environmental issues that lead to supply-chain disruptions because of poor quality, strikes, logistics failures, product contamination and community conflicts.
CD: What should directors do in the event of a supply-chain crisis, such as the recent Patties Foods recall?
RW: Always be prepared for the unexpected. No company can reduce their risks to zero but the approach that a responsible business will take is clear. From the outset it will have immediate, open and honest communications about what has occurred and what went wrong – denial never works with a sophisticated media. Ongoing, updated communications should reveal the source of problems but also the immediate responses that are being taken. Longer term, the business needs to be open about what it has learned from the crisis and how they are putting in place systems and procedures to ensure that such a situation is not repeated.
The Centre for Governance Excellence and Innovation is a resource centre that champions new thinking with the aim of driving organisational performance.
Read more: ASX200 Roundtable Summary: Environmental, social and governance issues in context.
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