November 25, 2015

3 Supply Chain Brand Risks That Can Sabotage Your Brand

Neil Shenoi

conflict_minerals_etc.jpgConfronting the ethical and humanitarian issues that could be hiding in the shady nooks of your end-to-end supply chain is neither easy nor enjoyable to think about. Yet, for the sake of your business’s brand and operations, it’s a necessary inspection. Due to a lack of supply chain visibility, some businesses are caught off guard when accused of using conflict minerals from unverified sources or utilizing slave labor at some stage of production – activities which may have transpired at a sub-tier level despite the company’s efforts to prevent them. With a greater public focus on corporate social responsibility, the widespread use of social media, and the advent of better technology for mapping sub-tier supplier visibility, businesses need to take a deeper look at the inner-workings of their supply chains to avoid the wrong attention.

In this post, we explore three modern supply chain brand risks that could be sabotaging your supply chain without your knowledge: counterfeit materials and products, slave labor and human trafficking, and conflict minerals.

1. Counterfeit Materials and Products

While globalized supply chains and world markets have given businesses tremendous opportunities to grow and thrive, broad global demand also stokes the production of counterfeit goods and intellectual property infringement. Counterfeiting is a tremendous brand risk because its prevalence affects all industries at various levels, from the consumer to the brand owner to the companies that unwittingly utilize or sell fraudulent products.

In the pharmaceutical industry, for example, counterfeiting poses tremendous consumer health and safety risks. At every corner of the pharmaceutical supply chain – from sourcing raw materials to production to distribution – there are plenty of opportunities to interject mislabeled, forged, or fake ingredients and materials. In 2006, over 78 people died in Panama from ingesting a cough medicine that used unauthorized ingredients from China. It was discovered that the cough syrup contained diethylene glycol (used in antifreeze) instead of glycerin, an inactive ingredient in most cough syrups. Authorities found that barrels were mislabeled to indicate they contained glycerin, when in fact the barrels were full of diethylene glycol.

Successful brands cannot afford risk the consequences of inauthentic goods and components. Properly verifying the chain of transfer from supplier to distributor to customer is critical to ensuring counterfeit products don’t infiltrate your supply chain and tarnish your brand.

2. Slave Labor and Human Trafficking

Slavery and human trafficking are crimes under state, federal, and international law. Yet slavery and human trafficking still exist in every country, even in the United States. From mines to factories, forced labor and child labor plague supply chains worldwide, yet consumers inadvertently abet these crimes by purchasing goods whose production is facilitated by slave labor. Due to the criminal natures of slavery and human trafficking, they are usually hidden from view and challenging to uncover, making it difficult for procurement professionals to assure their supply chains do not unwittingly involve exploitative labor.

Moral bankruptcy aside, the use of forced labor is a supply chain brand risk your business should be avoided at all costs. In September 2009, the United States Department of Labor released a report detailing 122 goods from 58 countries believed to be produced by labor in violation of international standards. Governments and consumers are demanding that businesses act to implement ethical sourcing programs. If found to be sourcing from suppliers using exploitative labor, a business can face legal ramifications, suffer reputational damage, and risk losing both consumer confidence and market share.

In recent years, significant legislative efforts have been underway to identify and punish perpetrators of slave labor and human trafficking. However, there has been a lack of legislative momentum towards addressing the wider market for tainted goods and products. Given your supply chain is compliant with international labor laws, publishing a formal statement of supply chain compliance can help assure supply chain integrity, build consumer trust, retain market share, and ensure compliance with international labor laws.

3. Conflict Minerals Rules

The term “conflict minerals” refers to minerals including tantalum, tin, tungsten, tantalum, and gold – also referred to as “3TG” – that are utilized in the production of various products, predominantly consumer electronics. In 2010, the United States Congress passed the Dodd-Frank Act which requires certain companies to disclose their use of conflict minerals, due to concerns that the exploitation and trade of conflict minerals by armed groups is helping finance genocide in the Democratic Republic of Congo, one of the main sources of these metals. As per the U.S. Securities and Exchange Commission, the Conflict Mineral Rule requires: 1) the company files reports with the SEC under the Exchange Act, and 2.) the minerals are “necessary to the functionality or production” of a product manufactured or contracted by said company.

However, ongoing litigation concerning key reporting and disclosure requirements has made conflict mineral compliance and 3TG transparency an industry-wide challenge. The Dodd-Frank Act requires compliance from nearly 6,000 companies, companies which are waiting for answers from nearly 250,000 suppliers. If a company sources minerals from the region, it must determine if they are from banned sources and report the findings to the SEC. Dodd-Frank compliance can be an arduous and expensive process, but it pales in comparison to the potential bad press, damage to reputation, and loss of business from non-compliance.

Nevertheless, some of the world’s biggest companies, like HP and Intel, have made commitments to being “conflict-mineral free.” Though difficult promises to upkeep, they’ve recognized the inherent brand risk of non-compliance, having proactively invested in conflict mineral compliance solutions to improve their supply chain transparency. Conflict mineral compliance services can help achieve reporting compliance, manage on-going compliance risks, increase the level of sub-tier engagement, and provide a repeatable process for quality data collection and reporting.

Take Proactive Measures

Though mired in geo-political complexity, the aforementioned brand risks are not untreatable – they just require transparency and proper protocol. Once supply chain visibility solutions are put in place, you can more easily root out malignancies in your supply chain. Strategic implementation of these services can establish a track record of ethical procurement activities, encourage investment in your business, and strengthen the brand. In short, resiliency pays off.

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Topics: supply chain visibility, supply chain risk management, conflict minerals compliance