When choosing a supplier, operations checklist traditionally includes factors such as durable contract terms, a smooth delivery schedule, the financial viability of the supplier, and, of course, price. But you should also consider how your suppliers reflect on your company. Although operations executives understand that suppliers directly impact perceptions of their companies, few translate this into specific criteria when evaluating current or potential partners. Corporate reputation makes up 33% of the market value of the FTSE 100, according to a recent report—and that means your suppliers could cost more in reputation damage than they’re worth.
In the public’s mind, your products are your company’s responsibility, whether negative press focuses on the enterprise, your supplier, or your suppliers’ suppliers. You can’t control a news story once it’s published: what you can do is protect yourself against risk. That’s why it’s important to incorporate reputation risk into the total cost of ownership when selecting a supplier.
A parade of headlines last year linked companies to their suppliers’ practices (and those of their suppliers’ suppliers):
- US regulators fined Wal-Mart Stores Inc. in July for safety and labor violations at a US factory in its supply chain; a November fire killed more than 100 garment workers at a Bangladesh plant where a supplier had subcontracted apparel orders.
- An advocacy group accused a contractor for Samsung in China of employing minors; a recent audit of its Chinese suppliers revealed several violations of labor regulations. The same group has made similar complaints about another electronics company, claiming that students were forced to work at its factories.
- Companies are preparing for the Dodd-Frank rules regarding the disclosure of the use of metals mined in African conflict zones. As this reporting is required, revelations that come to light could damage the reputations of companies who use conflict minerals.
Examining possible reputation risks doesn’t mean you’re obliged to select a supplier with no risk, and it may not be possible to evaluate, track, and manage all potential harm to your reputation. Yet you can take steps to reduce risk – and awareness is a smart way to start.
Consider your company’s values and match these to possible risks. For example, you might examine whether a prospective supplier has a history of bankruptcy or plant closures that could affect business continuity. You could look at involvement in past litigation. Consider examining the supplier’s suppliers or subcontractors. You might also review a vendor’s compliance record on issues that matter to your business: labor laws, environmental issues, health and safety matters, the tax it pays, or whatever you feel is most relevant.
One candy maker uses a variety of tools to determine which suppliers fit with its corporate values. The company developed a reputation risk-assessment grid with a segmented approach to recognize hidden exposure. The manufacturer also uses a tiered compliance plan, which allows the company to prioritize risks and then execute a plan based on the threat level. This enables the company to use the appropriate resources, keeping in mind that different suppliers require different levels of checks. It also employs a standard prequalification questionnaire and a detailed ethical assessment in its selection process.
Once you’ve determined which supplier to go with, set clear expectations and guidelines to avoid surprises. Clearly define ethical sourcing policies that you intend to hold suppliers to; conduct regular audits to ensure rules are being followed. Our guide to corporate social responsibility organizations can help you determine who to partner with to ensure compliance.
You should also monitor even trusted supplier decisions about how they’re going to fulfill your requests, especially when you’re asking for something special: for example, a shorter timescale or a cheaper product.
An American software company uses carefully shaped conversations to monitor sub-tier suppliers. The company starts by considering which ones to examine, starting with those crucial to its products. It might, for example, look at vendors vulnerable to certain market trends. The company then speaks to those prime suppliers, asking for permission to contact sub-tier suppliers and clearly stating the topics for discussion. If the supplier is willing to make the introduction, Intuit compiles a list of subtle questions around its most pressing issues, and interprets the replies.
The final piece of the puzzle is to make sure internal stakeholders understand the importance of monitoring, anticipating, and dealing with reputation risks. Quantify costs to illustrate how such risks could harm the company. Coordinate your risk management strategy with your company’s communications department. If something goes wrong, you’ll need to have a clear view of what your company will do about it and how your company discusses this with the press and the public.