Globalisation magic & the risks in supply chains
By Tim Wilson
According to the 2015 UK Reputation Dividend report, 27.4% – or GBP620bn – of the total value of the UK’s largest businesses (FTSE 350) was attributable to ‘reputation assets’. Corporate responsibility and environmental credentials alone contributed GBP22bn to that total, a proportion that is rising year-on-year.
Meanwhile, an analysis of a similar group of companies in the US (S&P 500) over the last 50 years shows that the contribution from intangible assets to corporate balance sheets has increased from roughly 20% to nearly 80%. It seems the Pareto principle – or unequal distribution of wealth – applies, but the proportions have reversed. The message is clear: as a shareholder in today’s corporations, an ever increasing slice of value is to do with how the company is perceived.
This shift in value has been slowly happening for decades, so it may not seem newsworthy. However, when combined with two other trends – supply chain complexity and regulatory proliferation – it becomes apparent that it is a key ingredient in an emergent ‘perfect storm’ for the world’s brands and retailers.
Over the last 50 years there has been an explosion of products: it seems that almost everything imaginable is being made by someone, somewhere and is available to buy on a tablet or mobile device at the touch of a button. And these products are becoming more complex, made of more components or ingredients. Each component is the output of a distributed array of processes performed by a global network of businesses, evolved within overlapping ‘sub economies’ of competition for labour costs, capital and logistics.
This is a triumph of efficiency, using hitherto unimaginable improvements in logistics and information technology to orchestrate manufacturing with optimised specialisation and the lowest input costs.
But this globalisation ‘magic’, while not illusory, does rely on some misdirection. Lower energy costs might arise from weaker regulation of energy production. Regions with higher energy costs have stronger regulatory frameworks to curtail the external negative impacts of production, such as global warming or air pollution. Lower labour costs probably reflect lower costs of living, which in turn flow from weaker welfare standards. So far, so evolutionary – so “business as usual”.
But those same improvements in logistics and information technology have ushered in 24 hour news, social media and global travel. The world has shrunk, such that we can perceive more of it. Now it looks like there are strong regulations in place to protect citizens, biodiversity and natural resources not ‘just down the road’, but on the other side of the planet. The distraction of the globalisation magic begins to be revealed. Some of the product abundance is not due to radical innovation (although some definitely is). It’s not so much because we’ve found a fundamentally better way of making things, but because we make them in Place A in a way that would be unacceptable in Place B. Bring that into public consciousness by way of 24 hour news, social media, et al, and attitudes begin to change.
A change in attitudes
Attitudes flow into commerce via shopping habits and brand preference, but also into regulations. There’s the rise of reputation assets, but also the rise of regulatory instruments that attempt to control what happens ‘just down the road’ by holding to account those who live under the jurisdiction of the regulation. Examples range across chemicals (the EU’s REACH chemicals legislation), timber (the US Lacey Act; the EU Illegal Timber Regulation (EUTR)), slavery (the UK’s Modern Slavery Act; the California Supply Chain Transparency Act), and minerals (the Dodd Frank Wall Street Reform and Consumer Protection Act; and proposed EU regulations on minerals).
So now brands and retailers are in a position where the business model is reliant on product abundance resulting from systems imbalance, but where the systems imbalance is not acceptable – not only to customers, but also to regulators. Now there is a risk that some aspect of how the products on the shelves were made can cause financial harm. Brands and retailers have a large inventory with a vast, global network behind it – and upon which their fortunes are increasingly contingent – and they don’t know what’s going on in it.
Consequently, there are now more ‘corporate risk’ professionals than ever, and increasingly they are dealing with so called ESG risks (environmental, social, governance) both for internal operations and for the supply chain. They are typically operating within a risk framework based on four key steps: Identify, Assess, Monitor, Control.
Modern Slavery is now an identified risk. There is data available to help assess which sectors and geographies it is most prevalent in: the highest risk. What is needed then is a monitoring tool to provide some understanding of what those global supply chain networks look like. How complex are they? Which bits of the world do they touch? Finally, once exposure to risk has been evaluated, a mitigation plan can be built to control that exposure, like investigating the reality on the ground, or changing product formulation, input specifications or input supplier etc. It seems that the trend towards increasing contributions to corporate value from reputation will continue. For most brands, retailers – and indeed the planet – this is probably a good thing, but it does require a new set of disciplines and procedures in place to really understand what is going on in global supply chains.