Apparel manufacturing in Bangladesh.
How are risks of doing business evaluated in your organisation – is it a once per year exercise, a response when things go wrong or a strategic responsibility?
The recent collapse of a building outside Dhaka and the reported loss of 1,100 lives once again shines the spotlight on the procurement practices of retailers and whether supply chain risks are fully accounted for in buying decisions.
It is an unfortunate fact that loss of life in a developing country has less effect on the decisions of companies from developed countries which buy from that country. Instead the thought of spending money to overcome supply chain defects, or suffering a reduction in the share price is the primary motive for action.
With share price in mind, a large equities firm has recently sent a questionnaire to the major retailers in Australia that asks about their buying policies in Bangladesh. Why should an equities firm be concerned? They have concluded that doing business in a low cost country carries potential risks that need to be identified, so that shareholders are informed when making buy and sell decisions.
While all the retailers have said they had no business relationships with manufacturers in the collapsed building, the questions being asked are concerned more about the larger and evolving supply chain risk situation. Risks have been present since trading began, the most obvious being natural disasters, delays due to infrastructure (physical and bureaucratic) and supplier failures. With globalisation and low cost country (LCC) sourcing the range of risks has expanded.
Low cost country risks
- Customer loyalty risk: if your brand is associated with a factory disaster or reports of bad conditions for employees, the business will be exposed to bad publicity via social media and the wider media, with a strong likelihood of changing customer loyalty
- Compensation risk: the potential for a buyer company to provide compensation or relief funding as a remedy for poor buying decisions and a lack of oversight of suppliers
- Location risk: to improve supply chain efficiency, suppliers may be located in clusters, but a disaster scenario can then affect many suppliers, such as in the Thailand floods
- Supply chain velocity risk: pricing of items assumes there will be no disruptions to the flow of items in the supply chains; but what are the risks of disruptions occurring?
- Political risk: disasters of any sort in a country can cause social and political unrest that can directly affect supply chains in and out of the country. What is the level of buyer knowledge concerning the country?
- Regulatory risk: regulations can be changed for any reason and in low cost countries those with influence may affect how regulations are applied. How capable is the supplier of obtaining and interpreting information?
- Intellectual Property risk: the use of your company’s Intellectual Property (IP) within any supplier carries risks. In low cost countries the risk could be higher. What structures and processes are in place to limit the use of IP at suppliers?
If your business is buying internationally, are risks considered as tactical, therefore it is acceptable to be a low level responsibility? Or do you have an ongoing strategic review process as a responsibility of the logistics team? This will be step one in understanding how you manage risk.
