The challenge of managing reputational risk in the supply chain

With digitalisation in full swing in the freight forwarding industry, forwarders are reviewing their software strategy.

In our globalised world, companies regularly offshore resources and labour with the aim to cut costs and achieve better profits. As a result, activities and partnerships with third-party supply chains are becoming more layered and less transparent, and companies are struggling to ensure that their partners are complying with established regulations.

The impact on reputation when things ‘go astray’ is known as reputational risk. According to LexisNexis, in the short run it affects a company’s public image and ultimately it can also damage its profits, but it also may have longer-term impacts such as legal action and even financial penalties. Furthermore, information on companies’ malpractice or alleged malpractice spreads even faster than it would have done say 15 years ago because of the Internet.

Today, a brand’s reputation depends not only on the practices of its own organisation, but also on the practices of partners throughout all stages of its supply chain, where the company does not always have full visibility. Swiss food and beverage giant Nestlé, for example, from 2016 has been fighting allegations and a legal battle after being accused of sourcing cocoa from the Ivory Coast where cases of child labour have been reported. More recently in October 2019, major UK supermarkets such as Tesco, Sainsbury’s and Morrisons, have been accused of sourcing tea from suppliers mistreating labour in various ways.

The logistics industry has been considering how technologies such as the IoT and blockchain could be implemented to improve asset visibility along the supply chain. For example, the IoT could be used to exchange information and track assets via tags, collecting data through wireless connection. Such use of IoT for asset tracking has already been considered by the fashion supply chain for recycling purposes. Under the initiative ConnectFashion, items are identified through an IoT CircularID, a digital ‘birth certificate’ made up of data containing information on the product which are necessary for recycling it at end of life thanks to a form of physical identification such as a RFID tag, NFC, QR Code, UPC barcode. The industry has also been supporting, for some time, the use of blockchain technology for smart contracts, self-executing agreements with embedded business rules that benefit from an extra layer of security on the back of a distributed and decentralised network of computers. The contracts are executed once conditions are met and benefit from being stored in an immutable blockchain database. Secure registration and tracking of assets can then be made possible by using blockchain-based smart contracts in logistics operations. In October 2019, blockchain platform GrainChain, focused on providing technological solutions for the agricultural industry, has announced that it has signed agreements with stakeholders in Honduras to implement use of its blockchain-based smart contracts, allowing to track the production and trade of coffee beans. The aim of the initiative is to encourage trust among supply chain players by increasing visibility and minimizing risks.

The use of IoT and blockchain technology could thus improve visibility along the supply chain, tracking assets from origin to destination, and possibly preventing and mitigating reputational risks derived from unethical practices.

When considering what role LSPs can have in preventing reputational risk caused by lacking end-to-end visibility in the supply chain, it is worth remembering that logistics companies are aware of the importance of technology and have been investigating possible solutions that can be applied to different levels. IoT usage in the warehouse is only partially used, with the initial implementation cost being a barrier, and blockchain smart contracts  are far from being implemented on a wide scale, the challenge will also be to ensure that the data collected is objective, exhaustive and not biased as could be the case, for example, where private blockchain networks are formed.

Source: Transport Intelligence, October 24, 2019

Author: Caterina Ciccone