In simpler times, a company needed only to worry about its own operational reliability, and its profitability and customer satisfaction would take care of themselves. But in a world of complex interconnections, performance and reputation are increasingly contingent on those who are interconnected.
The still unfolding Gulf of Mexico disaster is a case in point. Failures of operational risk and reputational risk – both in the extreme and feeding on each other – have caused lasting, and perhaps permanent, damage to BP, the oil rig’s owner. A different company, Transocean, was the rig’s operator. Lesser known, Transocean had less of a reputation on the line, but if it shares any blame at all – and it is undoubtedly significant, based on the finger-pointing so far – then it has helped to put the company at the head of its supply chain in a heap of trouble.
Transocean’s direct relationship with BP is just the most obvious type of supply-chain partnership; due diligence between such parties should be straightforward. If it can break down as badly as it did in this case, consider the potential for damage that partners of the partners – second- and third-order subcontractors – can cause.
Tom Ridge, the former secretary of Homeland Security who is now CEO of Washington, DC-based security and risk management consulting firm Ridge Global, says supply chains need to be vetted down to the second, third and fourth tiers. No multinational enterprise “can afford to let anybody in the supply chain, no matter how far removed, view risk less seriously than it does,” he said in a December interview in Risk Professional magazine.
Indeed, reputation is an intangible, but its value is more and more apparent. As viewed by the Intangible Asset Finance Society, such qualities as safety, security, ethics, sustainability, innovation, and quality typically represent more than half of a company’s market valuation.
At Walt Disney Co. – another company facing unwelcome publicity in recent days, in this case relating to an insider trading scheme – intangible assets in business processes, broadly defined, amount to more than 90 percent of valuation, asserts Scott Childers, Disney’s senior manager of integrated trade management.
Anticipating, measuring and mitigating risk in supply chains requires a holistic analytical approach, says Childers, whose responsibilities also include global trade compliance and who commented on these issues in an IAFS online program in May. His group monitors operational resiliency in the supply chain and the effect of risk mitigation on Disney’s valuation. “It’s all about remaining vigilant in these changing times,” he states.
Robert Rittereiser, a former top executive of Merrill Lynch & Co. and E.F. Hutton who joined in the discussion with Childers, is now CEO of Zhi Verden, which provides supply-chain management systems to the shipping sector. He likens the technology to the end-to-end systems that Wall Street developed in response to its paperwork overload in the 1960s.
Zhi Verden’s Global Trademaster system aggregates company data for examination at higher levels. The platform “links to other databases and assures goods are moved when and if they have been approved for shipment,” explains Rittereiser. “That’s the direction the industry should be getting behind.”
Both Childers and Rittereiser expect corporations involved in trade will have to deal more and more with compliance and financial regulations as authorities home in on money laundering, fraud and terrorism. Technology can help companies integrate compliance directives faster and more effectively and thereby help reduce supply-chain risk.
“We’re already having to meet certain requirements around data sharing, some expanding beyond borders, such as between customs [agencies] in different countries,” says Childers. “This kind of platform is what is necessary,” he adds, referring to Zhi Verden.
Paul Lieberman, chief compliance counsel for computer maker Dell, has compared risk mitigation to making deposits in a Reputation Bank that can be drawn down when issues arise – as Disney presumably can do as details of its alleged insider crime come out. BP apparently had less in the bank.
Says Rittereiser: “Companies who manage supply chain risk well develop a better reputation. There’s a great deal of evidence that companies with better reputations develop better price-earnings ratios, even if their financial earnings are similar.”
Maureen Nevin Duffy is a freelance financial journalist based in New Jersey. Jeffrey Kutler contributed to this article.
