Supply chain and business integrity risk – what is your new normal?

The state of play

COVID-19 alone is a sufficient reason for business to re-assess their current supply chain, third-party relationships, and routes to market.  This is because the pandemic has significantly impacted almost all areas of commercial operation globally, and it has posed particularly grave challenges for markets that were already vulnerable to corruption and other probity issues. The pandemic has created a host of incentives for businesses at every link in the supply chain to cut corners.

A case in point is the textiles sector in Bangladesh, which initially shut down on health and safety grounds and is now struggling to recover amid dwindling global demand, cancelled or pared back contracts with international fashion houses, and persistent public health challenges. Many of the four million workers employed in Bangladesh’s garments sector face a precarious future. Under immense strain, there are worries that labour and safety standards will suffer as the hard-hit industry works to regain its footing.

The race to secure personal protective equipment (PPE) in this pandemic is another example. As businesses across the world sought PPE to safeguard their employees, many of the usual due diligence measures were bypassed. Questions have now been raised as to whether procurement decisions were affected by ‘kickback’ schemes, subpar labour conditions, and fraud.

The reality is that few, if any, businesses are now operating under the same conditions and under the same regulations as they were before the pandemic hit. Suppliers and third parties who were previously assessed as low-risk may now present differently. Systemic issues like access to health care, labour protections, and the security of IP and consumer data—as governments grant themselves access to more and more information on public health grounds—all merit a fresh look.

As each country (and in some cases, each state or municipality) takes its own unique approach to combating the virus, operating conditions, legal and regulatory regimes, and stakeholder expectations—and resultant risk profiles—in each of those markets looks dramatically different than it did just six months ago.

Put simply: Policies and procedures that were put in place to mitigate risk in the pre-COVID environment may no longer be fit for purpose.

Moreover, the disruptions brought on by the pandemic have led many businesses to question the viability of their existing supply chains, convinced that diversification is crucial. For example:

1. Technology firms that saw their component manufacturers in China shut as the virus peaked are considering alternative production hubs in places like Vietnam and Taiwan, and the need to familiarise themselves with the particularities of new markets.
2. Drug makers in India who struggled to secure vital pharmaceutical compounds from China are looking anew at domestic production, which carries its own set of challenges for those producing the drugs and those importing them.
3. Changes in consumer behaviour and heightened reliance on e-commerce are also driving new supply and logistics requirements.

Tensions between the United States and China, worsened by the pandemic, are exacerbating many of these trends. New trade and investment restrictions are contributing to the destabilisation of existing supplier relationships and accelerating moves toward diversification, many of which were already afoot pre-COVID-19. The chill in Australia-China ties and Beijing’s imposition of tariffs and informal curbs on a range of Australian commodities is similarly forcing businesses to make difficult choices about where and how they source and sell their products in a new geopolitical paradigm.

Implications

1. Being on top of supply chain risk is business critical.  If the factory your business relies upon is suddenly suspended or closed, your business or parts of it may be significantly disrupted.  This may result in lost revenue, or claims being made against you for your inability to comply with contractual obligations.  All businesses should be assessing the risk of, and establishing a mitigation plan for:
   1. the shutting of an entire industry or ecosystem upon which the business relies as a result of the pandemic.  For example, it may be that the economic conditions force the closure of manufacturing or parts of its distribution, warehouses, transport or logistics;
   2. a factory or warehouse being unable to restart substantive operations because of social distancing requirements or lost capital;
   3. a supplier being unable to trade or trade competitively due to the imposition of sanctions or tariffs.
2. Similarly, being on top of your route to market, its vulnerabilities and “knowing your customer” is essential.  As the pandemic reshapes our world, all businesses should reassess these risks and implement an appropriate, refreshed risk management plan.  As you consider new locales, it is vital to undertake thorough due diligence to have the knowledge available to navigate unfamiliar legal, regulatory, political and probity risks.
3. Your business may be the subject of regulatory action, exposing directors, senior management and the company to criminal and civil penalties and class action risk.  This may be the result of:
   1. insufficient risk assessment and mitigation in respect of modern slavery, anti-bribery and corruption and suspicious transaction reporting;
   2. steps taken in an attempt to respond to the pandemic and continue operations. For example, requiring employees to work in unsafe conditions without PPE or COVID safe work procedures, laying-off workers or providing employee data to government authorities;
   3. reputational damage from reports of lax practices; or
   4. commercial losses flowing from disrupted or broken supply chains or routes to market.
4. Accordingly, it is important to design your due diligence and risk management strategies so that they address the relevant regulatory regimes as well as business needs.