The Covid-19 pandemic has exposed the vulnerabilities of the supply chains of many businesses, and especially for those who have a high reliance on China for raw materials or finished goods, according to a recent article from Deloitte.
“China’s dominant role as the “world’s factory” means that any major disruption puts global supply chains at risk. Highlighting this is the fact that more than 200 of the Fortune Global 500 firms have a presence in Wuhan, the highly industrialized province where the outbreak originated, and which has been hardest hit,” says Deloitte.
Supply chain disruptions can be caused by many factors. Trade restrictions are another potential source. The US has issued bans on certain agricultural products that are linked to forced labor. And, the United Nations in a recent report points to the increased likelihood of scenarios related to escalating conflicts due to environmental changes.
The high probability of supply chain disruption and threats to business continuity are causing businesses to take action to improve the visibility and control they have over their supply chain operations. Specifically, businesses are seeking increased capabilities to manage their Tier 1 suppliers and their relationships with Tier 2, and Tier 3 suppliers and beyond. In many cases, the goal is to gain a line of sight throughout the business value chain from the sources of production, through the transformation stage, and from distribution to the customer.
Value Chain Governance Model
Governance of the business’s value chain is aligned with a strong movement headed by institutional investors that have an emphasis on sustainability or, more broadly, environmental, social & governance (ESG). These include Blackrock, Morgan Stanley, Schroders, and State Street Capital among others.
Sustainable investing is linked to increased consumer demand for responsibly sourced goods. But, another important driver is shown by data that businesses that excel at identifying and managing risks out-perform those that don’t.
Value chain governance spans the numerous buying and selling relationships a business maintains and the many collaborations between partners and company managers who control operations for the range of activities required to bring products and services to market and, ultimately, their end use and end of life.
For example, an energy production business needs the ability to manage partners providing goods and services at its project sites throughout the world, and automatically detect missing or expired compliance, certification, and governance data.
In another example, a manufacturer that buys ingredients needs the ability to trace them from multiple source locations thru its production lines, into finished goods by lot # and, finally, to the customer location.
A third example is an investment bank that needs the ability to assess ESG related risks of entities they invest including energy usage and carbon footprint and related, the ability to engage efficiently with managers in the portfolio companies to collaborate to reduce risk exposure.
The value chain governance model enables business managers that need support to identify where they are exposed to risk, and provides information to be able to act quickly in the event of an unplanned event.
In addition to these scenarios, business leaders need ESG information about partners, products, and practices to engage with institutional investors and sustainable investment coalitions. ESG data are increasingly used by investors to assess and measure business performance and positioning on a range of topics. And, a recent assessment identified more than 3,000 entities with charters for environmental or social stewardship.
Redefining the Purpose of Business Organizations
Value chain governance is also aligned with a movement of major corporations that redefines the purpose of businesses, specifically, to serve multiple stakeholders. This new model expands the stakeholders to which a business is accountable to include: customers, employees, communities, the environment, and suppliers.
The new stakeholder model, which has been publicly endorsed by CEOs of more than 180 major corporations affiliated with the Business Roundtable, has the potential to impact corporate governance, metrics, and incentives which are a foundation for reinforcing and communicating a business’s strategy.
A recent post from the Harvard Law School Forum on Corporate Governance cites, “The COVID-19 pandemic, the associated economic impacts, and increased focus on social justice illustrate the increasing expectations on—and willingness of—corporate leaders to address social issues that may extend beyond a traditionally narrower view of the business purpose of the corporation.”
Data from Bloomberg reinforces that corporate leaders are responding with action that is in line with this movement to publically share information on the racial diversity of their employees and leadership, and board composition – a move that is supported by major sustainability-focused investors who are looking for businesses they invest in to enhance governance throughout their value chain and increase transparency to risk.
The Risks for Business are Increasing
The changes described here are sources of increased business risk exposure. Any one of the below can present major challenges for an organization. And, likely your business may be experience more than one because they are interrelated:
- Can’t Trace Relationships with Partners and Products / Materials / Ingredients
- Can’t Exchange Data Rapidly with Supply Chain Partners
- Lacks Adequate Visibility into the Supply Chain
- Can’t Detect Risks Automatically
- Struggle to meet requirements for ESG reporting
- Can’t Effectively Engage with Stakeholders
ICIX Value Chain Governance solutions enable businesses to automate collaboration and control for enhanced visibility and risk protection for stakeholders across the business’s value chain. ICIX empowers business leaders to manage, monitor and verify business performance to achieve financial, operational, environmental stewardship, diversity and social governance goals and objectives.