Managing Reputational Risks in Global Supply Chains

January 12, 2024 9 mins

Managing Reputational Risks in Global Supply Chains

Supply chain disruptions can have serious reputational repercussions, causing plummeting shareholder value and diminished stakeholder trust. The potential fallout underscores the need for management strategies that collectively address these risks.

Key Takeaways

Supply chain events that undermine reputation can erode stakeholder confidence and impact long-term profitability.
Amid growing public and regulatory scrutiny, organizations face accountability for ESG-related reputational risks within their supply chains.
Leaders should implement a mitigation roadmap to manage existing reputational risk in supply chains and stay ahead of evolving regulations.

The intersection of supply chain and reputational risks has created a perfect storm that poses a potential threat to both an organization’s profitability and brand equity.

Understanding and managing risks within supply chains is already a complex exercise. Supply chain management requires driving efficiency and margin through sourcing strategies, while facing various challenges including natural disasters, cyber threats and geopolitical instability.

At the same time, risk management must also contend with environmental, social and governance (ESG)-related exposures within the global supply chain. And these can have longer-term reputational impact, which may lead to both loss of stakeholder confidence and shareholder value.

ESG threats can cause downstream effects on supply chains, including product recalls, launch delays and unexpected price hikes, eroding customer confidence and investor trust. Further, these threats are quite common, with 43 percent of organizations experiencing financial loss in the past 12 months due to supply chain risks.

Managing Reputational Risks in Global Supply Chains Diagram

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In this environment, risk managers are working to better understand how to manage supply chain risk to avoid reputational exposures. “Supply chain activities, from raw material acquisition to component availability, shortages and product delivery, are all very public,” says Ladd Muzzy, Global Reputation Risk Practice Leader at Aon. “Stakeholders are seeking and expecting prompt answers of how the organization will respond to ensure operational resiliency.”

Mapping ESG-Driven Reputational Risks in Supply Chains

ESG reputational risks frequently originate in supply chains. These risks are often a result of highly visible exposures, such as environmental damage and excessive carbon emissions or human rights abuses. Reputation risks can also be brought on by strategic decisions that include supply chain as part of a larger business model. Understanding risk holistically ensures that all activities are part of the risk evaluation process.

Companies also face increasing legislative demands in an evolving regulatory landscape. These create expectations for organizations to conduct due diligence on their supply chains and ESG risks, including customer data, greenhouse gas emissions, health and safety — the list goes on. Enterprises that fall short may face significant fines, loss of business and investigation expenses, while also suffering damage to their reputations.

8th

Brand and reputation risk is the eighth biggest risk that global enterprises face today and has been a top-of-mind risk for leadership since 2007.

Source: Aon’s Global Risk Management Survey 2023

Read the Report

Reputational Impact of Modern Supply Chain Risk on Businesses

Reputation risks do not always cause direct interruption in supply chains, but consequences may be significant.

Inadequate cyber governance

A company with inadequate cybersecurity has a risk of experiencing a data breach and may face regulatory fines from bodies like the General Data Protection Regulation (GDPR), impacting their reputation in the process.¹
Lack of awareness about suppliers’ labor conditions

A company that is unaware of its suppliers’ labor conditions could potentially risk using child labor in its supply chains. This could not only lead to fines from regulations, such as the Germany Supply Chain Act,² but also lower reputational standing with stakeholders.
Lack of awareness about raw materials source

A company that does now know the source of the rubber materials in its supply chain could potentially have a higher risk of supporting illegal activities. This could include deforestation that destroys rainforests,³ which could in turn damage its reputation.
Material supply risk leading to unfulfillment of net-zero commitment

A company that has made a commitment to be net-zero by 2030, but is unable to deliver on this promise in its supply chain due to materials supply risk could not only face a decline in employee sentiment within the organization, but also draw the ire of advocacy groups.
Procurement of raw materials from countries with ongoing geopolitical concerns

A company that sources chips in its automotive supply chain could experience continued impact from the ongoing shortage and be unable to deliver final products to customers,⁴resulting in loss of stakeholder trust.

6th

Supply chain failures rank sixth in the top 10 list of risks facing organizations.

Source: Aon’s Global Risk Management Survey 2023

Read the Report

Sourcing decisions of any material in the supply chain that are construed to damage the environment, labor or public health can hurt a company’s brand. When you don’t have visibility of those risks beyond direct suppliers, your reputation is exposed.

LeAnn Timble

Director of Emerging Property Risk Control, North America

Case Study: The Impact of Supply Chain Disruptions on Shareholder Value

In March 2000, a fire broke out at a plant located within the United States. The fire was controlled quickly, but smoke and water damage destroyed the stock and as a result, production for a key component to be delivered to two global clients stalled. Disruption to production was expected to last a week, but continued for months.

The incident impacted two of the supplier’s clients who are competitors and whose divergent responses illustrate the impact of understanding the risks related to raw material sources. One company (Company A) had alternative supplies in place quickly and was able to pivot and restore capacity. On the other hand, their competitor (Company B) did not have the same level of supply chain resiliency and suffered substantial reputational damage, losing considerable market share as a result.⁵

Company B’s Dependency on a Single Source of Supply Leads to Loss of Market Share

Response
- The company accepts early assurances and awaits further news
- Its simplified supply chain is unable to respond when needed
- It does not disclose until part of its regular reporting cycle
- The company quits the mobile phone business
Value Impact Post-Event
- $63 billion in shareholder value lost over post-event year, representing a 38 percent drop
Lessons Learned
- Be proactive to determine facts
- Disclose early to key stakeholders
- Understand the consequences

Competitor Company A With Diversified Supply Chain Adds Shareholder Value

Response
- The company reacts quickly, dispatching engineers to inspect the damage
- It secures spare capacity and orders key supplies from alternative suppliers
- It demonstrates awareness and discloses details early
- The company cements its position as a market leader in Europe
Value Impact Post-Event
- $58 billion in shareholder value added over post-event year, representing a 25 percent increase
Lessons Learned
- Build resilience into the supply chain
- Take the initiative to assess damage
- Be transparent with stakeholders
- Recognize the problem

A Roadmap to Managing Reputational Risk in Supply Chains

In the face of intensifying interconnectivity between risks and growing stakeholder demand for accountability, modern businesses cannot afford to ignore reputation risks in their supply chain. While 74 percent of respondents in Aon’s Global Risk Management Survey stated their organization was prepared for supply chain risk, only 51 percent felt prepared to respond to reputation risk.

To manage reputational challenges existing within supply chains, business leaders may consider these risks in tandem via an enterprise-wide mitigation exercise that brings together different functions, such as procurement, corporate affairs, risk, IT and legal.

A roadmap could include:

Mapping the supply chain to understand where the risk is and to pinpoint critical suppliers, examining supply chain policies and conducting due diligence on supply chain partners
Evaluating the competences and capabilities that an organization has in place prior to an event and identifying where improvements can be made to manage supply chain reputation exposures
Implementing reputation analytics and risk monitoring to evaluate the wider reputational impact of a supply chain event
Reviewing existing risk financing approaches and exploring risk transfer options such as insurance or captive solutions
Assessing adequacy of insurance cover by understanding the interconnectedness of reputation risk with other exposures and related peril policies
Deriving capital benefits through risk retention options

Insurance is a useful instrument for introducing enhanced liquidity to help clean up damage from a reputation event. But it's ultimately how a company prepares for the event that will make a difference in whether confidence in their firm returns.

Richard Waterer

Global Risk Consulting Leader, Commercial Risk Solutions

Staying Ahead of the Risk

By preparing for and managing reputation risks within supply chains, organizations will be able to make better business decisions, improve financial and resource allocation, and in turn, reap capital benefits. Understanding the reputation implications within supply chains can lead to beneficial tactical decisions that reduce potential exposures, such as supplier concentration, non-compliance and the unavailability of products or their inputs.

Taking steps now to understand, manage and mitigate the reputation risks inherent in supply chains can ensure that organizations are proactive in addressing potential unwanted financial and non-financial exposures.

Discover how reputation risk analytics can protect shareholder value and preserve stakeholder trust.

¹ Cost of a Data Breach Report 2023, IBM Security, July 2023, https://www.ibm.com/downloads/cas/E3G5JMBP.
²The German Supply Chain Act: Overview and the practical challenges for companies, Norton Rose Fulbright, February 2023, https://www.nortonrosefulbright.com/en/knowledge/publications/ff7c1d04/the-german-supply-chain-act.
³ Opaque rubber supply chains are obscuring deforestation and biodiversity risks, Zoological Society of London, March 28, 2023, https://www.zsl.org/news-and-events/news/opaque-rubber-supply-chains-are-obscuring-deforestation-and-biodiversity-risks.
⁴ The semiconductor shortage is – mostly – over for the auto industry, S&P Global Mobility, July 12, 2023, https://www.spglobal.com/mobility/en/research-analysis/the-semiconductor-shortage-is-mostly-over-for-the-auto-industry.html.
⁵ Data for the case study was provided by the Aon Centre for Innovation & Analytics.

Aon’s Thought Leaders

Vesa Hakanen

Leader of AGRC EMEA Supply Chain Risk Solution
Martin McGovern

Director for Aon’s Actuarial and Data Science Practice
Ladd Muzzy

Global Reputation Risk Practice Leader
LeAnn Timble

Director of Emerging Property Risk Control, North America
Richard Waterer

Global Risk Consulting Leader, Commercial Risk Solutions

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