Managing Reputational Risks in Global Supply Chains

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.

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.

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.

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

Competitor Company A With Diversified Supply Chain Adds Shareholder Value

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:

1. 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
2. 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
3. Implementing reputation analytics and risk monitoring to evaluate the wider reputational impact of a supply chain event
4. Reviewing existing risk financing approaches and exploring risk transfer options such as insurance or captive solutions
5. Assessing adequacy of insurance cover by understanding the interconnectedness of reputation risk with other exposures and related peril policies
6. Deriving capital benefits through risk retention options

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.
² The 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.