All parts of the supply chain are changing, and that likely affects your company, whether it operates upstream or downstream. From software makers to medical-device manufacturers to semiconductor-materials producers, more and more companies are facing customer requests to abide by a code of ethics, labor practices or health and environmental guidelines. If your company fails to comply with those expectations, you lose customers.
One Southern California software service provider was asked by one of its largest software developer partners to ensure compliance with its corporate social responsibility (CSR) guidelines. Faced with the choice of demonstrating via reporting or losing that customer, the software service provider found it was able to easily meet the standards and even decided to exceed them. These steps reduced its carbon footprint and enhanced its reputation for corporate citizenship.
This demand for disclosures is on its way to becoming the norm. Companies need to be prepared to integrate sustainable practices into their operational strategies and report on them when asked to do so.
Know What’s Coming
The best way to prepare for potential questions from your supply-chain partners is to understand the environment in which they now work. Section 1502 of the Dodd-Frank Act, which requires companies reporting to the SEC to disclose the use of conflict minerals in their supply chain, was the most significant reporting change in the past few years. The rule was set in 2010, but only finalized in August.
For many companies, a failure to comply with this new regulation would mean losing credibility with investors, industry groups and regulators. In the longer-term, it could even lose companies the right to conduct business in the United States, as well as lose them U.S. customers if they’re part of U.S. companies’ supply chains. Even though much of the legislation won’t be disclosed until March 2013, it could behoove public-company suppliers to begin planning to meet the new standards now.
Here’s another scenario: Let’s say your company purchases raw materials or services from a vendor that’s committed to complying with CSR guidelines issued by another customer or regulator. The vendor notifies your purchasing managers that its costs to manufacture or supply the materials you need will increase over the next year or so because of added oversight, monitoring or changes in source materials. This change will impact your costs and margin forecasts and margins on your company’s sales. Although the vendor is unclear on the exact increase in costs, you can begin the process of evaluating which costs you’ll pass to your direct customers via your selling price.
Has your company already been affected by one or all of the above scenarios, or can you envision one of these happening in the near future? If you haven’t figured out how to operate within a sustainable framework across your supply chain, will that affect your relationships with government oversight bodies or influential buyers in your industry? What’s the potential impact on your business’ reputation? If you don’t have good answers for these questions, you’re not alone. Fortunately, there are some best practices available to help you along the process toward reporting.
Pitfalls to Avoid
We interviewed CEOs, CFOs, internal audit managers and attorneys and asked them to identify the biggest mistakes companies make when beginning the reporting process. Here’s what they told us:
1. Unclear Chain of Command
Any new initiative at a company comes with many moving parts. Add third-party influences and government regulation, and the process can get convoluted quickly. It’s important to articulate – right from the beginning -- who’s in charge of the review process and to create an accountability mechanism to ensure the process moves forward in a timely and effective manner.
Next Page: More common mistakes