In the worldwide manufacturing supply chain, managing a company’s reputation is often out of the control of the organisation. Andrew Thomas and Brittany Golob look at how companies can regulate communications

When the Rana Plaza factory, in the outskirts of Dhaka, Bangladesh, collapsed, the resulting 800-plus deaths made news around the world. That this was the worst disaster ever to hit the garment industry can only partly explain the global headlines published by a media normally indifferent to overseas deaths. Before the sheer extent of the accident was known, much of the media coverage focused on the international high street brands that sourced clothing lines from among the five factories housed in the Rana Plaza building. Primark in the UK, Bonemarche from France and Spain’s Mango saw their reputations come under close scrutiny as British, French and Spanish newspapers sought domestic angles on the overseas disaster. Suddenly, a page 14 story that would normally have a two- day lifespan was making the front pages two weeks later. For Primark, Mango and others the impact the crisis has had on reputation will continue. It is no longer simply good enough for companies to state that incidents lie outside of their control. Corporate communications teams must now understand and address supply management as it has never needed to before.

In global manufacturing, the last thirty years have seen a tremendous transition away from vertical integration to outsourcing. The potential risks and costs to a company’s brand and reputation can be immense.

An industry facing constant pricing pressure and flat or declining sales in its home markets often turns to countries with lower material and labour costs to retain its pricing advantage or margins. But companies like Swiss retailer Migros and British clothing chain Matalan need to consider both the opportunity costs, as well as the risks, in the search for growth and economies of scale abroad.

According to reputation monitoring company RepRisk, the last six years has seen more than 169 major supply chain scandals affecting multinational companies in 34 sectors. Cancer villages, employee suicides, accidental deaths and mass pandemics are now routine global headlines. Easy access to cost effective business processes tends to reduce considerations of risk when making decisions regarding the supply chain. But, that subsequently places businesses under pressure from investors, consumers, governments and NGOs to deal with underlying risks in their supply chains. Each scandal generates a renewed focus, demonstrating that environmental, social and governance issues are increasingly impacting the bottom line and future prospects for companies with manufacturing bases in developing countries across Asia.

Fishburn Hedges associate director of health and public affairs Holly Rouse says, “Reputation is very important because it has a direct impact on sales. So there is a strong need for companies to communicate with a multitude of stakeholders, from NGOs to government to political stakeholders, where there’s always the threat of increased legislation and regulation.”

Since the 1990s, China has provided a compelling cost structure that has lured multinationals to outsource its manufacturing to Asia. Coupled with a domestic market of more than 1 billion people and 2.7 million millionaires, China represents an attractive, quickly-evolving market for companies like Migros. It presents both opportunities and risks that have implications on strategy, competitiveness, risk management, stakeholder relations and business resilience.

While many observers foresee an Asian century with China playing a cornerstone role, China’s own policymakers agree that rapid growth is unsustainable under the current approach. Premier Wen Jiabao calls the current model, “Unbalanced, unstable, uncoordinated and unsustaiable.”

Firms faced with managing the trade-off between cost effective manufacturing and sustainability are now rethinking their strategies in China. Scandals involving melamine milk, contaminated pet food and lead painted toys has rocked the reputation of Asian suppliers. In light of the current pace of rebalancing in the country, many are beginning to question whether China’s can support a profitable and a sustainable business.

China continues to present a strategic opportunity for FMCG and retail companies to reach a fast growing market, deliver strong margins and diversify country risk. Compared to other low-cost producers like India and Vietnam its shipping channels, manufacturing technologies and infrastructure are considerably more reliable. China also boasts an appealing offer of manufacturers open around the clock and throughout the year, a cheap workforce compared to Western standards, and a no-risk engagement model of ‘no money down in exchange for your sample’.

Consumer retail companies seeking inexpensive growth abroad are increasingly cautious about the risks associated with a low price. An average of 30-80% in operational costs savings and providing economies of scale – while remaining an important factor in strategic decision-making – cannot totally justify the decision to operate in China. Many stakeholders voice concerns that prosperous economic times and future prospects of margin gain from Chinese consumers have steered their companies to discount business risks. Product recalls and subsequent impacts on market share and reputation for companies like Mattel, Toyota, Procter and Gamble, Nike and Migros, have given weight to one important consideration in global manufacturing – that the biggest trade off executives must consider to profitability is the attention needed to ensure operational supply chain governance for sustainability.

Achieving sustainable profitability in China relies on key drivers for supply chain operational governance such as multi-tier risk management, quality standards, IP protection and CSR.

Today, a company’s license to operate relies on its ability to manage controversial relationships in its network of suppliers while responding to societal expectations regarding its environmental, social and governance (ESG) footprint. Governance is an essential tool in daily operations to ensure sustainable supply both against agreed volumes at accredited quality standards and within the confines of the law, in order to protect market share and revenue streams.

Transparency though, remains an issue. For large multinationals, the supplier network can be a complex web. While Mattel worked with its first- tier suppliers on addressing issues pertaining to quality and safety, its its suppliers’ subcontractors may not have done so as well – as was made clear when the use of toxic levels of lead paint was discovered on its children’s toys. This resulted in a $2.3 million fine in civil penalties that the Consumer Product Safety Commission states was the highest ever for the agency’s regulated product violations and the third largest in its history.

Governing a complex global supplier network requires multitier supply chain visibility to control inventory and reduce ESG risks. A company’s implementation of quality frameworks and company wide sustainability management programs are initiatives to achieving this.Rouse says corporate values should disseminate down the chain, “There are challenges with suppliers not able to implement certain measures. When you have a large corporate that is looking to uphold high standards and reputation, then that has a knock on effect through the supply chain.”

Business culture must also be a consideration. According to industry veteran Paul Midler, Chinese manufacturers are known to take a pragmatic short- term view on the customer relationship. Often clients demand unrealistic pricing in exchange for highly specified products. To meet the client expectations, projects are often managed based on a single order’s margin objectives and what is known in the business as ‘quality fade’. These actions put an organisation’s reputation at risk.

Tangerine B2B MD, Sam Gregory, says, “Your brand is all about trust you build up. A brand is a promise. It says that if you buy from me, you know what you’re going to get, you see the value in that brand and you understand it.”

China’s current five year plan has stated a focus on renewed governance, ensuring and assuring quality standards are ongoing issues addressed by the manufacturing sector. In an effort to mitigate risk, a quality certificate offering ‘international standards compliance’ is often produced only for the sample, not the entire order. This has gives rise to a multinational’s need to invest in both independent auditors and its own quality control teams within China. Consequently, an entire industry has sprung up in China to provide ‘fake audit documentation’ and to help Chinese manufacturers get through foreign audits. According to Peter McAllister, director of the Ethical Trading Initiative, “Audit fraud is an issue of considerable concern to companies that contract with Chinese manufacturers. It appears to affect factories of all sizes.”

Gregory adds, “The key thing is companies are really living up to their values then the supply chain should share those values as well, so they should be workgin with like for like companies that share their culture and their values if you can get that right that will lead to better partnerships and more transparency”

Safety and employee conditions issues also offer potential risk to a company’s supply chain. Additionally, oversupply of inventory and poor IP protection continues to be an ongoing business risk. Both result in problems with counterfeiting.

In 2005, an oversupply of the distinctive Burberry beige check, originally trademarked in 1920 and the company’s hallmark, led to mass counterfeiting of its products, resulting in the ‘chavificaton’ of its brand. For Burberry, this expensive lesson in supply chain governance eroded consumer trust and damaged its brand, negatively impacting both its market share and profitability. It’s check product sales crashed from 33% to less than 5% of the Burberry portfolio and the company’s share price subsequently plummeted. It’s board appointed a new CEO, Angela Ahrendts to turn the company around. Her first move was to move the balance of its UK manufacturing to China in 2006, mandating specific control measures and governance for risk management, in an effort to restore customer trust and margins and be physically closer to Burberry’s growth markets. By 2012, Burberry was again one of the most profitable luxury brands in the world.

Despite Burberry’s strength in managing its Chinese supplier relations according to the global 2013 Deloitte Survey of Operational Risks in China, one third of foreign companies operating in the region continue to see poor IP protection as their biggest challenge in operating in the region. The International Chamber of Commerce expects that by 2015, the value of counterfeit goods globally will exceed $1.7 trillion.

At more than 2% of the world’s total current economic output and with China acting as the world’s manufacturing hub, counterfeiting is a massive problem. This is exacerbated when production moves farther away from the companies that originally designed the product and there is an opportunity for corruption and fraud to seep into the manufacturing process.

Poor supplier governance is a material risk not only to the bottom line, but also to brand reputation. Risks can come from many, often unpredictable, directions both at home and in developing countries.

Poor governance of a company’s supply chain and a lack of interest in CSR can result in a significant loss of market share and impact a company’s share price, as was highlighted by Burberry’s issues and subsequent turnaround.

While the growing influence of consumers, investors and NGOs on business practice, Mattel’s lead paint incident and Burberry’s ‘chav’ disaster are examples of only two case studies in which bubbling issues of governance can quickly come to crisis.

In China, however, there has been an understanding at the highest level that transparent supply chain management is vital. Premier Wen Jiabao, has stated that failure to detox China’s supply chains through implementation of the five year plan, could jeopardise his own party’s future and the stability of the Chinese economy.

Supply chain communications has been transformed over the past decade as foreign suppliers and foreign disasters have reaped consistent reputational havoc on European businesses. Whereas companies were previously unaware of the values, quality and policies of the lower links in the chain, they are now beginning to instil better business practice unto all suppliers in order to ensure transparency and consistency. The Rana Plaza disaster, while horrific, is just one of many crises which has prompted a reevaluation of supply chain management for retail and FMCG companies as businesses see their supply chains.