The Supply-Chain Butterfly Effect

Or why the irresponsible conduct of that supplier in a remote corner of the world puts you at risk…

It was 1961 when Edward Norton Lorenz, American mathematician and meteorologist, decided to rerun a numerical computer model for a weather prediction entering the initial condition 0.506 instead of the full precision value of 0.506127. The final result was a completely different weather scenario – and marked the beginning of what is called chaos theory. Two years later, he stated:

One meteorologist remarked that if the theory were correct, one flap of a seagull’s wings would be enough to alter the course of the weather forever. The controversy has not yet been settled, but the most recent evidence seems to favor the seagulls.”

Eventually, he followed the advice of replacing the seagull with the more poetic butterfly in his metaphor.

Like weather, modern global supply-chains are complex nonlinear systems where seemingly inconsequential details can have major impacts in terms of reputation, compliance and economic bottom line.

Your supply-chain, your accountability

Being part of a global value chain has significant implications for each of the businesses involved:

  • Raw material suppliers have to be compliant with local laws and regulations, as well as codes of conduct and certification schemes imposed by larger clients downstream;
  • Intermediaries need to ensure traceability of the materials they supply and face requests for reporting from clients who provide financial incentives for enhanced transparency;
  • Retailers directly face the expectations of the consumer market, plus regulations are increasingly holding them legally responsible for irresponsible conduct upstream the supply chain.

The Malaysian palm oil supplier IOI was removed from Unilever’s suppliers list this April after the Roundtable of Sustainable Palm Oil (RSPO) suspended it for several violations of the “No Deforestation, No Peat, and No Exploitation” policy. Shortly after, Kellogg’s, Mars, Nestlè,  Hershey’s, Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, SC Johnson, Yum! Brands and Reckitt Benckiser disengaged with IOI. Additionally, other companies, such as Dunkin’ Donuts, are verifying if IOI is in their list of suppliers and have plans to drop it if it is.

IOI’s official press release gives a more vivid idea of the impact on their business. “The suspension of our RSPO certifications, which affected our prevailing RSPO oil contract commitments and caused significant disruptions to certain segments of the European and American food manufacturing sector, has inflicted many stakeholders of IOI: IOI’s 25,000 shareholders, the suppliers of IOI who include small holders, the customers of IOI and other users of certified palm oil down the supply chain, and lastly thousands of the employees of IOI who have put in so much effort over the last ten years in enabling all our Malaysian plantation units and downstream processing units to be RSPO–certified.”

Without adequate supplier monitoring and action the supply chain is dark and full of terrors, as purchasers cannot effectively mitigate the reputational and legal risks it exposes them to.

From the supply-chain to the courtroom

Supply-chain responsibility is no longer part of the soft law world of certification schemes and Fair Trade labels. National and international law is progressively regulating specific issues, thus extending the legal liability of companies to their supply-chains.

For example, the UK Modern Slavery Act mandates commercial organizations with a total turnover of over £36 million per year to publish a slavery and human trafficking statement each year explaining the steps they have taken to ensure there is no slavery or trafficking in their supply chains or their own business.

Similarly, in the US the Business Supply Chain Transparency on Trafficking and Slavery Bill – H.R.3226 – is proposed to require companies with annual worldwide global receipts in excess of $100,000,000 to disclose information describing the measures that they have taken to identify and address conditions of forced labor, slavery, human trafficking and the worst forms of child labor within their supply chains.

A comparison of the emphasis put on Forced Labor by companies operating in the Basic Materials industry (upstream) and those operating in the Consumer Goods and Service industry (downstream) gives an indication of where along the supply-chain risk mostly resides.

Consumer Goods and Services:

Basic Materials:

Our data shows that the topic is not widely discussed in either industry. However, there is more awareness of issues related to Forced Labor in the Basic Materials industry than in the Consumer Goods and Services Industry.

Analyses of this kind can help inform risk assessments along the supply chain, therefore capturing early warning signals that might prevent dangerous crises.

Ask for a quote if you’re interested in finding out more about how we can help with supply chain management.


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