Playing With Fire: Hidden Risks Lurking in Your Supply Chain

Modern supply chains are fraught with risk that can result in volatility and increased operational costs, large and sometimes devastating losses, and long term damage to the corporate reputation. These risks can be organized into four major categories, but non-compliance risks alone, the first category, should be more than enough to scare you.

Of the four major categories of risk, the costs of non-compliance risk is often the easiest to quantify, and the corresponding price tag of regulatory violations alone can be enough to halt a supply chain in its tracks as the bank account is bled dry.

Corresponding costs can range from the $3.0M, $3.19M, and $4.95M fines from the recent settlements by Washakie Renewable Energy, ExxonMobil, and Noble Energy for violations of the energy policy, clean water, and clean air acts, respectively through the 13.2M settlement by Lumber Liquidators for violating the Lacey Act to the $81.6M in fines that Wal-Mart had to pay in 2013 for the mishandling of products that became damaged or were returned and became hazardous waste, of which $60M was a result of violations to the Clean Water Act and $14M was a result of Federal Insecticide, Fungicide and Rodenticide (FIFRA) violations.

But environmental acts aren’t the only acts that can result in large fines. There are also worker’s rights acts, where even simple filing errors can cost over 1M, as Abercrombie & Fitch found out when they were fined $1,047,110 for numerous technology-related deficiencies in the company’s electronic I-9 system.

And while most violations of worker’s rights law or filing requirements are rather small, the violations could increase now that anti human-trafficking and modern slavery laws are popping up that can hold your organization responsible for any violation of these laws anywhere in your supply chain, even if the infraction is caused by the supplier to the supplier of your supplier.

But these fines will still likely dwarf the fines being levied by the US Department of Justice for violations of the FCPA – Foreign Corrupt Practices Act. In 2014, the average fine for a violation was $156.6 Million, and this included a $772 Million penalty to Alstom, the second largest penalty in history.

But this is just one set of risks with an associated cost that can bleed the bank account dry and effectively cripple a global supply chain. If you would like to know what the others are, watch for Sourcing Innovation’s latest paper on Playing With Fire — 4 Hidden Risks Lurking in Your Supply Chain (coming soon), sponsored by Ecovadis.