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Supply chain disruption pushes operations, bribery and fraud up the risk agenda

By Simon Watkins and Jessica Tasman-Jones

This article is brought to you by FT Specialist’s Agenda, a publication that focuses on corporate boards.

We thought supply chain disruptions would be temporary, Ngozi Okonjo-Iweala, director-general of the World Trade Organisation, said in January. That was when the Omicron variant was disrupting trade, and pandemic-related shipping delays, congested ports, packed warehouses and lack of semiconductors wreaked havoc.

Now, Russia’s invasion of Ukraine has added to supply chain woes, with businesses having to navigate sanctions and reputational risks, alongside disruption to trade routes, vital supplies and operations in both countries. Indeed, last week, a report by Moody’s said the “greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict”.

Once again, supply-chain resilience has rocketed up the board agenda. “Supply chain managers are used to adapting to new challenges, but it is important that UK boards ensure procurement strategies are given the necessary priority within the business to help manage the risk,” says John Glen, an economist at the Chartered Institute of Procurement and Supply and a visiting fellow at Cranfield School of Management.

“Most supply chain managers will already be aware of the extent to which their organisation is dependent upon Ukrainian and Russian suppliers, and the challenge is to find alternative suppliers at a time of great disruption in global trade,” he adds. “While supply chain managers usually look for a combination of price, quality and timeliness when choosing a supplier, now the only consideration will be availability of supply.”

This does not just present an operational challenge – the upheaval, first introduced by the pandemic, also creates risks such as bribery, fraud, and suppliers taking shortcuts on ESG (environmental, social or governance) standards.

“We are absolutely seeing people cutting corners,” says Katie Tamblin, chief product officer at Achilles, which specialises in supply-chain risk management. “We are seeing companies having to find suppliers quite quickly when they’ve been disrupted, and then not going through due diligence.”

UK companies have already felt the effect of pinched supplies. In the last quarter of 2021 UK-listed companies issued 70 profit warnings, according to EY, the consultancy. Of these, almost half (44 per cent) cited problems in supply chains, which came above increased costs and the pandemic.

Supply was the most common reason for issuing a profit warning, which is a huge increase from historical levels, says Dan Hurd, head of turnaround and restructuring at EY-Parthenon. “[Before the] pandemic only 2 per cent of profit warnings mentioned supply chain issues,” he says.

Notable examples include Jaguar Land Rover, which was hit by the global chip shortage. The carmaker suffered a £9m pre-tax loss between October and December compared with a £439m profit for the final three months of 2020. And the automotive industry is one UK sector likely to face problems from the Ukraine crisis due to the amount of metal it imports from Russia, notes Paul Dales, chief UK economist at Capital Economics.

Until the pandemic, just-in-time supply chains were rarely the focus of strategy. Now companies have taken a hard look at supply chain management, says Hurd, citing an EY study published in January which found that 79 per cent of chief executives have already, or plan to, adjust global supply chains.

“People are reconsidering the just-in-time model. There has been a lot of work around nearshoring, looking at alternative suppliers and building buffer stocks,” he says. But Glen cautions that looking for a supplier close to home is not always straightforward: it requires capability and capacity, and often comes with significant cost.

Following the pandemic, Tamblin also says that more firms are considering nearshoring and “supply-chain mapping”. This uses either machine learning or artificial intelligence to harvest public data and build a picture of complex supply chains, together with the credentials of companies involved.

Such maps help to create a vetted pool of potential suppliers, giving companies choice and agility in the event of disruption, Tamblin says. Vetting or accreditation is the obvious tool to tackle the threat of fraud or misrepresentation that can accompany supply chain stress.

Most companies recognise the threat posed by the unscrupulous. Nearly half (49 per cent) of UK executives said that lack of visibility of third parties increased the risk of bribery and corruption, according to the Global Fraud and Risk Report for 2021 and 2022 from Kroll, the corporate intelligence group.

The pressure created by supply-chain disruption increases that risk, says Arun Chauhan, founder and director at Tenet, a UK compliance and litigation specialist. “Pressure causes people to act opportunistically,” he says. This does not always lead to fraud or corruption but it can compel suppliers to misrepresent their capacity, overpromising or under-delivering.

With disruption set to continue this year, and with a long-term need to increase resilience, experts agree on the need to invest in all possible answers and mitigations, including near-shoring, supply-chain mapping, inventory building and due diligence.

Directors will have to keep asking difficult questions about the resilience of their supply chains.

This article is an edited version of a piece published by Agenda.

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