Supply Chains – Here we go again

  • Supply Chains – Here we go again

    Supply Chains – Here we go again

    As we start the new year and economies pick themselves up from a bruising encounter with 2020, we can expect supply chains to be a major focus for many companies.

    Both politics and compliance will be front and centre of corporate concerns as 2021 unfolds. Trade politics will be a big determinant of supply chain viability, especially post Brexit and with a new administration in the White House. Machinations surrounding China trade, the balance of power in the Middle East, and climate change will all play their parts.

    Human rights due diligence (especially in the EU) could be a big compliance driver in 2021. But even without this there is plenty to keep companies occupied.

    Changing business demographics, and the shift on-line might also impact supply chain compliance. The Boohoo saga offers a glimpse into some of the challenges ahead facing an online economy dealing in goods. As always it is the intersections between the on-line and the physical economy that present much of the risk.

    Boohoo’s business model was predicated upon speed and low prices. This put suppliers under incredible pressure, and with Boohoo’s purchasing power allowed it to dictate terms.

    Something had to give, and in Boohoo’s case it was compliance.

    In her November 2020 investigation report Alison Levitt QC quotes Mahmud Kamani (Chairman and majority owner) :

    “…the way we treat our people is our responsibility, but if we’re subsequently getting so many garments made in Leicester and there is maybe 20 or 30 thousand machinists, is that my responsibility? If they then eat too many chapatis and become obese, is that then my responsibility? I don’t know where this goes” .

    This quote comes after a damning Channel 4 documentary (“Fashion’s Dirty Secret” 2010 with a sequel in 2017) into Boohoo’s Leicester supply chains; a 2018 FT expose of their supply chain labour practices; a Parliamentary Environmental Audit Committee Inquiry into the sustainability of the fashion industry (to which Boohoo was called to give evidence); a 2017 risk assessment by PWC; the hiring of Verisio to fix identified issues; and the Levitt investigation.

    In the same report the CFO, Neil Catto, echoes this attitude – provided Boohoo is getting the products it wants, at the price it wants, how the suppliers deliver is their issue, not Boohoo’s.

    Despite the Levitt investigation the Guardian reported just before Christmas 2020 that Boohoo was allegedly moving much of its production away from Leicester (which caused so many of its recent headlines) to, what the press termed, “sweatshops” in Pakistan.

    Although the Levitt investigation lists a startling number of supply chain compliance failings, the real cause of its problems was indifference. Boohoo has a record of missed opportunities to correct its supply chain issues going back to the first Channel 4 documentary in 2010.

    It was only in September 2019 that Boohoo appointed a Director of Sustainability to manage compliance. Up to that point compliance reported to the Director of Merchandising – hardly a guarantee of independence.

    For much of the time the compliance team consisted of just one person, who was inspecting up to twenty supplier factories a day. Senior management had been asked repeatedly to address the compliance resourcing shortfall, with the matter going to the board as recently as 2018. Notwithstanding the negative publicity supply chains were generating, nothing (Levitt’s report notes) appears to have come of the requests.

    There is only so much compliance can do. If it is starved of resources and overworked, there are bound to be problems.

    To be fair to Boohoo, not all the blame for the Leicester sweatshops can be laid at its door. Alison Levitt hints at a singular failure of the authorities to take effective action. It might also be pertinent to ask whether (despite continuing reforms to corporate governance requirements) the regulation and governance of listed companies in the UK is keeping up with current challenges (Boohoo has been an LSE AIM listed company since 2014).

    There are lessons in the Boohoo share price for advocates of markets being left to drive good corporate behaviour. Despite recent ups and downs Boohoo’s share price has climbed by roughly 1,000% (in line with its revenues) in the last five years. Investors (including some ESG funds – one of which had put a majority of its holdings into Boohoo) have been slow to react. Some analysts have put this down to over reliance by investors on ESG ratings by agencies (such as CSRhub), which on average put Boohoo into the top 30% of companies.

    However, that might not be the end of the story. Disregard for socially responsible business practices may come back to bite Boohoo, especially as rivals come into the market place with “greener” products. A business model predicated on cheap and fast is not going to build brand loyalty.

    Accordingly, online retailers should pause and consider. As pressure mounts to redress economic imbalances, human slavery and human trafficking (two crimes that exemplify the worst aspects of capitalism) will receive ever more attention. Anti-bribery legislation already contains a corporate criminal offence in which the mere failure to have adequate procedures to prevent bribery is a wrong doing in itself. How long before such thinking spills over into legislation targeted at worker exploitation ?

    The good news, of course, is that good compliance is not incompatible with profitable business – indeed done right it should be an enabler.

    The first priority is to conquer indifference. Next comes the translation of proportionality into a viable framework. A starting point for such an exercise is to assess risk, then adapt that to a formula for a sustainable compliance budget. Having a proper process for calculating resources (which should also include upper limits so as not to inhibit business) is a key not only to getting compliance right, but also to providing defensibility when the press and authorities come knocking.

    The principles are straightforward enough, but the practical realities are complex. Many organisations grasp the mechanical aspects of implementation, but struggle with aspects that require a degree of judgement. And these are many – starting with understanding who the right and wrong people are to lead transformation.

    I will be writing more in my next article about the three responses (conquering indifference, implementing a proportionate framework, and getting programme resourcing right). Nevertheless, if you wish to know more sooner, TSG will be more than happy to talk with you, and share our approach.

    The author leads TSG’s Advisory Services. He has spent many years in law enforcement and banking specialising in financial crime risk and compliance. TSG is a Research (including due diligence) specialist, also offering Ethics Compliance and Advisory services to its clients. TSG offers expertise in Eastern Europe, as well as East Asia.