Why should boards care about supply chains?

The topic of supply chains is on everyone’s mind more than ever.

The topic of supply chains is on everyone’s mind more than ever. Board members are increasingly obliged to ask themselves what their own company’s supply chains look like, and with whom they do business. The issues associated with supply chains are complex and require consideration from multiple angles.

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner at Better Boards, discusses supply chains with Anahita Thoms, one of the 100 Most Influential Women in German Business, according to manager magazin.

Some of the key takeaways of the conversation include:

Anahita Thoms heads Baker McKenzie’s International Trade Practice in Germany, and is a Member of the EMEA Steering Committee for Compliance & Investigations. She is Global Lead Sustainability Partner for the Industrials, Manufacturing and Transportation Industry Group, and a Member of the ABA International Human Rights Steering Committee. She also served for three consecutive terms as co-chair of the Export Controls and Economic Sanctions Committee of the ABA. She has won various accolades, including International Trade Lawyer of the Year (Germany) at the 2020 ILO Client Choice Awards, and Young Global Leader of the World Economic Forum, Capital 40 under 40.

“Systems make shocks”

Anahita notes that supply chains are an increasingly important topic across many sectors and jurisdictions. They pose real challenges to boards, who must ensure that organisations are sufficiently supplied with whatever they need to operate, and yet also consider the emerging body of laws regulating supply chains as it becomes ever more complex. This can often lead to redesign of an organisation’s entire supply chain.

Systems make shocks, whether they be pandemics, geopolitical issues or legislative changes. The obvious example is the supply chain disruption and shortages experienced during the pandemic. These ‘system shocks’ can highlight dependency, shortages, production slowdowns and even loss of production.

Anahita points out that trade wars can create havoc for organisations heavily dependent on importing certain items, if suddenly they face tariffs on that item, increasing import costs. Production costs may become so significantly higher that they potentially affect the entire business model. Legislation is another major issue. More and more companies must (and do) recognise their responsibility with regard to human rights and environmental issues – and laws require this of them. Typical examples include the Act regarding corporate due diligence obligations and supply chains in Germany, and the similar French law on vigilance obligations. The European Commission also has various proposals, for example an EU Directive on corporate sustainability, due diligence, and various non-financial reporting requirements throughout the European Union. Anahita believes it can only be a good thing that, for many boards, these multiple legislative initiatives or laws are a high priority issue – and rightly so.

“Board members may have had the perception that supply chain management is only a metaphor”

Anahita feels that in the past, board members may have had the perception that supply chain management is only the responsibility of those preparing the sustainability report or the procurement team. Nowadays, and in light of supply chain shortages, geopolitical challenges and legislative developments, many boards now understand that disruptions in supply chains are a real risk, and may even become a reputational challenge. Hence, supply chains are becoming an important topic for boards.

“Supply chains are value chains are at the heart of businesses”

Businesses need to ensure that they are profitable, and supply chains are value chains at the heart of businesses, particularly those that export and import a lot of products. So, supply chain efficiency also dictates the speed at which an idea comes into the market. Altering supply chains smartly can in the long run decrease production costs as well as emissions, so the cost drivers and business impacts of each link in the supply chain need to be properly analysed.

Real time supply chain planning and stakeholder engagement can make a huge impact, says Anahita, but they can also create synergies between the organisation and suppliers, as well as local communities and stakeholders. This can in turn create a competitive advantage, leading to building new service solutions from the bottom up, and also strong relationships with reputable, resilient suppliers. So monitoring of supply chains is an opportunity as well as a necessity.

“Directors should concentrate on exploring possibilities to diversify their supplier base and also digitalize their supply chain”

Anahita believes that, at the moment, most companies will be concerned with making their supply chains more resilient to future prices. She recommends that to increase supply chain resilience, focus should be on exploring possibilities to diversify the supplier base and digitalize the supply chain. She recommends that smart, capable and business-oriented Chief Sustainability Officers be enabled to set the tone from the top, so the organisation can anticipate and not just react.

“Diversification is something that has to be ongoing”

The topic of ESG is so broad that most companies are really struggling, Anahita feels. She recommends viewing ESG as an ongoing process – to become better every year, rather than believing you can achieve everything in a short period. She also advocates including employees in the whole discussion.

Regarding diversification, she points out that sourcing products and components from only a single source only makes supply chains vulnerable. However, the issue of whether a greater diversification is a viable path, depends on the organization. For highly complex products, it always starts with analysing the weak points of the supply chain, and building a sustainable business relationship with suppliers, which she notes can be a long process. Thus, a risk-based analysis can show how far it is possible to diversify more, and this should therefore definitely be an ongoing effort.

She also suggests that supply chains should become more digital in the future, with the goal of end-to-end transparency of the entire supply chain, and tracking tools to help map goods movements transparently and in real time. She points out that the faster you identify a problem in the supply chain, the faster you can decide on counter measures.

“You cannot look at these things in silos”

Anahita believes in a three-pronged approach – the business, the profitability challenges and the reputation – rather than operating in silos. She recommends rationally analysing supply chains, then looking at the values of the company and then the risks.

 

The three top takeaways from our conversation are:

• Supply chains are vulnerable to disruptions. Therefore, supply chain management can be a source of risk if done badly, and it can equally be a source of great opportunity.
• Supply chains must be understood in a more holistic manner nowadays, as sustainability in supply chains is more than just necessary, but a reputational topic.
• Boards will play an increasing role with regards to supply chain management, because they are a source of risk to the company’s business.

 

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