Competitive pressures affecting bottom-line profit margins have risen dramatically in today’s global economy. As a result, an increasing number of U.S. companies have turned to outsourcing of goods and services to reduce manufacturing and operational costs.
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Although international supply chain outsourcing has long been the arena of large, established international corporations, research suggests that many U.S. companies that fall into the category of small to medium-sized enterprises are also building vast, international supply chains to compete against their larger counterparts.
In many cases, the focus on operational cost saving vs. attention to quality and supply chain compliance has seen more and more companies looking for supplier opportunities in emerging and fast-growing markets. Notably, a PricewaterhouseCoopers survey report released in 2011 indicates that 76 percent of companies dealing with these markets cited corruption as the prime factor of noncompliance.
In addition, in a recently released survey of more than 100 executives compiled by MetricStream, roughly 50 percent of respondents indicated that their organizations had faced an issue of noncompliance resulting from a supplier. On a more encouraging note, the MetricStream survey suggests that about 91 percent of U.S. enterprises have adopted some form of supplier governance and supply chain management process to ensure supplier compliance under the Foreign Corrupt Practices Act. Of concern, however, only 5 percent of the respondents reported that the integration of supply chain risk management systems was in line with their organization’s overall business strategy and corporate governance. The MetricStream survey report concludes, “Most companies approach supplier compliance management with the myopic view of avoiding costly regulatory penalties or lawsuits. In other words, their goal is to protect business value. But what if supplier compliance could actually be used to enhance value?”
Although international supply chain outsourcing has indeed proven to provide potentially significant reductions in operating costs, for those companies less seasoned with the perils of foreign outsourcing, the risk undertaken in doing so could prove devastating. The saying that “what you don’t know can’t hurt you” with regard to foreign outsourcing could never be more wrong.
Ignorance of U.S. and global chain-management regulatory compliance requirements, as well as the risk associated with brand reputation, corporate and risk management governance, legal actions—especially shareholder class-action suites—not to mention faulty or delayed supply of goods and services due to local natural catastrophes or political instability, could lead to the financial ruin of any enterprise.
Furthermore, recent charges made by the Securities Exchange Commission and the Department of Justice based on noncompliance under the Foreign Corrupt Practices Act, and fairly recent additions added to the Frank-Dodd Act, have shifted focus from laying charges against violation by an “enterprise” to the specific responsibilities of the executive directors of the companies involved. This has introduced a new but very potent level of added risk in terms of managing supply chain compliance and corporate governance at the executive level.
Foreign supply chain regulations
Although the Foreign Corrupt Practices Act was introduced in 1977, seemingly little regulatory attention has been given to this foreign anti-corruption legislation until recent years, when the volume of charges made by the Securities Exchange Commission and the Department of Justice against enterprises and their executive directors rose substantially. The PricewaterhouseCoopers report points out that in 2010, the Department of Justice presented 48 prosecutions under the Foreign Corrupt Practices Act compared with two actions taken in 2004. The PricewaterhouseCoopers report also shows a significant shift of attention by the Department of Justice and SEC to take action against an enterprise’s executive directors and even shareholders.
The sudden rise in Foreign Corrupt Practices Act noncompliance charges since 2010 is no coincidence—this increased regulatory attention coincides with the introduction of the Frank-Dodd Act (which was introduced to tighten regulatory requirements and oversight of the financial investment and banking industries following the financial global meltdown of 2008 and 2009). The legislation also contained several seemingly benign provisions such as the Conflict Minerals Rule, initially intended as a form of financial sanctions against the worn-torn Democratic Republic of the Congo and neighboring countries based on violation of human rights.
The Conflict Minerals Rule applies to suppliers of tin, tantalum, tungsten, and gold (3TG). As a result, multiple U.S. enterprises reliant on these raw metals, ranging from sectors such as electronics, communications, aerospace, and automotive manufacturers to jewelry and healthcare, have been severely hampered by this provision of the Frank-Dodd Act. Several lawsuits have subsequently been initiated by business and manufacturing groups against the SEC and Department of Justice to prevent increased application of this rule (as well, or in conjunction with the Foreign Corrupt Practices Act) in pursuing noncompliance prosecutions.
For instance, the Conflict Minerals Rule requires that all enterprises that use off-sourced 3TG minerals, and that fall under the regulation of the Securities Exchange Commission, must submit a compliance report determining on a “reasonable basis” that the base metals procured were not in conflict with the provision. Furthermore, enterprises sourcing these minerals—whether new or recycled and/or considered scrap, must still file a compliance report with the Securities Exchange Commission regardless of the “first source” origin.
An analysis report released by the Securities Exchange Commission subsequent to the introduction of the Conflict Minerals Rule estimates the ruling will affect about 6,000 enterprises in the United States and abroad to the tune of roughly $3 billion in the first year, and at least $200 million each year afterward.
Supply chain governance best practices
It’s clear from recent trends and actions taken by the regulators with regard to oversight of corporate governance and risk management procedures as a whole—whether this involves foreign supply-chain outsourcing or financial arrangements/exposures—that the authorities are attempting to “push and pull” companies into adopting comprehensive and holistic enterprisewide risk management best practices. Unfortunately, this “push-pull” strategy is unlikely to be the best approach in bringing about changes with regard to the corporate mindset. Boards of directors of corporations need to willingly embrace the concept of integrated risk management processes, corporate governance, and enterprisewide best practices with the view that this is not a cost, but an investment in the future. Only the ignorant—or the believers that “what you don’t know can’t hurt you”—will remain focused solely on “cost” vs. the benefit of a comprehensive supply chain risk management system.
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Reshoring to avoid foreign supply chain risks
Instability and uncertainty are an inherent part of doing business offshore. Companies have experienced intellectual property theft, political instability, unfair laws and regulations, unreliable suppliers etc as mentioned in the article.
However, companies that adopt a more comprehensive total cost analysis are finding that the “hidden costs” of offshoring often counterbalance any remaining savings from cheap price or labor abroad. These companies are investing and sourcing in the U.S. because it makes good economic sense for them to do so.
The Reshoring Initiative Can Help In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the not-for-profit Reshoring Initiative’s free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm
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