Risky Business

Navigating regulatory compliance in a global market

Published: Tuesday, December 2, 2008 - 17:00

When regulatory compliance and risk management come to mind, they usually evoke feelings of fear, uncertainty, and doubt as to how well an organization is prepared for government scrutiny or any worst-case business scenario. Questions arise, such as: Have we developed the proper procedures to ensure product compliance? How can we measure and actually know if we are within the regulatory guidelines?  Do we have “proof of absence” or are we at risk from “absence of proof” by market and regulation? Do our systems help or hinder us?

The consumer recalls in 2007 are prime examples of how compliance and risk management go well beyond internal operations to span the entire supply chain. A comprehensive strategy includes three dimensions:

• An internal dimension comprising variables manufacturers can control
• An external dimension, which includes factors outside manufacturers’ control
• A customer dimension, encompassing supply-chain factors that manufacturers can influence

While it’s common for companies to firefight internally to meet compliance mandates, it’s critical to involve and consider all constituents as part of the compliance strategy. Equally important is to recognize that compliance and risk management aren’t projects, but rather are processes that must be monitored and adjusted on an ongoing basis. To meet emerging corporate responsibility and compliance mandates, companies can no longer afford the cost and risk of being reactive and the increased risk associated with “absence of proof” strategies. They must incrementally move to an active, and eventually proactive, compliance plan that is built into all processes and products, and ensures the “proof of absence” to regulatory exposure.

The compliance mandate
Over the past few decades, the pace of introducing new government regulations and compliance guidelines has accelerated significantly and is unlikely to slow down. Partially as a result of consumer demand for economic, environmental, and social responsibility, the burden of safety is shifting from governments to manufacturers. Additionally, mounting pressure driven by special interest groups has led to the creation of many new laws that put tighter restrictions on manufacturers. These new restrictions and laws have increased costs and have mandated changes at all levels, requiring that companies retool at the plant floor level, reevaluate materials and suppliers, and reexamine how products are introduced and marketed. Companies often respond in an ad hoc manner. The proliferation of compliance and risk management concerns requires that companies build a strategy encompassing the three primary influences—internal, external, and customer dimensions.

The internal dimension includes supply-chain factors under a manufacturer’s control, such as product idea, design, and lifecycle management; the selection of suppliers and ingredients; product allocation; and distribution strategies. Systems with different configurations, varying or inadequate business processes, and minimal integration often result in limited visibility into risks. Several high-profile recalls in 2007 can be linked to inadequate safety or compliance specifications from the manufacturer, or a lack of vendor auditing of suppliers in emerging markets. Perhaps most important, this dimension incorporates the core values established for the organization which help guide decisions and dictate how the company is perceived in the market.

The external dimension includes those variables out of a company’s control, such as new government regulations and restrictions; trading-partner mandates such as reductions in consumer packaging, product labeling and delivery requirements, new technology introductions such as RFID or e-pedigree; as well as electronic distribution of product updates. Other external conditions include foreign tariffs, global political issues, and weather conditions that can interrupt production or delivery and can influence supply channels, thereby instantly changing demand requirements. As companies increase the use of strategic partnerships from product design to production and distribution, strategic-partner compliance will become as critical as internal compliance.

Often overlooked is the customer dimension, which, although outside a manufacturer’s direct control, can be influenced based on the company’s customer-centric values and business ethics. The customer dimension considers the active participation and involvement of customers in product design and development and the ability to work together to offer meaningful product promotions and jointly manage supply and demand factors. With many customers and retailers mandating improved sustainability or green products, companies that are proactively designing compliance into products in accordance with these guidelines will have a competitive advantage and can minimize their regulatory exposure.

A multidimensional approach to compliance and risk management

Companies that take a proactive approach, actively institute socially responsible policies, and conduct themselves in a forward-thinking manner not only stay ahead of the compliance game but can even win new business.

Managing compliance and risk
Compliance and risk issues have seemingly gone in cycles, with financial compliance and corporate ethics receiving greater attention in recent years compared to the current increased focus on regulatory compliance and overseas manufacturing practices. Regardless of media attention, the three dimensions of compliance and risk are always active and need to be monitored and managed. Companies typically fall into one of several categorical approaches to managing compliance.

Many companies take a reactive approach to compliance, choosing to respond to issues as they arise and to realize short-term gains instead of focusing on keeping costs and resources low. With increasing customer or consumer scrutiny, operating with “absence of proof” or being reactive puts brand equity and company image at risk. With the appropriate systems in place, companies can quickly assess the effect of product issues, and minimize the cost and effect of product recalls. With automated business processes, manufacturers can adopt an active compliance methodology, building processes, and procedures to manage these issues more efficiently. For example, integrated validation and workflow processes allow companies to stop shipments to locations based on regulatory lock-out rules, or to stop shipment of a material to a plant without adequate regulatory handing capabilities.

To turn compliance and risk management into a competitive advantage and begin to strengthen the company brand, companies need to adopt a proactive mode of compliance. This ensures that compliance and risk management are built into the design of products, business processes, and each department’s business plan. From product life-cycle management, to sourcing and supply-chain planning, and from enterprise resource planning to enterprise asset management, continual feedback and integrated compliance ensure that manufacturers do it right every time. To achieve a proactive stance, it’s important to embrace compliance as a corporatewide initiative, from shop floor to top floor.

Taking a balanced approach
Compliance and risk management for any company, whether it’s making electrical components, packaging food, or processing raw materials, have become increasingly complex. How can a company balance the rising risks and costs of compliance with the escalating expectation of quality and safety from government and consumer constituents, and at the same time grow a profitable business?

In addition to instituting forward-thinking core values and best practices, businesses must also implement systems to improve efficiencies and reduce the cost of compliance and risk management. Implementing a risk-based compliance strategy allows companies to focus on the areas of greatest exposure, as well as the areas with the potentially biggest competitive advantage. Implementing an integrated business system will accelerate the capture of transactions and save time, as well as keep the workforce on track with planning and execution activities that are designed to maintain compliance. In more and more environments, it’s becoming a mandatory requirement to keep better records, and as a result, organizations are turning to business system vendors to apply new technologies that help maintain compliance.

Proactively internalizing new regulations and making product-development decisions based on new research can help build a stronger brand and win new customers. For food manufacturers, this can mean moving beyond simply updating labeling to identify trans-fats and allergens, to working toward removing those ingredients from their products.

Summary
Companies can take a fresh approach to compliance and risk management that goes beyond cost containment and lawsuit prevention, and turns necessities into a competitive advantage. By focusing on product designs, materials, and quality and safety capabilities that exceed expectations, manufacturers quickly set themselves apart from their competitors. Achieving these goals requires commitment from the executive team and others throughout the organization. This helps to sustain the effort, because compliance and risk management are on-going processes that take time to realize the anticipated benefits.

These measures are noble and will help build long-term customer loyalty, meet emerging social responsibility expectations, and develop more highly motivated employees, leading to higher levels of product quality and innovation, which in turn help to secure long-term company profitability and viability. By integrating external, internal, and customer-driven influences, a company’s compliance and risk management efforts put them at the forefront of their market and set them apart from their competitors.

About The Author

Rory Granros

Rory Granros is the director for industry and product marketing for process industries for Infor, a global provider of enterprise software. With more than 25 years of experience in developing and marketing innovative PLM, ERP and decision support solutions, Granros leads the global marketing initiatives for Infor’s industry-specific process manufacturing capabilities including PLM, ERP, SCP, SCE, EAM and CPM.