Quantifying the Cost of Supply Chain Disruptions Due to Sustainability Issues/Violations

I recently checked out a study conducted by Ecovadis, Insead and PWC that provides a quantitative analysis of value drivers associated with sustainable procurement. It's a fascinating read, and I will post a link to it when it becomes available online. I'll also provide a series of links and synopses to our coverage on Spend Matters UK/Europe, which we're not covering here in the US. One area that caught my eye that I haven't seen examined by an academic or professional organization at this level of detail -- aside from anecdotal observations -- is how the "direct costs linked to sustainability issues after a supply chain disruption" represent .7% of a company's revenue on average." This is a significant number, but the examples in the rest of this post have more impact, as they add color to the aggregated quantitative study component.

Consider the early case of Palm, going back five years, when its stock value dropped 14% "due to suppliers not meeting the RoHS directive" which in turn caused the organization to "withdraw its Treo 650" from the European market. Or consider how in 2008, Baxter International saw its market capitalization tumble 13% "due to contamination of Herapin imported from China." Other examples that we've observed where companies have either lost revenue from supply chain disruptions tied to CSR issues and/or seen negative market capitalization impacts include high-tech product launches, contamination in consumer and food products and labor violations in textiles and apparel.

In total, from a capital markets impact, the study found that among public companies, share prices declined on average of 12% "after a supply chain disruption due to a sustainability issue." Yet companies must realize that a share price is only one measure to consider for ethical supply chain issues. The authors of the study also suggest that in other cases, these types of disruptions/violations "have impacted a brand's reputation without directly affecting the company's market capitalization or major environmental issues have led to disastrous situation for a company with indirect and direct costs much higher" than a share price drop.

To summarize the importance of this aspect of the study, if you're looking to build a risk management-based case to invest in capabilities that track and manage CSR programs and supplier credentials in your supply chain, it's pretty clear that the Ecovadis, Insead and PWC data should prove helpful in making the financial argument to get the rest of the organization to take action.

Jason Busch

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