The Trade Facilitation and Trade Enforcement Act of 2015 was signed into law in February and prohibits the United States from accepting imported goods made through forced labor. A previous loophole allowed goods produced through slave labor to enter the country if demand for the product outweighed current supply. The new law also known as the customs bill calls on companies to gain a higher level of visibility into their multitier and global supply chains.
Resilinc, a provider of cloud-based supply chain risk management solutions, recently published a report on how exactly the new trade act will impact supply chains. We reached out to Resilinc’s Chief Marketing Officer Wayne Caccamo to discuss the report and its key takeaways for supply chain managers.
Spend Matters: The Resilinc report points out that 60% of companies do not have visibility beyond their tier-1 suppliers. How can companies even begin the process of ensuring their supply chains are free of forced labor if they do not have full visibility into tier-2, tier-3, etc., suppliers? Where do they start?
Wayne Caccamo: It starts with an executive commitment to a supply chain visibility and mapping initiative. By leveraging their own resources or that of a third-party service provider, companies begin the methodical process of onboarding suppliers tier-by-tier on to their supply network and supplier intelligence repository. Tier-1 suppliers share information about their own tier-1 (the company’s tier-2) suppliers and so, and so on.
SM: Companies are operating in an increasingly complex global environment and are faced with more and more supply chain risks every year — forced labor being one of them. Where does forced labor sit on the scale of the biggest supply chain risks facing companies today?
WC: It’s difficult to generalize. The salience of this issue depends on your industry and the regions your supply chain extends to. Food, agriculture and textile providers are most closely linked to this risk. But, even high tech, life sciences and auto companies should not overlook production-critical materials that have been linked to slave labor. If you have sub-tiers located in China, Malaysia or the Democratic Republic of Congo you face an increased risk.
In comparing this type of risk with other types of risks companies face in their supply, such as business continuity or disruption risk, capacity risk, security risks, and compliance risks with risk to brand and reputation associated with corporate social responsibility (e.g. forced labor), there isn’t a readily available single metric which can be used for an apple’s to apple’s comparison of risks to decide which risks are the biggest.
Adding to the complication is that some risks like a factory fire play out and are resolved sometimes in a matter of days or weeks, while others can take years for the impact to be detected and years before companies fully recover. The risk to brand and reputation associated with links to slave labor is an example of the ladder. Security risks are unique in that detection usually happens well after the event is triggered.
SM: The Trade Facilitation and Trade Enforcement Act removes the “consumptive demand” loophole, which previously allowed goods into the U.S. produced through forced labor if the demand for the product outweighed current supply. As Resilinc points out in its report, this will likely push more pressure on companies to rid their supply chains of forced labor. But exactly how big of a challenge is this for businesses? Do you think most companies will be able to meet compliance of the new regulations?
WC: I think the main goal of companies is to act in a socially responsible way in order to protect their brand and reputation. Compliance is a means to that end. So, when you view the question through that lens, companies need to be able to demonstrate that they have taken reasonable if not extraordinary measures to meet the spirit of the legislation's objectives. If this results in falling short of meeting the standard defined by “compliance,” I believe customers will be lenient, especially if their efforts are in line with industry norms.
SM: Can you talk about the risks companies face when they are unable to gain full visibility of their supply chains? What damages will occur if they do not comply with the new trade act?
WC: As suggested above, the main risk is to brand and reputation. This type of risk is among the most troublesome since no one knows how long and how deeply the impact will be felt in terms of brand loyalty, and in turn, market share and revenue. A relatively more immediate impact could be felt if a supplier is shut down either without the brand owner’s knowledge or is eliminated from the brand owner’s sub-tier supply network as a result proactive risk identification and mitigation measures. In either scenario, it is possible that until a new/alternative supplier is identified and brought online, downstream product availability could be impacted, resulting in delayed shipments or cancelled orders.
SM: What are leading companies doing to improve supply chain visibility and manage supply chain risks?
WC: Leading companies are doing three key things. First, they map their supply chain network and gather supplier intelligence and store information in a central (typically cloud) repository. Second, they apply analytics to their data store to proactively identify, quantify and prioritize risks for mitigation based on revenue impact whenever possible. Third, they monitor their global supply chain via a 24/7 global event monitoring and analysis service so that they can respond rapidly to relevant events — that were not anticipated or proactively mitigated — by mobilizing crisis response plans and playbooks.
SM: What would you say is the main takeaway from the new Resilinc report?
WC: Companies need to think strategically about individual supply chain risks like the slave labor issue in the context of the broader array of risks that they face every day. Supply chain risks should be addressed as part of a comprehensive resiliency strategy and not a “one-off” risk mitigation exercise. This is because the processes associated with risk mitigation and the treatment options available are common across a wide variety of risk types.
For example, the process for achieving supply chain visibility via multitier supply chain mapping and supplier intelligence gathering is the same regardless if the risks being identified are related to business continuity, capacity, change management, cyber-security or corporate social responsibility including slave labor. And, the risk mitigation or treatment options are also finite and the same (e.g., qualification of dual/alternate sources, contingent business insurance investments, supplier audits, strategic buffering, etc.).