Nissan car sales have taken a dive in Japan after its supplier, Mitsubishi Motors, admitted to manipulating fuel economy test data for the last 25 years on some of its vehicles. While Nissan ultimately discovered the fuel efficiency discrepancies in the cars Mitsubishi supplied, the story serves as an example of what companies should be doing to manage potential risks in their supply chain.
What did Nissan do wrong in this situation, and how was it not aware its supplier had been cheating fuel efficiency data for a quarter of a century? According to Steven Minsky, CEO of LogicManager, an enterprise risk management (ERM) software provider, Nissan did not do its due diligence to ensure its supply base was meeting specific standards. It did not properly conduct a risk assessment of its supply chain. Companies should be identifying the root causes of potential business risks through a proper risk assessment process, he said.
Many companies rely heavily on the RFP process to learn about a potential vendor but fail to do follow-up work once a supplier is signed, according to Minsky. Once a vendor is selected, companies with effective ERM strategies in place do a risk assessment on the vendor and fact check the information the vendor provided during the RFP process, ensuring a new business partner meets specific standards and does not pose potential risks. Sure, Nissan gets some bonus points for first calling attention to the Mitsubishi Motors fuel economy issue, but Minsky asks what took the carmaker so long to identify this problem?
Shares of Mitsubishi fell 10% last week following the carmaker’s admission to cheating fuel efficiency tests. Nissan’s April car sales dropped 15% overall for all its vehicles. For Nissan minicars specifically, sales fell 45%. Nissan also reportedly stopped selling its Dayz model minicars supplied by Mitsubishi. The partnership between the two carmakers formed in 2010, and Nissan CEO Carlos Ghosn said the company would wait to make a decision on the future relationship with Mitsubishi.
While car sale declines are largely contained within the Japan auto market at the moment, the implications of the scandal could have broader negative impacts on Nissan’s brand and reputation. Minsky called situations such as these a “contagion” — the Nissan and Mitsubishi story may seem as if it is an exclusively Japan problem, but it will likely have broader implications on the global automarket and impact sales elsewhere.
“The first thing that came to mind is, ‘this is going to spread,’” Minsky said.
ERM Adoption on the Rise
The goal of ERM is to minimize the impacts potential risks could have on a business and its bottom line. More companies are realizing ERM is something they should be actively managing as ERM solution success stories spread. When Minsky’s company LogicManager was founded in 2005, he said about 1% of businesses were looking at ERM seriously. Now, he sees that number at about 20%–40%.
The increase has occurred for for a number of reasons: government regulations, proven ERM ROI and growing media coverage of companies failing to tackle risk management properly.
Today, risk managers understand their responsibilities, know what kind of software is required to manage risks and what that software should be able to do for the organization, Minsky said. No longer are companies questioning if they should address ERM. Instead, they are determining how they tackle it and where exactly on the list of priorities it falls. For some companies, Minsky said, ERM just needs to sit higher up on that list.
“It needs to be bumped up in prioritization,” he said.