Is Procurement Reputational Risk Mis-sold?

Please welcome this interesting article from Dr Gordy (Dr Gordon Murray), practitioner, academic and all-round procurement guru. We are sure it will trigger some comments!

For many years I have heard about the risk of poor procurement performance damaging reputation - I'm sure you have too. I'm also sure you would have heard it from me too.

Have you ever thought though how adverse impact would be manifested?

The assumption on impact may well have been a share price decline - bad media coverage about a procurement issue correlating with a decline in share price. At first glance that sounds logical enough but there's a major problem if the firm or organisation in question does not have shares publicly quoted. For example, public sector organisations, third-sector organisations and private companies would not be quoted on the stock exchange!

Okay, so setting that aside, and only considering the share price performance of organisations like, Tesco, Premier Foods, Primark, and H&M - yes all these have had adverse national media coverage linked to procurement: could we see adverse impact on share price linked with the horsemeat scandal, wrong use of the Red Tractor QA logo, supplier late payments and profit mis-statement, supplier coercion (e.g. pay-to-stay), the Rana Plaza disaster, poor SCM conditions?

I looked at the quoted share prices, the day before the news story broke, the day after, two weeks before and two weeks after, and even considered the trends over a longer period of two years.

Now what do you think I found? Well it appears to me, without an major statistical analysis, that where you could see an adverse impact, it was short-lived (a blip) and the firm in question was already in a long-term state of a declining share price anyway - the procurement issue is unlikely to have helped but was probably indicative of wider strategic management weakness anyway. Then bizarrely, in a few of the situations the share price increased. Yes, major adverse press coverage of a procurement related issue and the share price rose and continued to rise - the firm was on a steady long-term upwards trajectory of its share price and the adverse media coverage of the procurement issue appeared to have no detrimental long-term impact whatsoever - perhaps it was how the firm was perceived to have responded to the issue?

Also interesting was when I considered firms which were perceived to have come out well in media coverage, for example, those food retailers who were praised at the time of the horsemen scandal, I couldn't find a tracker which demonstrated a benefit - they were not publicly quoted on the stock market!

What does this tell us? Well the whole threat of potential reputational damage used in selling procurement strategy may well be mis-selling. Perhaps procurement issues are not as big an issue as we see them? Perhaps nobody really cares? Perhaps the whole notion of measuring adverse impact through share price is flawed?

What do you think?

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Voices (4)

  1. Paul Wright:

    Shooting from the hip here, so feel free to ignore but I think an interesting point is that those suffering a negative impact were also (probably) suffering from poor strategic management. I suspect but cannot prove that many (some?) of the poor procurement decisions arose because of larger problems in the organisation, and in thrashing about to improve things non-procurement senior managers intervened in the procurement process with such wizzard wheezes as not paying suppliers on time. These may seem to others as such obviously brilliant ideas that they cannot understand why Procurement have not done them before. Of course they have not imagined the consequences, or not believed they would arise. One example I heard about was a company whose FD decided to pay Shell late, and was gobsmacked when they played hardball and immediately put them on stop.
    Could it be that the source of the problem is that SCM is not seen as that important to many of these organisations? So I agree with Dan above

  2. Dr Jo Meehan:

    Interesting article Gordon. I suppose the issue for me is, whether as a profession we seek to avoid the actual impact of poor procurement – peoples’ suffering and inequity (at a human level) – or if we spend our time wondering how to measure “impact” and how to correlate with financial performance. I know the old adage “if you can’t measure it you can’t improve it” has a point, but in a world of impact measurement we need to ensure we fundamentally care about the people/impacts that sit behind the numbers more than the numbers themselves. If our primary driver is to avoid reputational damage rather than avoiding ‘actual’ damage does our moral compass need to be recalibrated?

  3. RJ:

    Interesting, yes, relevant, maybe. In my view correlating procurement reputational risk (or indeed any other single issue than simple financial results) directly with share price performance is probably too simplistic an analysis. Share price, and indeed financial performance as a whole, is just too dependent on so many other issues.

    The possible exception to this would be a situation where reputations have been built specifically on a particular procurement or supply commitment: ironically Waitrose/John Lewis may not have benefited from being less affected by the horsemeat scandal because it would have been expected of them but had they actually been the worst culprit they might have suffered. Similarly, I could see Body Shop being hit if their suppliers were using child labour or polluting vast swathes of a country’s water table. But budget high street retailers using Asian sweatshops? Well, we always expected it, didn’t we, and just closed our eyes to it.

    I suspect you’d need to dig far deeper into Net Promoter Scores and other, more behavioural, analyses to really understand what procurement reputational risk impacts could really be.

  4. Dan:

    Reputational issues would only be a problem if it encourages customers to go to their competitors (share prices are concerned with profitability both current and future). Since I would say that supply chain issues are not a huge priority to most customers, reputational problems would have little effect on profitability in itself – but it would if said supply chain issues were indicative of poor management overall, which would directly affect profitability.

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