Today's market is putting significant pressures on businesses, particularly manufacturers with complex supply chains. These pressures are largely caused by growing demands for sustainable business practices, complex regulations, and changing market dynamics. Companies are increasingly recognizing that they are responsible for their suppliers’ actions, and to avoid negative business impacts, they’re working to identify and manage third-party risks before they become liabilities. These efforts are imperative for businesses that want to preserve profitability and secure a competitive position in the market.
Understanding the different facets of supply chain risks
Before we can mitigate supply chain risks, we first need to understand the nature of these threats and the behaviors that leave businesses exposed to them. They fall into three broad categories:
Financial risks in supply chains can often be traced to shifts in the regulatory landscape, changing consumer demands, market volatility, and even environmental factors. These elements, if overlooked, can lead to severe impacts on the bottom line or even the ability to continue manufacturing, highlighting the vital need for a proactive strategy to identify and manage this risk.
Practices that expose businesses to financial risks
Failure to conduct due diligence is often a driving factor behind financial impacts, and the consequences are more complex and difficult to identify or quantify than they appear. For instance, consider a company that does not meet the necessary requirements for its products to be sold in Europe. In these cases, non-compliance can lead to direct liabilities like fines or expenses related to blocked market access and product redesign. Blocked market access, although not always as visible as a direct fine, can profoundly affect a company's financial standing and market position.
Beyond these traditional costs, however, lies the subtler, yet much more substantial impact of lost revenue opportunities. Companies may miss out on orders because their products aren't qualified for certain markets, or they may lose orders or even customers due to late deliveries caused by customs delays or rejections, or an inability to prove compliance.
Operational risks in the supply chain often emerge as supply shortages or production bottlenecks and can swiftly escalate operational overhead and lead to significant customer dissatisfaction. These challenges are further complicated by external factors such as societal pressures and regulatory changes, adding a layer of complexity to supply chain management. A notable illustration of this is 3M's decision to phase out PFAS and roughly 21,000 products that use them. This impacts its own operations, as well as those of thousands of other manufacturers that rely on 3M materials not only as components of their own products, but also for factory maintenance, repair, and operations (MRO).
Practices that expose businesses to operational risks
A company’s level of operational risk is determined by its understanding of how external factors impact suppliers. A prime example of this is evident in the medical device industry, where there is a misconception that products are often exempt from emerging materials restrictions because they are “essential.” However, just because a company may be out of scope of some direct requirements, that doesn’t mean they are immune to operational risks. New regulations impact the manufacturing sector at large, which in turn, have indirect but significant implications for individual businesses, including companies in the medical device sector that are technically out of scope.
For instance, even if a company is outside the scope of new U.S. Toxic Substances Control Act (TSCA) legislation around PFAS, they might find themselves unable to procure essential parts for their products, assembly line machinery, or even safety equipment for employees due to the decline of PFAS in the supply chain. Overlooking these aspects of materials compliance — focusing solely on the legal ability to sell products — ignores the broader operational threats, especially as materials regulations affect supplier behavior and their ability to use and purchase certain products.
Another key aspect that businesses often overlook is that their current compliant status doesn’t remain valid over time. Many companies believe that if they were compliant two years ago, that stands true today. However, regulations constantly evolve, and what was compliant yesterday may not be compliant today. This type of oversight can also lead to significant operational risks.
A company's reputation is a delicate and invaluable asset, and due to increasing scrutiny from stakeholders, it’s more susceptible to damage than ever before. The supply chain plays a pivotal role in upholding a good reputation. Any perceived lapses in transparency or sustainability can significantly tarnish a company's public image. Incidents of non-compliance, enforcement actions, or customer backlash are not just temporary setbacks — they can leave a lasting dent in the company's reputation, affecting future customer relationships and stakeholder trust.
Practices that expose businesses to reputational risks
A recent KPMG study revealed that over half of respondents have canceled deals due to findings during ESG due diligence. This underscores how failures in meeting materials compliance or environmental, social, and governance (ESG) standards pose severe reputational risks. For instance, if a company is found to be using suppliers linked to forced labor, even deep within their supply chain, the repercussions extend beyond non-compliance penalties to include very public naming and shaming.
Moreover, on the product materials front, a company caught selling products containing hazardous chemicals, particularly when claiming to be sustainable, exposes itself not only to non-compliance penalties but also public lawsuits.
Reputational risks are also hidden in the products themselves. If products are non-compliant, causing delays, the company risks being perceived as an unreliable supplier, affecting its standing in the eyes of customers who prioritize timely delivery.
The interconnected nature of supply chain risks
We’ve broken down these risks into three categories to show you where your business faces the most risk, but it’s important to understand that these risk types are deeply interconnected. None of them exist in siloes. For example, operational disruptions like delays due to harmful chemicals in your products can lead to delivery issues and cause reputational damage. Conversely, reputational risks, such as negative publicity from unethical practices within the supply chain, can impact sales and growth prospects.
The importance of proactive risk identification
To effectively manage escalating risks, you’ll need to start with early identification using resources like the Supply Chain Risk Assessment Tool for Complex Manufacturers. This tool not only helps pinpoint risks but also aids in developing proactive strategies to address them before they escalate. By doing so, it reduces the need to make emergency decisions. For example, without timely updates to compliance programs, companies risk being unable to sell in key markets, which can lead to customer dissatisfaction and revenue loss. This tool helps avoid such scenarios by ensuring risks are managed promptly and effectively.
Being proactive also means avoiding the trap of emergency resource allocation, where critical projects are sidelined to address compliance issues. Instead, with proactive planning, products can seamlessly transition through their lifecycle without the need for rushed redesigns. With this foresight, businesses can allocate resources more strategically, focusing on innovation and growth-oriented projects rather than getting bogged down in compliance crises while trying to protect existing market share.
About the author: Cally Edgren, Senior Director of Sustainability at Assent
Cally Edgren is a proven compliance program leader with experience developing, communicating, and executing company goals and strategies. She is a subject matter expert on product materials compliance as well as market access certifications and has a background in program and process development to support regulatory compliance requirements. Cally has 30 years of experience in developing and managing global compliance programs at Rockwell Automation and Kohler Co.