Mitigating Reputational Risks in Supply Chains

Abstract

Purpose – The purpose of this paper is to explore reputational risk that are borne in the supply chain and contribute to this contemporary but growing research stream.
Design/methodology/approach – First, a theoretical framework is provided to help in the characterisation of reputational risks and how they impact supply chain members that may be multiple tiers away from the manufacturer. Then, semi-structured interviews were conducted with practitioners who were familiar with reputational risks and who were engaging in varying mitigating techniques. Cognitive modelling was
utilised to report the findings.
Findings – The practitioners in this paper were very familiar with the risks and were active in varying mitigating practices as budgets and resource constraints would allow. The brevity of the risks identified and the significance of specific risks with how they impact a reputation was revealed. Mitigation is an ongoing and haphazard process with very little information available as would be expected with a typical risk management approach.
Research limitations/implications – This paper serves to provide practitioners insight into the varying methods used by firms with supply chain members that number in hundreds. Based on our findings, a recommendation was made that utilise corporate social responsibility as a foundation that is proposed to address a number of risks including those related to price, availability and quality. The limits of this work are that it is specific to a select group of practitioners specialised in this area. Although the information is rich, it is not generalisable.
Originality/value – This paper makes a significant contribution to the literature by providing insight into the perceptions of practitioners who make decisions on mitigating reputational risks. The results suggest that this is a very new area of management that is striving to find a way to minimise their exposure.

Full text

Supply Chain Management: An International Journal
Mitigating reputational risks in supply chains
Henry L. Petersen Fred Lemke
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Henry L. Petersen Fred Lemke , (2015),"Mitigating reputational risks in supply chains", Supply Chain Management: An
International Journal, Vol. 20 Iss 5 pp. 495 - 510
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Mitigating reputational risks in
supply chains
Henry L. Petersen
Department of Management, University of Wisconsin-La Crosse, La Crosse, Wisconsin, USA, and
Fred Lemke
Department of Marketing and Sustainability, Newcastle University Business School, Newcastle upon Tyne, UK
Abstract
Purpose – The purpose of this paper is to explore reputational risk that are borne in the supply chain and contribute to this contemporary
but growing research stream.
Design/methodology/approach – First, a theoretical framework is provided to help in the characterisation of reputational risks and how they
impact supply chain members that may be multiple tiers away from the manufacturer. Then, semi-structured interviews were conducted with
practitioners who were familiar with reputational risks and who were engaging in varying mitigating techniques. Cognitive modelling was
utilised to report the findings.
Findings – The practitioners in this paper were very familiar with the risks and were active in varying mitigating practices as budgets and
resource constraints would allow. The brevity of the risks identified and the significance of specific risks with how they impact a reputation
was revealed. Mitigation is an ongoing and haphazard process with very little information available as would be expected with a typical risk
management approach.
Research limitations/implications – This paper serves to provide practitioners insight into the varying methods used by firms with supply
chain members that number in hundreds. Based on our findings, a recommendation was made that utilise corporate social responsibility as
a foundation that is proposed to address a number of risks including those related to price, availability and quality. The limits of this work
are that it is specific to a select group of practitioners specialised in this area. Although the information is rich, it is not generalisable.
Originality/value – This paper makes a significant contribution to the literature by providing insight into the perceptions of practitioners who
make decisions on mitigating reputational risks. The results suggest that this is a very new area of management that is striving to find a way
to minimise their exposure.
Keywords Corporate responsibility, Risk management, Supply chain ethics
Paper type Research paper
Introduction
We have known that supply chains can have a considerable
impact on the environment (Shi et al., 2012;Svensson and
Wagner, 2012), and significant strides have been taken to
address this fact (Simpson and Power, 2005;Tachizawa et al.,
2014). The practices with greening supply chains have shown
continual improvement. However, irresponsible business
activities remain a risk to others in the chain. A good example
is the most recent and perhaps memorable incident that
occurred with Apple Inc. The employees of Foxconn, a
manufacturer of electronic devices for many firms including
Apple, threatened mass suicide for the poor working
conditions in the facilities. As a result, Apple was implicated in
the sweatshop conditions (Guglielmo, 2013), merely by
association and their reputation was threatened. This example
serves to represent supply chain reputation risks where chain
members’ irresponsible actions have the potential to impact
other parties.
There are many other examples of this type of risk such as
Deepwater Horizon’s questionable activities resulting in the
worst oil disaster in the history of USA. Because of
Deepwater, British Petroleum (BP) paid the price
monetarily (Gilbert and Scheck, 2014) and with respect to
their reputation, the impact continues. In the USA, the
release of the screenplay “Deepwater Horizon” is
anticipated for September 2016 – IMDb.com, Inc., an
amazon.com company, already listed the movie as the
“Most Popular Feature Film released in 2016” in the
“Drama” category (Anonymous, 2015).
Although a close collaboration between chain members
can often lead to positive outcomes for all parties involved
(cf. Wagner and Alderdice, 2006), it is the dark side to it
(Juhasz, 2012) that deserves the most attention. The
“Horsemeat Scandal” in Europe (see Anonymous, 2013a
for the timeline of events) impacted many organisations
along the supply chain. Even large retailers fell victim to the
The current issue and full text archive of this journal is available on
Emerald Insight at: www.emeraldinsight.com/1359-8546.htm
Supply Chain Management: An International Journal
20/5 (2015) 495–510
© Emerald Group Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/SCM-09-2014-0320]
Received 29 September 2014
Revised 9 February 2015
7 June 2015
20 June 2015
Accepted 21 June 2015
495
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phenomenon, with IKEA withdrawing their product from
14 European countries (Pollak, 2013) and Tesco
investigating and revising their list of approved suppliers
(Stones, 2013) in an effort to rebuild their reputation and
trust with their customers. Tim Smith, Group Technical
Director at Tesco, emphasised:
We want to leave customers in no doubt that we will do whatever it takes
to ensure the quality of their food and that the food they buy is exactly
what the label says it is (Anonymous, 2013b).
The following article builds upon the concept of
reputational risks generated in the supply chain. We begin
with reviewing the reputation and risk literature and
instances in which this has become a topic. Next, a model
is proposed theorising how member activities may affect the
reputation of partnering firms. We then present the results
of a qualitative investigation, highlighting how practicing
managers perceive the phenomenon. Lastly, we discuss the
varying risk management approaches that may be taken and
the opportunities for further research.
Reputation
Reputation is a dynamic asset, and, as a resource that
creates value, it can mitigate the negative outcomes
stemming from a crisis (Vanhamme and Grobben, 2009)
and serve as a fundamental source of competitive advantage
(Dierickx and Cool, 1989). A positive reputation has been
linked to improving upon the bottom line (Finch, 2004),
attracting capital, closing contracts and having a positive
influence on consumer behaviour (Dowling, 2001).
Reputation is derived from three foundational elements:
1 the perceptions of individuals;
2 the aggregate of those individual perceptions captured
as stakeholder perceptions; and
3 the comparability of those perceptions (Fombrun,
1996).
Consumers develop an impression of an organisation by a
number of different methods. It may be from their
individual experiences with the firm’s people (Lemke et al.,
2011), their perceptions of how the firm manages its assets
or how it may interact with the local community (Castro
et al., 2006). Essentially, each consumer forms impressions
through a multitude of different avenues and, when
considered collectively with other stakeholders, results in a
reputation. From a distance, stakeholders can then be
mapped on a network and separated into definable groups
(Ackermann and Eden, 2011). Understanding these groups
is critical for managing them appropriately (cf. Money et al.,
2012). This allows managers to observe and evaluate the
reputation of corporations over time – at least on theoretical
grounds – which makes its management that much more
plausible.
Dollinger et al. (1997) noted that individual perceptions of
reputation was accrued based on the practices of management,
the financial performance of the firm and, lastly, the
characteristics of its product. These are the raw and somewhat
physical layers that managers accept and control for. But there
are other interwoven dimensions that cut across companies and
describe reputation in detail. With the growing risk of supply
chain partner behaviour, and in consideration of the
business-to-business (B2B) relationships found in supply chains,
we adopted the model suggested by Fombrun (1996) and
Fombrun and Shanley (1990) to unravel the reputational
construct (Figure 1).
In Figure 1, reputation rests at the core and is formed by
perceptions of: management and their capabilities, how the
organisation utilises its resources, the long-term
investments made, products and services offered, the
management of employees, innovativeness and, lastly,
corporate social responsibility (CSR). These serve as
variables in the formation and development of a reputation,
which reflects a multi-stakeholder acuity whether it is in a
business-to-consumer or B2B setting. These dimensions
are particularly suitable for capturing the perspectives of all
stakeholders associated with the processes and outcome of
a supply chain. It also provides insight as to how a
reputation may be damaged (Dowling, 2004;Hamilton,
1995).
In the supply chain context, corporations will develop a
reputation depending upon where they find themselves
along the chain (Eltantawy et al., 2009). Figure 2 represents
a simplified view of a supply chain. We only consider one
raw material producer, processor and manufacturer for
practical purposes, but there may be many more with
multiple tiers. Yet, the basic principle remains the same:
reputations are formed based upon the perceptions of
stakeholders with respect to the firm’s activities and
competences for each of the dimensions.
What we are now seeing is that the reputation derived
from any one or more dimensions has the probability of
being transferred from one party to another (Fiol et al.,
2001;Kotha et al., 2001;Lemke and Petersen, 2013). For
instance, a manufacturing firm that has a significant
reputation for innovation, like Nike, may have a spill over
effect and thereby enhance the innovation domain of a
partnering firm, as shown for supply chain “A”, in the upper
part of Figure 3. Put another way, the retailer borrows the
reputation for innovation from the manufacturer.
In contrast, the lower part “B” of the figure shows a raw
material supplier that operates sweatshops and/or causes a
significant amount of damage to the natural environment.
This behaviour will develop a reputation that predominates
within the CSR dimension[1] and entails being dirty or of
committing human rights atrocities. There is now a high
probability that partnering firms will experience a spill over
effect in which they may also be associated with the
misdeed, placing their reputation at risk. It is important to
understand that reputational dimensions are transferrable
in both the positive and negative cases. Likewise, knowing
which dimensions remain with the party that essentially
earned it is key for capturing reputation holistically. This
helps us to understand when or where risks should be
mitigated. We differentiate between “reputational owners”
and “reputational borrowers” (discussed elsewhere, see
Lemke and Petersen, 2013) and that both reputational roles
co-exist throughout the supply chain. The reputational
owner actively creates reputation through the market
offering, communication and action, while the reputational
borrower passively receives reputation from the owner
merely by association. Transferring reputation from the
Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
496
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owner to the borrower is the spill over effect – the principle
that ties the two roles together. In this light, mitigation
begins with analysing how the dimensions of reputation are
developed and transferred. What appeared to be a separate
firm-specific reputation actually has the potential to surface
in the supply chain as a holistic and multi-source construct
that poses a risk to all chain members.
Risks
Risk management typically addresses issues related to
strategy, operations, economics and hazards (Andersen,
2008). As a universal principle, risks and returns typically
go hand in hand. Most investments have varying degrees of
risk and, at times, diversification may be used to offset the
loss in one area with gains in another (Wang et al., 2003).
For many risks that are related to liability, an organisational
portfolio provides managers with the tools for identification
and classification (Donaldson et al., 2012). The risks are
then assessed for their probability of occurrence, the costs
to be incurred if the risk were to be realised and, then lastly,
what portion of the burden/cost the organisation should
take on. This assessment facilitates risk prioritisation. From
Figure 1 Reputational dimensions relevant to all stakeholders
Figure 2 Diagrammatic representation of a supply chain and reputational risk elements
Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
497
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there, four generic decision options are taken: risk
avoidance, loss prevention and control, risk transference
and risk retention (Bodie and Merton, 1998). Risks to a
corporation’s reputation, reputational risks, tend to fall
outside of basic risk management practices.
Reputational risks have been defined as the cumulative
likelihood that events stemming from exogenous or
endogenous sources can occur and negatively impact
stakeholder perceptions of the firm’s behaviour and
performance (Roehrich et al., 2014). They may be based
upon an economic, societal or environmental event that the
firm was engaged in directly or may arise indirectly via the
activities of another organisation in the supply chain
(Hoejmose et al., 2014). However, these risks are typically
overlooked. As we have pointed out, an organisation’s
reputation may be placed at risk if a member organisation
conducts itself in such a manner that the behavioural
outcomes spread beyond its organisational boundaries.
Given the simple and isolated “input, throughput and
output view” of a single company, it is no surprise that this
type of risk may occur largely unnoticed. There may be
several reasons for this. On the one hand, reputational risks
rarely result in the disruption of resources and they hardly
impact the quality and quantity of a supply, two major risks
that receive the most attention. On the other hand, it is
generally problematic to assess their associated costs,
making mitigation difficult to justify. Lastly, estimating the
probability of an event occurring and the impact the event
will have on a reputation (and to what extent) is completely
off the charts. Hence, assessing the costs and benefits of risk
management is highly unpredictable.
This phenomenon led us to a set of interrelated
questions: What are the risks from a practitioner’s
viewpoint, how (if at all) do they impact on reputation and
how could these be mitigated in a supply chain context?
One of the corporate governance mechanisms for
managing risks to reputation has been the implementation
of sustainable development or CSR. Roehrich et al. (2014)
suggested that reputational risks were the primary driver for
implementing sustainability practices in the supply chain
and that managing social issues or sustainability could come
under the umbrella of social responsibility (Hoejmose et al.,
2014) or the greening of supply chains (Lamming and
Hampson, 1996). Hence, we turn our focus to CSR with
respect to risk mitigation for practical and theoretical
foundations (Dollinger et al., 1997;Fombrun, 1996;
Fombrun and Shanley, 1990).
CSR and the mitigation of risks
From a traditional stakeholder vantage point[2], one of the
primary roles or responsibilities of business is wealth
generation (Friedman, 1970) which guides them on their
duties as for-profit entities (Davis, 1973). Included in the
building up of monetary wealth, business now must also
strive to assume CSR which entails responsibilities
surrounding economic, societal and environmental issues
(Inoue and Lee, 2011;Jo and Harjoto, 2012;Orlitzky et al.,
2003;Petersen and Vredenburg, 2009a,2009b). Although
it is becoming common practice for organisations to assume
other responsibilities, the CSR concept is still somewhat
ill-defined (Freeman and Hasnaoui, 2011). This is due, in
part, to varying stakeholder expectations (Franz and
Petersen, 2012;Jamali, 2008) and what one would consider
to be a CSR-related action (cf. Alessandri et al., 2011).
Adding to the ambiguity is that, in some circles, CSR is
considered a voluntary business strategy and may very well
Figure 3 Diagrammatic representation of a supply chain and reputational risk spill over effects
Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
498
Downloaded by Newcastle University At 04:23 28 July 2015 (PT)

be impacted by the discrepancy of “what firms think” about
CSR (cognitive), “what firms say” (linguistic) and “how
firms tend to behave” (conative), according to Basu and
Palazzo (2008). This portends to an eclectic practice that
has resulted in a multitude of contradictory definitions
(Freeman and Hasnaoui, 2011) and actions. Because CSR
is a normative construct, it is shaped by the activities of the
firm, the environmental situation and the perceptions of
respective stakeholders – a phenomenon that is similar to
that of reputation.
In the supply chain context, Awaysheh and Klassen
(2010, p. 1,248) note that social responsibility is also
undefined and call for “a mid-range definitional construct”
so that more research may be conducted to identify the
tools needed to manage chain members. Although
Hoejmose et al. (2013) extend this by referring to socially
responsible supply chain management as the integration of
social issues that are within the control of operations and
supply chain managers, the problem is that not everything
can be easily controlled for and reputational risks are one of
them. Building on from this, and the works that have
defined and identified stakeholder expectations (Carroll,
1979,1991;Epstein and Roy, 1998,2001;Franz and
Petersen, 2012;Petersen and Vredenburg, 2009b), we refer
to the operational approach used by Lemke and Petersen (2013),
which is composed of four distinctive spheres: governance,
ethics, environment and social (Figure 4).
The first CSR sphere, governance, views a corporation as
being embedded in existing social structures and
international business networks. This sphere encapsulates
how organisational resources are being deployed and the
type of interaction the organisation has with its stakeholders
(Daily et al., 2003;Turnbull, 1997). Responsible firms have
better organisational performance, good risk management
practices, contributions by institutional investors, satisfied
employees and loyal customers (Becker-Olsen et al., 2006;
Du et al., 2007;Groza et al., 2011;Hansen et al., 2011;
Kiron, 2012;Peloza and Shang, 2011;Petersen and
Vredenburg, 2009b).
The second sphere is ethics which captures the
expectations of stakeholders and also the corporation’s
willingness to assume its ethical responsibility (Perrini,
2006). In general, ethical behaviour has a direct impact on
shareholder value (Johnson, 2003) and, in the supply chain,
organisations are serving a more diverse and global market
and, thus, have to cooperate with multiple and sometimes
international suppliers and buyers. Often, multiple tiers of
suppliers are involved. Ethics covers the materials and
working processes used at each link of the supply chain that
may start in one country and crosses national boundaries,
cultural zones, legal systems and individual viewpoints.
Thus, the interpretation of ethics can and does change and
what appeared to be ethical at one stage – even with the best
intentions at a given time – may look neutral or unethical in
the next (cf. Adebanjo et al., 2013). The final ethical verdict
comes from the end-consumer, which highlights the
necessity that the ethical interpretation of all supply chain
members becomes united and reflects one and the same
ethical approach.
The environment represents the third sphere and it
captures the responsibilities and actions pertaining to the
management of the natural environment. This sphere
includes business processes (Brundtland, 1987) so that the
organisation and the environment form a symbiotic
relationship in which both entities flourish. In this instance,
a future-oriented and pro-active environmental strategy
could reap financial rewards for the business (Yu et al.,
2014), although market demands and business offerings are
not yet quite in sync when it comes to environmental issues
(Lemke and Luzio, 2014).
The last CSR sphere is social and it involves the public’s
expectations on business leaders that surpass their fiduciary
duties. Just as we would expect of a good citizen to
participate in alleviating social ills, businesses are also
expected to contribute in the same way. Human rights
atrocities, racial disparity, the prevention of child labour,
creating awareness of alcohol abuse, anti-smoking
campaigns – there are many issues needing attention and
socially responsible firms get behind those that they believe
they can contribute the most.
This four-lenses perspective allows us to appreciate the
complexity of the CSR construct while articulating a
definition, a mid-range definition, of CSR in context.
Hence, CSR is based on a commitment to governance,
ethics, environmental and social dimensions, and it is
reflected in what the firm thinks, does, says and associates
with. As a corporate mechanism, CSR is suggested to have
the potential to improve upon the risk identification process
(Ennis, 2015) and, as Peters and Romi (2014) note, may
also increase the transparency of members. From this
perspective, we wanted to assess whether reputational risks
are indeed a relevant practitioner issue and if so, the
mitigation methods they are considering, including CSR.
Practice
Given our close relationships with supply chain
practitioners, we interviewed selected individuals to get
their expert opinions on reputational risks. Helmer and
Rescher (1959) introduced the systematic investigation
technique for making predictions based on an unbiased
multi-experts’ assessment of a current, real and uncertain
event or situation. Because we are right on the interface of
varying views, and through witnessing and recording the
Figure 4 Four spheres of CSR
Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
499
Downloaded by Newcastle University At 04:23 28 July 2015 (PT)

communication process among experts, we know how
experienced participants think and act. This is in line with
Dewey’s (1910) rationale for cognitive investigations as well
as with the spirit of the “reflective practitioner” by Schön
(1995). Due to the richness of the information that emerged
in the data collection process, qualitative sample sizes are
typically small. In this light, Baker (2002) recommends
following the researcher’s judgement who tries to
understand such an exploratory area. Our qualitative
investigation has a clear scope that blends reputation, risk
and CSR within the supply chain setting. Depending on the
details of the interviews, Carson et al. (2001) recommend a
sample size of 6-12 to reach the data saturation point. We
selected eight participants based on their expertise in supply
chain management and risk assessment.
In our investigation, we adopted established guidelines
for data collection (Dalkey and Helmer, 1963;Delbecq
et al., 1975;Okoli and Pawlowski, 2004;Schmidt, 1997).
The experts in our study are key informants (Campbell,
1955), which we selected because they had a full
understanding of the strategic direction of their
organisation, were involved in supply chain management
and possessed in-depth knowledge about the operational
implications of reputational risks which made them a useful
source of insight (Husted and Allen, 2007). They came from
the aerospace, electronics, energy, logistics and life sciences
industries. They were not direct competitors, and the
organisations were located at different stages of the supply chain.
The interviews took approximately 45 minutes on average and
followed a semi-structured protocol.
Being that this was exploratory, and that we were seeking
to understand managerial perceptions of the different types
of risks in the supply chain, we adopted a mental models
approach to organise and display our findings. Mental
modelling is a method that provides a cognitive map of a
person’s belief or understanding of a concept (Morgan
et al., 2002). The information that was gathered was
categorised into prototypes that, when combined, compose
a schema (Palmer and Pickett, 1999) which is the
declarative state of knowledge that answers the question of
“what”. In short, it is utilised to impose meaning upon
situations.
Mental modelling serves to capture a snapshot of a
schema and, in combination with others, creates a single
description that summarises the pooled knowledge of
people (Morgan et al., 2002). This method is particularly
helpful to assess comprehension, using before and after
analyses and risk communications to gauge the effectiveness
of information that is conveyed (Slovic, 1992). With
regards to the latter, the method maps the collective
knowledge of a professional group, thereby providing a tool
to assess how risks are perceived. Based on these
characteristics, the method is appropriate for this research.
It is worth noting that the model does not identify specific
cause and effect relationships. Rather, it simply but
elegantly allows us to present a very rich set of information
that uncovers important points and concepts that are
related. As a result, the arrows used in the following maps
serve as a representation of nomological space in which
meaning is translated in the associations of prototypes that
comprise the schema. The circles represent the ideas or
concepts related to the subject in question.
Cognitive modelling uses specific aspects of the case
study method as a means of reinforcing the mental models.
This method provides a suitable procedure for observing
and measuring behaviour in a realistic setting (Macdonald
et al., 2011;Yin, 2009). Similar to the methodological
approach by Pagell and Wu (2009), we targeted the specific
firms that are doing something different. For validity
purposes, and in-line with the prescribed case method for
triangulation, we reviewed the internal documentation of
the respective firms as well as the public records such as
newspaper articles and practitioner magazines. The
interviews were recorded, transcribed and then the
researchers categorised them independently first and
collectively later to increase the validity of the findings.
Our primary questions are reported here, but have been
supplemented by probing questions:
1 Risks:
●What types of risks affect your organisation?
●Do members of the supply chain carry the same risks
or are there differences?
2 Reputation:
●In a business context, what does the term “reputation”
entail?
●Do your business partners effect the reputation of
your organisation?
●If so, how?
3 Corporate social responsibility:
●What CSR activities does your organisation do?
●Why do you do these things?
●Do these activities relate to any of the risks discussed
earlier?
●Have all supply chain members the same
opportunities to engage in CSR?
4 CSR and reputational risk:
●Does CSR impact the reputation of your organisation?
●Can CSR be used to address the reputational risks of
your organisation?
In the following section, our findings are orchestrated in the
logical flow that practitioners associate with these topics,
supported by original quotes of respondents.
Risks
All participants recognised a multiple number of risks
facing their companies in the supply chain context. In
listing these, the following description does not reflect an
order of priority or magnitude, rather it is simply
acknowledgment and awareness.
To start with, specific risks related to the availability of
the service or product was identified. This included the
timeliness of the delivery, the acquisition of the product as
well as obsolescence. The second set of risks was with
respect to quality, risks surrounding noncompliance, the
(chemical) composition of the products, the performance
levels and the regulatory requirements. Regarding the
chemical composition, numerous mentions of the
Dodd-Frank Act (Anand, 2011) were made. The use of
materials from conflict zones was a concern, as well as
Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
500
Downloaded by Newcastle University At 04:23 28 July 2015 (PT)

products having materials that were banned or deemed
unsafe.
Safety was identified as a common risk. Operational
issues associated to fires, hazards, explosions, chemicals or
technologies were pointed out. The concern with safety was
a reflection of their concern for the public, their employees
and customers. References were made to BP and the
contractor used to drill the well that led to the disaster in
the Gulf of Mexico (Juhasz, 2012):
Have you looked at the whole BP thing? Remember, BP tried to blame it
on someone else. But it was a supplier and so everyone sees it as BP’s oil
spill (Director/Manager, Energy Industry).
Financial risks were also identified. These pertained to the
price of partner products, the financial strength of the
partner, commodity prices, exchange rates and interest
rates. With respect to the environment, having an
environmental policy was important. Vendors have
expressed an interest in established policies, which were
believed to be reflective of current practice. Other
environmental issues raised were energy use, climate
change, resource scarcity and impacts on the natural
environment:
No environmental policy is a threat of losing customers like WalMart,
AT&T and Verizon etc. They have a lot of questionnaires that involves
our supply chain (Director/Manager, Electronics Industry).
We really do think that climate change and resources are a true risk to us
and limited resources can drive costs (Director/Manager, Electronics
Industry).
There were several social risks identified. Human rights
were pointed out and the Apple and Foxconn case
(Guglielmo, 2013) was referred to on numerous occasions.
Ethics or unethical practices were also identified as a risk as
were stakeholder pressures. Figure 5 provides a snapshot of
the perceived risks in a supply chain.
Having identified the major risk areas, we then examine
the results on how risks threaten an organisation’s
reputation, if at all.
Reputation
Each participant identified how their actions, products,
communications, public relations and more formed the
reputation held by their various stakeholders. Regarding
business partners affecting their organisation’s reputation,
all respondents confirmed a reputational impact, followed
by detailed business examples. Interestingly enough, all of
the examples, but one, were associated to ethical and
regulatory practices surrounding the environment or social
responsibility. Availability and pricing, by contrast, were
not mentioned. Unfortunately, we are unable to report on
specific instances here without the risk of compromising the
anonymity of our participants and their organisations. The
following quote may serve as a testament to the growing
body of evidence that social and environmental practices of
chain members, several tiers away, are a risk:
There have been occasions here where people protested in front of my
company for something that was three or four layers down the supply
chain that we knew nothing about (Director/Manager, Energy Industry).
There was also the expression that all of the risks identified
were a threat to the organisation’s reputation. This
stemmed from the supply chain but also extended directly
to the organisation’s own practices. For instance, one
respondent emphasised that they stood to lose some of their
big box retailers if their firm – and in particular their
suppliers – had no environmental policy:
All risk can eventually impact the reputation of the company (Director/
Manager, Aerospace Industry).
When asked about a partner’s reputation impacting their
organisation’s reputation, all respondents answered “yes”:
If something happens with one of our suppliers and it is associated with
some kind of negative connotation or some kind of act that does not align
with [our company’s] values that is a reflection on our company as well
(Director/Manager, Aerospace Industry).
A positive reputation is a trust that has been built up between us and our
customers and hopefully us and our suppliers and vice versa (Director/
Manager, Energy Industry).
Figure 5 Cognitive model of participants for supply chain risks
Mitigating reputational risks in supply chains
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Volume 20 · Number 5 · 2015 · 495–510
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Risk mitigation
Mitigating the identified risks, and in particular the risks to
the firm’s reputation, was a concern of all participants. This
was especially important for participants whose chain
members were numbered in the hundreds. One particular
partner had varying tiers with approximately 1,300
suppliers in 26 countries:
We could have up to 500 suppliers that go into one product (Director/
Manager, Electronics Industry).
It is incredibly difficult for one manufacturer to go out to all of our
suppliers, launch these questionnaires, follow up with an audit or
somehow get some level of verification, and then the next year, when our
product line changes, do it all over again (Director/Manager, Electronics
Industry).
Mitigation of many of the risks was attempted with the
typical contractual obligations regarding availability,
quality and cost (i.e. counter party risks). For risks related
to the environment and social responsibility, mitigation was
performed via questionnaires that seemed to be prolific
going up and downstream in the supply chain:
We have seen a lot coming from our customers, pressing us as part of
their supply chain and the more they press on us the more we press on
our suppliers and they press on theirs (Director/Manager, Life Science
Industry).
We see partners building supply chain audit programs and we get a lot of
questionnaires. We get them on both sides. We get them from our
resource side and we get them from our vendor side (Executive, Life
Science Industry).
On an indirect level, i.e. with partners that were more than
one tier away, validation was identified as needed but not
easily implemented. Hence, the organisations in this study
used questionnaires to transfer the mitigation of the risks
throughout the supply chain to partnering organisations,
which, in turn, may influence their chain partners with
questionnaires and so on and so forth. Partnering programs
were implemented by two of the eight participants
interviewed. This involved partnering firms working
together to minimise risks and fortifying the connection.
The approach was effective but had limited reach beyond
direct partners.
Other forms of mitigation entailed communications and
public relations. Lastly, transparency was also considered a
mitigating technique. Although we could have grouped
transparency with communications, the item arose in its
own context and, therefore, is listed as such. Figure 6
outlines the mitigating activities that participants elicited in
our interviews:
If you are just as open in sharing challenges that you face as you are with
your successes, you become a more credible voice and more believable. The
results seem more believable when you are willing to share the challenges as
well (Director/Manager, Energy Industry).
Corporate social responsibility
We adopted CSR as an entry point to capture and illustrate
expert views in relation to reputational risk. All of the
participants were descriptive of their CSR activities. The
number of activities and their scale were enormous and
entailed activities as would be expected for the environment
(reducing the carbon footprint, taking back programs of
goods sold, biodiversity, reverse logistics) and society
(employee engagement, education, diversity, non-profit
partnerships). There were a significant number of reporting
mechanisms such as the Dow Jones Sustainability Index,
FTSE4 good or the carbon disclosure project. Lastly,
philanthropy was a common activity with organisations
donating money, assets such as technology, employee time
and even skills.
With respect to why the organisations engaged in CSR,
the answers varied and can be viewed in Figure 7.
Stakeholder expectations were a common factor.
Participants mentioned how investor expectations have
changed and requests were made for them to participate in
the Dow Jones Sustainability Index or FTSE4good. They
also made explicit that investors wanted more information
like environmental practices, thereby forcing their firms to
address items that may have not been on their radar
beforehand. Customers were considered an influential
stakeholder as were employees. With respect to the latter,
the emphasis was on employee engagement and
satisfaction, and there was a belief that CSR attracted new
recruits. Lastly, there was a perception that supply chain
partners were attempting to influence CSR activities along
the chains via questionnaires, inquiries and contractual
expectations. However, audit or some form of validation
was rarely performed:
Internally our employees are very proud of our CSR reputation
(Executive, Life Sciences Industry).
Another factor that influenced these organisations for
engaging in CSR activities were to mitigate the many risks
that were discussed earlier. When asked whether CSR adds
to their reputation, all respondents expressed an
affirmative. Likewise, CSR was also considered a mitigating
factor for the risks that have the potential to impact their
reputation. Lastly, CSR was believed to have a positive
Figure 6 Cognitive model representing participants’ perception of mitigating actions for supply chain risks
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impact on the business which led to increases in efficiencies,
the acquisition of contracts, attracting better employees and
the making of appropriate investments that improved the
bottom line:
We believe in doing good. On the other hand, CSR is very profitable
[. . .] so investment, where it makes sense, is a key priority for us
(Director/Manager, Life Sciences).
When you go into negotiations for a bid and you review the RFP [request
for proposal], everything is weighted and as a contracting officer, your
opinion of the past performance of different companies is a weighted
value. So, even if they may not be the most cost efficient when awarding
contracts the reputation definitely goes into the subjective side of
awarding a contract (Director/Manager, Logistics Industry).
Figure 8 is an illustration of how our participant-group
perceived risks in the supply chain, the different mitigation
practices that they use and CSR. With respect to the risks
identified, there was a direct association to ethical issues
and their respective impact on the organisation’s
reputation. Human rights atrocities or environmental
negligence is a significant societal issue that garners a great
deal of attention.
For mitigation practices, the techniques were typical for
common risks such as timeliness of delivery, quality and
price. For reputational risks, particularly those drawing
upon ethics, specific activities were related to social
responsibility because it mitigates the negative reputational
impacts of supplier activities. That is certainly not the only
reason for their engaging in such activities, but this is one of
the benefits. With respect to their influence of other
members of the chain, this is sporadic. The direct influence
on partnerships is limited due to resource constraints.
Currently, the plethora of questionnaires raises the topic of
social responsibility, although the effectiveness of this
method is questionable as mentioned.
Discussion and implications
The present study builds on the work of Hoejmose et al.
(2013) with respect to reputational risks in the supply chain
and generates a rich set of data that verifies the seriousness
of the threat. In this paper, we extend the definitional
construct to include risks that extend beyond sustainability
and greening the chain, and we add to this by including a
multi-dimensional construct of reputation that
demonstrates the potential for spill over. The professionals
in this select group expressed how these types of risks
typically remain undetected by the organisation and that
these stemmed from unethical or at best ethically
questionable activities. It is understandable that
practitioners would first seek to manage the risks associated
with availability, cost and quality as these are often
characteristics that directly impact a product or service
offering. It is also easy to see how these three aspects would
have an immediate and direct effect on the survivability of
a firm, which suggests that these risks may appear to be of
higher order. This may also explain why reputational risks
have limited resources as pointed out by Roehrich et al.
(2014). Nevertheless, reputational risks were identified as
significant and mitigation practices are evolving. For
classification purposes, we refer back to the risk
management process of identification, probability, costs
and prioritisation. Identifying these risks is incredibly
difficult. Given that these stem from unethical or
questionable behaviour, this is not something that is
directly advertised or even reported upon. That is until an
event has occurred. In fact, identifying the threat in the
supply chain may be all but impossible. Without a historical
record, it is difficult to know who is a potential offender.
From here, assessing the probability of an event occurring
and its impact on an organisation’s reputation is perplexing.
It seems not all events impact partnering firm reputations
and when one does, the exposure is selective. For instance,
Apple received a considerable amount of attention for the
sweatshop conditions alleged at Foxconn, a manufacturer
contracted by Apple (Blanchard, 2012). However, many US and
European firms contract Foxconn. Why others were not
implicated in the many offences allegedly committed by Foxconn
is a mystery. Nevertheless, the probability of an event occurring
may be assessed, but the probability of the outcome impacting
one firm as opposed to another would be difficult. Perhaps this
would have to do with the revenue or industry position of a firm
(i.e. industry lead) and the level of brand awareness. More work
needs to be done in this area and this would help in assessing the
costs of the risk if realised.
Given the problems with characterising the risks,
investments in collecting more data are highly
Figure 7 Cognitive map of participants’ perception for why their firm engaged in CSR
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Volume 20 · Number 5 · 2015 · 495–510
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recommended. Decisions for mitigation are essentially
dependent upon the quality of the information available
and, given the newness of this phenomenon, additional
research is needed. The current risk management practices
fall under generic risk management categories that we
discussed earlier: avoidance, loss prevention and control,
transference and lastly retention. Avoidance would entail a
change in managerial and institutional practices so that
exposure to the risk is either minimised or removed
altogether. For instance, Sony (2015) avoids certain
materials in their product to prevent being implicated in
sourcing materials from areas of conflict. Avoiding a
product or material is one option. Perhaps avoiding a type
of firm and its consequential behaviour is another. In fact,
utilising memberships to specialised associations may allow
for some form of screening to minimise potential offenders.
This will be discussed later.
Another risk management method may be found in loss
prevention and control. For instance, Apple attempted to
manage the reputational damage stemming from the
Foxconn incident by contracting another manufacturer.
Amidst the news of abuses with the new partner, Apple
indicated that they were not aware of the problems and that
steps would be taken to manage this in the future (Neate,
2013). This was their attempt at controlling the situation,
minimising the impact or potential losses and trying to
control the outcome.
Transference is a common mechanism, but we were not
aware of what insurance may be purchased and what the
cost of this option would be. Transference of the risk to
Figure 8 Participants’ cognitive representation (schema) for supply chain risks, methods for mitigation and impetus for CSR
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other partnering firms is, in some ways, practiced via the
questionnaires that serve as a means of transferring the risk.
By simply asking the questions about policy, there seemed
to be a hope that this brought about awareness of the topic
in question. Not one of the participants knew of a follow-up
to a questionnaire and there was no mention of how the
answers on the questionnaire impacted the relationship.
Finally, retention of the risk is the last option. Here, no
action is taken and the costs of the risk, if realised, are
anticipated and covered. Based on our interviews, we know
that this is the current default option because mitigation of
such an intangible risk remains difficult and uncertain.
With regards to all risk mitigating methods used today,
the contractual obligations appear to be the strongest.
Hence, any attempt to enter into a contractual agreement
would be advised. As one participant put it:
It is not if they comply, they must comply if they want to do business with
us (Director/Manager, Electronics Industry).
However, as the chain broadens, contractual agreements
become less effective and more costly. There is also the
consideration that if your position of influence is not
significant, as a powerful buyer or supplier, the likelihood of
controlling partnering behaviour weakens. There is also the
issue of verification, as the tools needed to verify actions are slow
to develop (Awaysheh and Klassen, 2010). The same can be said
of questionnaires and codes of conduct. Short of adopting an
auditing program or hiring third parties to conduct audits, the
effectiveness of the current methods is speculative. For instance,
Lee (2014) found that questionnaires and a code of conduct did
not mitigate the risks of suppliers using child labourers. Still,
auditing is costly and given the fluid nature of some chains, this
option is incredibly complex.
We recommend the adoption of a more holistic practice
of forming an association, whereby participants or members
agree to a set of CSR policies that serve as a foundation for
good governance. In part, we recognise the mitigating
potential of CSR and we refer back to Figure 4.
What CSR offers is the pre-emptive guidance for
addressing many supply chain risks. An organisation
committed to fair wages and not engaging in human rights
atrocities, as described in their CSR policies, may be less
likely to offend. Certainly, they do run the risk of a public
outcry and possibly persecution by their immediate
stakeholders if they were found to be operating contrary to
proclaimed practices. This would appear to be more
effective than the current proliferation of questionnaires.
What CSR accomplishes, that the questionnaires do not, is
an attempt at transparency, public accountability and
perhaps a refining of corporate governance on a multi-tier
level (Tachizawa et al., 2014). Table I demonstrates how
CSR may address the different risks posed in the supply
chain. Each of the four spheres (on the right of the table)
can serve as a placeholder to a set of corporate policies that
commit an organisation to take on specific responsibilities.
In this sense, all members would be strategically aligned
to design and control for varying risks in the chain. Table II
shows how CSR and its four spheres may mitigate the risks
for each of the dimensions of reputation. For example,
within the sphere of governance, the organisation would
commit to a corporate policy for the effective use of
resources. No policy is effective without measures. This
means that the consequent development of a management
system leads to continual improvement. This sphere would
similarly address financial performance and thereby
decrease the likelihood that a risk will be generated there.
As can be seen in the table, mitigation may be initiated
for many dimensional risks before they even start.
Extending this further, we believe that by focusing on each
of the dimensions of reputation, and not simply mitigating
the risks but bolstering the dimension, may serve as an
effective means of enhancing a firm’s reputation in the
supply chain setting.
Conclusion
The potential for research in this area is tremendous, both
qualitative and quantitative. There is a great deal of data
making its way through the chains via the many
questionnaires being filled out. This data would prove to be
insightful. Also, knowing how many firms are impacted by
this phenomenon and the varying methods being used will
help in the development of best practices. This research is
by no means representative of the population or
generalisable having relied upon a selective and small
sample. Although this work contributes an in-depth
cognitive perspective of practicing managers, more research
is needed in other industries, in different cultures and in
differing positions along the chains.
Another area ripe for research is the impact of supply chain
activities on stakeholder perceptions for each of the
individual dimensions of a reputation. Each of these may be
explored in both the negative and positive frames. Finally,
do companies actually assess the partner profile with
regards to reputational risk potential and how does this
compare to other established and documented selection
factors, such as price, quality and delivery performance?
Given that we identified other factors that contribute to the
reputational risk, it is fair to ask whether reputation should
be an overriding supplier selection factor or not, and if so,
is this objectively captured or does this remain on the
subjective level only?
Supply chain management is a relatively difficult
management task and the significant gap that exists
between theory and practice just does not help (Storey
et al., 2006). Even suggesting that there may not be an
unified agreed upon definition of supply chain management
(Stock and Boyer, 2009), which is foundational for
harmonising and advancing research that aids practice,
makes it that much more challenging. Although we are
emphasising and promoting the mitigation of reputational
risks borne from partners in a supply chain, we must
highlight the fact that given the underwhelming
performance of supply chain management (Storey et al.,
2006;Zumsteg et al., 2012), let alone the risk management
practices (Fischl et al., 2014), recommendations for
multi-tier mitigation process are weak at best. What we are
suggesting is that a CSR policy adopted by associated members
may address reputational risk and may also apply to the
mitigation of generic supply chain risks related to quality and
disruptions. However, not unlike the questionnaires and codes of
conducts, the process begins with a commitment by tier-one
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Table I Supply chain risks and mitigating activities (Present and future) – heat map
Risks
Mitigation
Present activities Future activities CSR
Audits Questionnaires
Contractual
agreements Transparency Communication
Partnering
programs Governance Ethics Environment Social
Availability ⫻⫻⫻
Environment ⫻⫻ ⫻ ⫻
Financial ⫻⫻ ⫻ ⫻ ⫻
Quality and compliance ⫻⫻ ⫻ ⫻ ⫻ ⫻ ⫻
Safety ⫻⫻ ⫻ ⫻ ⫻ ⫻ ⫻
Social responsibility ⫻⫻ ⫻ ⫻ ⫻ ⫻
Reach of mitigating action Tier-1 Tiers 1-2 Tier-1 Tier-1 Tier-1 Tier-1 Entire chain Entire chain Entire chain Entire chain
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partners to an association with a set of corporate policies and
practices. They in turn influence their partnering firms, who in
turn exercise their influence over partnering firms and so on
and so forth. This mitigating action can have a domino effect
that spreads up and downstream. Aligning organisational
commitments is like choosing friends. Pick them carefully, lest
you find yourself running with the wrong crowd.
Notes
1 We exclusively refer to CSR as a simplified mean to
facilitate our discussion. Note that reputations
represent a cumulative perception of all eight
dimensions, and not just one.
2 This takes into consideration that there are several
different business models and private firms that may
have as their objectives an end to a societal problem. In
this case, we are referring to public firms utilising the
equity garnered on an exchange.
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Corresponding author
Henry L. Petersen can be contacted at: hpetersen@
uwlax.edu
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Mitigating reputational risks in supply chains
Henry L. Petersen and Fred Lemke
Supply Chain Management: An International Journal
Volume 20 · Number 5 · 2015 · 495–510
510
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