In our globalised and interconnected world, organisations span both industries and continents. In this environment it is increasingly unlikely that those organisations are able to operate alone. They will need to procure the services of suppliers who can add value.
But where 30 years ago this was a simple linear contractor-supplier relationship, today it is a global, integrated supply network. However, the strengths that make these networks strong sometimes also serve to make them fragile and vulnerable to disruption. Such global supply chains can be disrupted by geopolitical risks such as natural disasters or conflict.
Recent history is littered with examples of organisations that have not adequately managed risk to their reputation inherent in their agreements with suppliers. Brands such as Nike and Adidas suffered reputational damage in the 1990s because of the use of child labour by suppliers in Asia. Customers wanting to buy iPads in 2011 were left empty handed when the earthquake in Japan meant that iPad component makers were unable to source the materials they needed.
The risk of using suppliers is not limited to private, global organisations. There are many instances of the public sector failing to manage these risks. Think of G4S’s failure to recruit and train staff, which meant that thousands of military personnel had to be called up to staff the 2012 London Olympics.
The institute has recognised that the risks inherent in contracts and with suppliers have become increasingly prominent in recent years and we will be conducting research in this area. There are a number of questions we will be addressing that are of interest to internal auditors:
- What involvement does internal audit have when contracts are being set up?
- Do organisations and service providers discuss and identify how risks will be shared and managed between the commissioning organisation and the contractor?
- How do you get assurance that the supplier has adequate controls in place?
We will be addressing these issues among others. Look out for our research which will be published in the autumn.