Ey commodity trading and risk management
Compliance and reputation risks in the supply chain are different. Instead of a company looking horizontally to find more suppliers of materials, the company must look vertically down to its suppliers, and then their suppliers, and their suppliers, and so forth—all to be sure that no unwanted goods have infiltrated the supply chain at any point. That requires new mechanisms to confirm the source of commodity goods; and new collaboration among treasury, risk, procurement, and compliance departments to do the task well.
The consequences can be significant. Take the example of slave labor used in the fisheries business in Thailand. Nestle, Costco, and Whole Foods have all been sued in the state of California, by activists who accused the companies of not doing enough to eradicate those shrimp supplies from their products sold in Western supermarkets. The plaintiffs have exploited the California Transparency in Supply Chains Act, which requires businesses to disclose what efforts they take to remove human trafficking from their supply chains.
Nestle, meanwhile, took the extraordinary step in November of admitting forced labor is part of its supply chain. It also announced numerous steps to address the problem, from anonymous reporting hotlines, to more training, to external audits of its anti-trafficking efforts. The underlying dynamic there—a sharp increase in compliance and reputation risks for goods that previously only carried financial risk—upends the usual company oversight.
Once upon a time, the corporate treasurer or risk officer would be in charge of finding the right hedging strategy to ensure enough materials at acceptable prices. Today a company cannot manage physical purchasing and financial risks in isolation; it must address compliance and reputational risks as well. That is something treasury and risk officers have rarely done. Likewise, the company functions most likely to oversee compliance and reputational risks the compliance and legal departments have less experience with the supply chain.
Most large companies already appreciate the risks posed by their immediate suppliers, distributors, and other third parties; some have even launched vigorous programs to herd those third parties toward some desired standard of conduct. But that only brings visibility to the next link on your supply chain. That means businesses must somehow push their own due diligence efforts further down the supply chain if they wish to combat that risk of unscrupulous commodities trading.
The certificate of origin is one useful first step, but it is only that: An end-to-end program to fight commodities corruption involves much more, and needs the following characteristics:. Commodities dealers already use certificates of origin throughout the import-export world to show where their goods purport to come from. All such efforts should documented, and the documentation placed in some central repository so it can be found whenever necessary, by anyone who needs to peer down the supply chain.
All companies ultimately are responsible for vetting their own supply chain, but in the real world where most corporations have thousands if not more of third parties—other links in your supply chain can make themselves more appealing by adhering to standards set by trustworthy trade groups.
A right-to-audit clause should be standard in any supplier agreement, even if your business has limited ability to conduct an actual audit. Trusting your suppliers to obey some code of conduct is no longer enough, in the eyes of regulators, investors, and the public.
Even if you have a superb code of supplier conduct, and thorough documentation requirements, and right-to-audit clauses you exercise regularly—all that means you will face considerable labor yourself to ensure you have an ethically rigorous supply chain. The ideal is to construct a system where every part of the supply chain has commercial incentive to be ethical. It reduces your effort, builds trust, and even further ostracizes the few unscrupulous commodity traders who remain.
Another challenge is to ensure that everyone within your company who somehow plays a role in the supply chain which can be a lot of people shares all the risks they see with everyone else, so senior management can run a coordinated effort that reduces everything from wasted money to bad headlines. Those communication channels are crucial. In one survey of more than supply chain professionals Thomson Reuters conducted at the end of , nearly two-thirds of respondents said procurement and compliance departments both oversee two critical tasks: What can happen if that communication falters?
Compliance or risk committees have existed in many large organizations for years, to ensure everyone is aware of various risks the business faces and the practical challenges of getting business done. Global trading houses specializing in trading commodities Trading divisions of large conglomerates, consumer goods and industrial companies buying and selling commodities Financial trading and broking companies Industry bodies and infrastructure providers in the sector Commodities Markets is a global specialization.
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