Procurement is a business function that is mandated with acquisition of goods and services that are required to support business operations. The acquisition of these goods and services is done using processes that are also regulated using approved procedures. The procurement processes involve different stakeholders (internally and externally) and as a result, these stakeholders are associated with the company (business). The public perception of these stakeholders is therefore extended to the company as a result of association.
The association of the procuring company (business) with the different stakeholders who are involved in the procurement processes can have an impact on company performance, which can be both negative and positive. It is therefore very important for businesses to have a good evaluation criteria for use in selection of its stakeholders, for instance, suppliers of goods and services, donors and sponsors. Engagement of stakeholders with unethical practices, bad reputations or dubious image tarnishes the company’s image and should always be identified as a reputational risk which should be well managed.
It is therefore important for a company to have procurement processes that provide for identification and elimination of suppliers that have a potential to cause reputational damage to the company by way of association. The following are examples of undesirable elements that the company should identify as reputational risks and therefore avoid engaging of stakeholders with such characteristics;
a. Use of child labour
Some suppliers exploit and engage under age children for work in their production processes as a source of cheap labour. This is an unethical practice which can result in legal action, demonstrations and boycotting against such suppliers and other companies associated with them. This can lead to loss of sales and profitability of such suppliers which is extended to the company.
b. Use of processes that are harmful to the environment
This is popular in manufacturing, mining and energy industries whereby you find that the production processes result in harmful wastes that end up endangering the environment. Such producers end up facing legal action that can result in high fines. The companies can also lose business as a result of pressure groups taking action against them. If these companies are associated with your company, they will badly tarnish your corporate image and you will also lose potential business.
c. Acceptance of donations from organizations with bad reputation
Donations are mostly welcome by companies, especially those that are facing some financial challenges and as a result they are not scrutinized enough to identify some of the risks that they might bring to the company. Association of a company with donors that have bad reputation can result in loss of potential business as other companies would not want to be associated with them. Some donors can even donate equipment in bad faith with the ultimate objective of making money out of the recipient companies by way of sales of consumables and spare parts for the same equipment. This usually results in over dependence on the source of the spare parts/consumables which ends up selling at very high prices leading to high operational costs and reduced profitability for the company (business).
There is a need for careful consideration of reputational risks that may result from association with different stakeholders at all times and companies should have mitigating strategies embedded in their processes to be used for engagement of stakeholders, for instance suppliers, donors and sponsors.
Scottish Qualifications Authority, UK
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