Supply Chains and Transportation

How to tackle unethical behaviour caused by supply chain disruption

Ever Given, one of the world's largest container ships, blocked the Suez Canal causing supply chain disruption in 2021

"When disruptions occur, supply chain firms may exhibit a less sincere and more self-serving attitude." Image: REUTERS/Amr Abdallah Dalsh

Adegboyega Oyedijo
Assistant Professor of Supply Chain Management, Baylor University
Hannah Stolze
William E. Crenshaw Chair of Supply Chain Management, Baylor University
This article is part of: World Economic Forum Annual Meeting
  • Supply chain disruptions can affect the relationships between suppliers, buyers and consumers, sometimes creating new realities where unethical practices can emerge.
  • During the COVID-19 pandemic, for example, customers experienced unfair pricing, supply chain partners engaged in inequitable exchanges and workers suffered from inadequate compensation.
  • Supply chain fraud and unethical trading practices are particularly frequent problems during supply chain disruption.

Relationships between suppliers and buyers are critical to the success of the modern economy and can predict positive business performance. Supply chain disruptions often affect these relationships, however, and can significantly impact the movement of materials, goods, services and money.

Companies that experience even minor disruptions can face significant declines in revenue growth, stock returns and shareholder wealth, with effects lasting at least two years after the initial disruptive event.

When these disruptions occur, they lead to new realities, shifts in relationships and network structures, changes in the behaviour of firms in the supply chain and unanticipated decisions that may facilitate the emergence of unethical practices.

Supply chain disruptions

There are several causes of supply chain disruption. These include factors such as adverse weather events, power outages, labour strikes, supplier bankruptcies, geopolitical conflicts and disease outbreaks. Policy changes, international or interstate border controls, unavailability of transportation systems, labour capacity shortages and shortages of raw materials are also common causes.

At a company level, disruptions can be caused by institutionalization (e.g., disruption of the institution), the innovation and adoption of new technologies and changes in relationships and networks, such as switching to a different supplier.

Disruptions and unethical practices in supply chains

While ethical practices are good for business, unforeseen and unpredictable disruptive events can force firms in the supply chain to behave in ways that other parties might consider unethical or unfair.

For example, when demand for apparel dropped significantly due to temporary store closures in 2020, many brand owners cancelled orders, refused to accept shipments of products already manufactured, unilaterally extended payment terms, demanded substantial price reductions or refused to pay outstanding balances altogether. Many factory owners laid off workers without full severance pay or demanded wage concessions from remaining workers as customer orders and payments were reduced or delayed.

Supply chain disruptions before and during the COVID-19 pandemic
Supply chain disruptions before and during the COVID-19 pandemic.

However, when suppliers could not fulfil every order (owing to the bullwhip effect), simply having the product in stock became a point of competitive difference for wholesalers and retailers. Using their power opportunistically, many large grocery stores demonstrated a lack of fairness in stocking shelves by pressuring suppliers for favourable product allocations, imposing strict delivery requirements and threatening penalties for non-compliance. Price gouging also occurred since personal protective equipment and cleaning supplies were limited during the pandemic.

Overall, the COVID-19 pandemic demonstrates how disruptions can have a significant impact at all levels of the supply chain: customers experienced unfair pricing, supply chain partners engaged in inequitable exchanges and workers suffered from inadequate compensation.

How unethical practices emerge when supply chains are disrupted

Ethical codes of conduct are widely recognized as a means of improving the social and environmental performance of organizations. Yet, despite their disruptive and damaging characteristics, unethical practices are a pervasive reality in many organizations and a major obstacle to a sustainable and resilient supply chain.

When disruptions occur, supply chain firms may exhibit a less sincere and more self-serving attitude. This is not surprising: disruptive times are characterized by high levels of uncertainty, leading each firm to act in its best interest to maximize profits.

Examples of such unethical practices include fraudulent practices, abuse of power, intentional lack of transparency in contractual agreements, absurd changes in terms of trade, lack of respect and communication and profiteering, all of which violate social and moral norms.

In our recent study, we focus on two unethical practices which often emerge when supply chain disruptions occur: supply chain fraud and unethical trading practices.

In times of disruption, modern supply chains are particularly vulnerable to procurement and supply chain fraud owing to their global reach, which spans geographies with varying regulatory frameworks, standards, cultures and institutions. Given the breadth and depth of today's global supply chains, the increasing resources required to combat fraud and the complexity of the information technology systems required, disruptive times present a perfect opportunity for fraud. Examples include collusive kickback schemes, fraudulent certificates of origin, inventory forging, payment irregularities, bribery and corruption and bid rigging. All of these are becoming more prevalent and harder to detect.

Disruptive times also lead to an increase in unfair supply chain practices, which broadly include issues related to fair pricing, fair trade and fair pay.

How to ensure ethical supply chains

  • Supply chain regulatory compliance: regulatory compliance helps companies in the supply chain comply with relevant regulations. However, given the complex global supply chain with multiple layers of actors, a solid understanding of regulations in all areas where a firm’s supply chain extends, not just locally, can help combat unethical practices in the event of a disruption. Supply chain companies can invest in and implement monitoring and reporting systems to ensure compliance.
  • Supply chain traceability: traceability can ensure products are sourced and labelled correctly. It can also help supply chain firms manage the flow of materials in compliance with regulations, reducing the opportunity for infiltration, fraud, counterfeit or substandard products.
  • Managing people in the supply chain: employees are the largest risk when it comes to supply chain fraud. The relationship between the supply chain management function and human resource management is critical to combat unethical practices. Human resources can hire the right people with the right skills and impeccable ethical standards. It can also provide ethical training to employees and implement ethical codes of conduct, particularly in relationships between employees and external parties.
  • Data and information systems: investments in data and information systems can improve transparency, which can expose supply chain vulnerabilities such as forced labour and fraud. Data systems can help supply-chain companies improve transparency through real-time monitoring and updates, verification of payments, purchases and sales, auditing and record keeping and supplier relationship management (SRM) systems. It can also facilitate anonymous reporting, which can encourage the reporting of unethical behaviour.
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