4 Hidden Costs of Non-Compliance

February 15, 2021

Compliance is climbing up the agenda of supply chain executives around the world, and the development and implementation of effective compliance programs is consuming an increasing amount of time, talent, and capital for organizations. As laws and regulations expand both internally and externally, companies must spend more and more resources addressing them, which gives birth to a natural question: what would the cost of non-compliance be?

Even with compliance challenges and costs rising, evidence shows that non-compliance is vastly more expensive — and far riskier to a brand’s reputation, stakeholders, and bottom line. According to a 2011 study by the Ponemon Institute, non-compliance is at least 2.65 times greater than complying with regulations ($3.5 million vs. $9.4 million, respectively). Furthermore, non-compliance costs increased by a sobering 45% in the 6 years following that study, and these costs are expected to be even higher in 2021 and beyond.

Below we present why compliance is important, the different areas of compliance that organizations need to understand and adhere to, and 4 ways non-compliance can quickly come back to haunt you.

Why compliance is important 

Supply chain compliance is a headache for organizations, yet we must not lose sight of the importance of regulations. Many protect human rights, safety, fragile economies, as well as our oceans, waterways, air, and environment. Compliance with internal processes is also extremely important in the supply chain, since this can ensure better corporate governance and an improved performance from suppliers and factories. Furthermore, it keeps you in business, maintains your brand’s reputation, preserves trust, and helps prevent expensive lawsuits, scandals, fines, and other remediation costs.

COVID-19 has only intensified customer trends toward sustainable fashion and retail. As the Association for Supply Chain Management (ASCM) writes, “Today’s consumers demand to know that the products they purchase are made in socially, ethically and environmentally conscious ways.” Watchdogs, whistleblowers, investigative journalists, and activist groups are ready to hold companies to their word. Consumers and employees alike are hungry for companies they can trust — as MIT Sloan writes, “Companies known for their transparency and liberal disclosure of information, such as Patagonia, attract talent and keep it.” This all shows that having visibility over the activities of your supply chain, and keeping track of the compliance with internal and external regulations, is now a business imperative.

Organizations today are expected to take responsibility for their supply chains. ASCM uncovered in their survey that 83% of supply chain professionals believe supply chain ethics to be important. Nonetheless, “there is a disconnect between this understanding and action.”

All of this signals a need for brands and retailers to align their compliance strategies in order to maximize supply chain transparency (which MIT Sloan defines as visibility over the supply chain coupled with effective disclosure of information at the desired level of detail). This represents a great opportunity for companies, like ASCM explains, but “to make the most of that opportunity, business leaders need to be in tune with their company’s supply chain.”

A sizable challenge is the fact that modern supply chains have largely been designed around efficiency at any cost, as opposed to collaboration or transparency. Simply identifying compliance risks while achieving business goals can provide a significant challenge as well.

Categorizing the areas of compliance

Organizations need to pay attention to a number of different areas where compliance is becoming increasingly important. For the retail industry, some key areas include: 

  • Sustainability
  • Social and labor
  • Health and safety
  • Environmental
  • Technical audits
  • Supplier compliance
  • Procurement
  • Trade/import/export

Furthermore, retail companies, especially those at the enterprise level, can experience pressure to be compliant from different stakeholders at the same time, such as:

  • Customers demanding greater visibility over the products they consume
  • Governments creating and enforcing laws and regulations
  • Employees
  • International organizations
  • Industry leaders

and others.

Hidden costs of non-compliance 

The following are four ways that non-compliance is significantly more expensive than compliance:

1. You lose money in expensive lawsuits and fines.

When governments and other organizations discover non-compliance, the legal ramifications can be harsh and costly. Businesses violating laws and regulations leave themselves open to governmental sanctions and lawsuits from customers, employees, and institutions.

Though there are many regulations currently in place, the European Union’s upcoming Due Diligence law provides an example of one in the pipeline. This EU-wide human rights and environmental due diligence mandate requires all businesses to constantly assess the risk in their supply chains, create preventive and corrective actions, and set up monitoring mechanisms. Expected to go into effect in 2021, this law will likely impose “a system of enforcement and sanctions” against companies that either violate its terms or cannot map out risk within their supply chains.

Whether lawsuits are coming from governments, private citizens, institutions, or employees, the cost of settlement can be high.

2. Non-compliance can cause business disruptions. 

Supplier non-compliance can lead to business disruptions, which is why lacking full visibility over your supply chain is a risky choice. At any moment, suppliers could be engaging in behaviors that will land your company in trouble — they could be violating labor and human rights laws, harming the environment, engaging in corrupt activities, illegally outsourcing production, or any number of other undesirable activities. If you can’t see what they’re doing, you don’t know when they’re putting you at risk.

Certain suppliers or intermediaries “may or may not disclose the production sites where a brand’s products are being manufactured,” writes Human Rights Watch, adding that “brands that have zero visibility over their production sites expose themselves to heightened human rights risks.” Such problems can bring production, import, and sales to an immediate halt if there are no monitoring and alerting mechanisms in place.

By gaining full visibility over your supply chain ecosystem, you can take a proactive step in preventing disruptions due to non-compliance. Also, as MIT Sloan explains, ensuring supply chain visibility can bring “improved governance and compliance with your own corporate policies and values, [and] reveal ways to operate more efficiently and cost-effectively.” From there you are able to gather actionable insights, act on them, and disclose that information to the public. This is a growing trend in the fashion and retail industry. As a study shows, “Sustainability will be at the centre of innovation in the fashion industry […]. Fashion companies have started to embrace the importance of sustainability, with 42 out of 100 fashion brands in 2017 disclosing supplier information.”

With full visibility in place, you can conduct regular assessments to stay connected with your suppliers and ensure compliance across your ecosystem.

3. Your brand loses its reputation.

In today’s world of social media and 24-hour news cycles, it takes only a spark to start a forest fire. Consumers, governments, NGOs, and journalists are keeping a watchful eye on supply chain activity. Brand reputation is at risk if a scandal goes viral.

Conversely, protecting brand image through ethical behavior has long- and short-term financial advantages. As Interbrand noted in a report, “the more a company proves to the financial markets and other audiences that it is a sustainable business, the lower the risk associated with that company.” This is consistent with the 2015 Nielsen Global Corporate Sustainability Report, which found that the number of worldwide consumers who reported being willing to spend more for sustainable brands rose 11% in a single year — from 55% to 66%.

The cost of intangible assets like brand reputation is becoming more quantifiable with environmental, social, and corporate governance (ESG) metrics; between 2014 and 2019, ESG Clarity estimates that sustainability scandals cost US S&P 500 companies $534 billion.

4. You lose trust from customers and stakeholders.

Non-compliance leads to the loss of loyal customers, many of whom will not want to buy from a brand they view as unethical. In 2019, nearly half of internet users quit shopping from brands they felt didn’t share their values, and Deloitte reports that “30% of the average company’s annual revenues are at risk from consumer backlash or regulatory non-compliance.” In short, if you don’t comply, you lose support.

As noted in a 2018 report by the United Nations, “self-regulation initiatives are crucial;” the value of consumer trust is becoming increasingly apparent to industries. This ties into the overarching migration from a “shareholder” mindset to a “stakeholder” mindset. The latter strategy focuses on the well-being of customers and affected communities as well as the production of sustainable products. Harvard Business Review notes that such a strategy is concerned with “employees, suppliers, customers, partners, society” — and it generates greater employee engagement and financial results.

Thus, the business of the future is one that prioritizes social responsibility, environmental awareness, and a stakeholder-based strategy. Failing to adopt and invest in these compliance goals can cost your business a place in society — but making them a key part of your brand can earn you loyalty across your customer and stakeholder base. This last point applies to both external compliance requirements across different areas as well as taking voluntary responsibility and implementing internal compliance programs in your supply chain.

How to avoid the hidden costs of non-compliance

Failing to comply with laws and regulations leads to expensive lawsuits, fines, business disruptions, loss of brand reputation, and abandonment by customers and stakeholders. By gaining visibility over the activities of your suppliers, you insulate yourself from risk and lay the framework for sustainable compliance programs in all areas across your supply chain.

As noted by PwC’s 2019 State of Compliance Study, “now is the time for compliance to define a radically different way of operating than it does today: a way that has a digital core.”

A digital solution like Inspectorio Rise helps you keep even the largest supply chains organized, letting you maintain full visibility over supply chain partners of all tiers — in other words, reducing the cost of compliance while increasing its effectiveness. Leverage technology to automate and optimize your compliance operations, standardize and centralize your compliance and sustainability efforts, easily compare and evaluate compliance data for better business decisions, and create a data-driven compliance roadmap. This kind of digital solution allows you to always keep a finger on the pulse of your supply chain, make better use of your resources in effective compliance programs, and quickly adapt to the ever changing situations with compliance regulations.

Learn more about the Inspectorio solution here.

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