On September 12th, calamity struck the Pakistani port city of Karachi when a fire broke out at the Ali Enterprises garment factory. Hundreds of workers found themselves trapped inside the burning factory by locked doors, barred windows and only one open exit. Panicky workers threw themselves from the four-story roof while those trapped below died of smoke inhalation. All told, the fire claimed the lives of nearly 300 workers in a gruesome disaster reminiscent of the legendary Triangle Shirtwaist Factory Fire of 1911 in New York.
Now, it is time for a sober assessment of the risks and liabilities exposed by the tragedy. Many are asking how a factory that received a prestigious SA8000 certification only a month earlier became an inferno. Companies that relied on these non-profit’s inspectors to verify the safety of their factories abroad now stand exposed to reputational and potential safety risks as well as supply chain disruptions. The non-profit group responsible for inspections relied on its overseas affiliates to actually conduct their inspections. They took risks by putting their firm’s reputation in the hands of unknown individuals who may or may not have conducted the work they were paid for. The reputational risk of having your products associated with such a disaster cannot be overstated. As this tragedy demonstrates, even well meaning companies and non-profit groups can find themselves exposed to risk by disasters abroad and the actions of their overseas subsidiaries and affiliates. Numerous industries, from the garment industry to the consumer electronics industry, depend on overseas factories in their supply chain, and rely on third parties to conduct safety inspections in their name. Certifications for supposedly safe, independently-inspected factories are only as good as the inspectors conducting the audits.
By taking a three-dimensional approach to risk, an independent risk management consultant can help an organization understand the Total Cost of Risk (TCoR) associated with their activities overseas, thereby providing the firm’s leadership with a transparency which would allow them to understand and protect their organization from these risks. In this case, an independent risk management consultant would have done a country risk review which would have uncovered corrupt practices within the country. A company, armed with such a report, would have been able to avoid the damaging reputational costs of this fire by shifting its supply chain to a different, safer country.
If you would like to learn more about risk mitigation procedures, Total Cost of Risk, and other tools you can use to protect your organization in emerging markets, please feel free to contact our Managing Principal, Albert Sica at 732.395.4251, or by email at [email protected].
