Readers may have noted the numerous posts I have penned that follow the ongoing developments related to the tainted milk scandal unfolding in China, as well as the all too numerous recall incidents of late. I focus on these specific incidents because they provide key learning for supply chain management professionals relative to supply chain risk management. Beyond the moral issues, rage and consciousness reflected in the latest China milk scandal of managing a supply chain that operates with a culture of back-door business dealing or bribery, there are consistent patterns of what can be expected in the discovery, assessment and mitigation phases for many of these incidents.
The latest development in the China tainted milk scandal reflects that both the scandal and the scope of the recall continues to widen. In China, the number of tested batches finding contaminated milk has risen to a least 100, and includes dozens of brands involving China’s biggest producers. As in other incidents of this type, the tracing of exposure across multiple supply chains has now begun to impact numerous countries, including the U.S. The Journal article points to the fact that the consumer protection commissioner for the state of Connecticut initiated tests that have now found melamine in White Rabbit Creamery Candy, which was imported from China, and the U.S. FDA has reiterated its warning to consumers to not eat this brand of candy. Officials in Indonesia, Hong Kong, Japan and Thailand continue their efforts in testing of other products with potential China milk powder content, and no doubt, the food companies potentially impacted are scurrying to react or resolve concerns. So as the third week of this latest crisis starts to wind down calendar-wise, the scope of potential impact to consumers, brands, and corporate reputations remains very uncertain.
Past incidents have involved the contaminated heparin drug that originated in China, the suspected salmonella outbreak in tomatoes in the U.S. that was later found to be peppers coming from Mexico, and tainted pet food in the U.S. traced to gluten originating in China. Each of these specific incidents point to the fact that supply chains may not be necessarily within product specification, and it takes precious time to trace the entire supply chain for both root causes and true extent of the problem. In the incident of the life-saving drug heparin, from the time of public acknowledgement in mid-February, it took the U.S. FDA nearly three months to complete its investigations before it could officially declare U.S. supplies safe. Human lives were lost and hundreds of others were affected. The tainted tomatoes incident first became public in mid April and ran through the end of July before positive identification could be made to peppers originating from certain farms in Mexico. Damage to tomato growers in the U.S. was needless to say quite detrimental in terms of dollars as well as brand reputation. Keep in mind these incidents involve regulated supply chains with mandated inspection controls and reporting requirements. Think of how these incidents would unfold in unregulated environments where critical information is harder to gather or uncover.
The key takeaway is that supply chain risk management is something no company can afford to ignore. The global expansion of supply chains involving all sorts of products and multiple business cultures has no doubt added to this risk. Even if your products are sound, safe, and appealing to consumers, the risk of other competitors not doing so can cause backlash. More importantly in my view, is that all of these incidents point to an ongoing need for enhanced supply chain-wide visibility, supplier control, and active risk management mitigation.
Let’s hear your comments, agree or disagree?
Your commentary is right on. One of the key challenges many companies face with their visibility systems is that they are focused only on order management data. While that will allow traceability of tainted products from a supplier it doesn’t enable real process control. Collecting data on quality tests, capturing data on sources of raw materials, and other relevant process data needs to be part of supply chain controls. Just because operations have been outsourced doesn’t mean quality control can be outsourced. Asked Mattel.
Visibility systems need to provide the collaborative integration to get to the data that really matters. Being on time and toxic is worse than being late.
Absolutely agree that organizations, or economies, cannot afford to ignore any longer. However, it’s been my experience that they don’t necessarily “ignore” it but rather fragment and silo it (the risk) – based on a job function and the associated incentives and penalties. Who owns the problem?? No one is accountable for the entire risk issue throughout the extended supply chain in most instances, i.e. procurement is responsible for suppliers (and beating down increases/maintaining or improving margins), ops manager in manufacturing is responsible for his plant, logistics manager for movement across many product lines (not the specific one). Few take the horizontal few because of the lack of incentives (or penalties) to do so. The horizontal or process view offers the potential to achieve “lean” supply chain risk management capabilities by leveraging the tracing/mapping/discovery step across a variety of risk issues – climate footprint, labor practices, security, continuity, quality (recall), etc… The days of limiting the view to just what the organization does or the big tier 1 suppliers went out with the vertically integrated supply chain. The systemic risk that now exists as a result of dominant orgs pushing (and expecting) the management of this risk (environmental, quality, security, continuity, labor, etc..) to the upstream providers parallels the problem that led to the sub-prime portion of the financial crisis. The risk is believed to be managed by another entity, superficially it appears that the risk is being managed, under the covers the upstream organization finds it almost impossible to manage the risk because of cost constraints or lack of knowledge/experience/resources, and in the end the risk comes right back to those that tried to displace it in the first place. Is anyone else concerned about systemic failure when a major concentration goes bump in the night???
Gary Lynch, Global Leader, Supply Chain Risk Management, Marsh
(Author: “At Your Own Risk”, Wiley)
Good comments. To me, the key takeaway was that Supply Chain Risk Management is something that no company can afford to ignore. Of course, I couldn’t agree more. However, while Bob’s focus was on quality, I want to make sure that we also focus on the flow of materials within the supply chain. Not having any product to ship due to a supply chain problem will also have a negative impact on your company. Let’s take a look at some of the events over the last little while;
• This year, the Olympics were held in Beijing. The Chinese government put extremely strict limits on factories and on transportation in and around Beijing running up to the 2008 Olympics in an attempt to reduce the air pollution in that region. If that region was part of your supply chain, you would have been impacted
• Earlier this year, there was a significant Earthquake in China. While less important than the loss of life and the pain and suffering brought about by that event, several factories were destroyed. Along with those factories sections of several supply chains were also destroyed
• In March of this year, the LG Chem factory in Ochang, South Korea burned, causing laptop battery shortages for Dell and HP
• In February of this year, year, the Lite-On LCD factory in Dongguan, China burned, impacting Dell, HP and Lenovo amongst others
• There are many other examples, some of which may have impacted you.
In addition to these catastrophic events, strikes, business closures, extreme weather and global shortages (and excesses) can all impact your supply chain.
So how do you identify and manage the risks in your supply chain?
It starts with visibility. You need to be able to see what suppliers contribute to your end product (and how much). You need to be able to identify which suppliers supply unique components – components you can’t get from any other supplier.
Then you need to have analytic tools. You need to be able to model your entire supply chain. You need to be able to report results in ways that are relevant to your business.
Next you need to be able to simulate supply chain events. What would be the impact if this supplier cut production by 50%? What if I couldn’t get any of these components? What impact would this have on my corporate metrics. What would be the impact of a 10% downside? What would that do to my inventory position What about a 15% upside? Could my supply chain cope?
Finally you need to be able to simulate potential solutions. How long would it take to bring on another supplier? What parts could be substituted if I couldn’t get this part? What alternate routes could be leveraged to transport these goods?
I’ll leave you with this thought. The difference between those companies that are significantly impacted by supply chain events and those that can ride them out is the extent to which they have anticipated and planned for the possibility of these things happening. Which will you be?