Sunday, May 18, 2014

How Do You Keep Your Suppliers Honest?

In a 2010 article in The Wall Street Journal, Mark Vandenbosch and Stephen Sapp wrote that “globalization and its relentless drive for efficiency have led us into a world of long and complex supply chains. Even ‘simple’ products, such as cereal bars, can be made of ingredients from more than eight countries on four continents. Such complexity has led to higher productivity for companies and lower prices for consumers. But there's also a dark side: Complex systems, with a plethora of suppliers, are increasingly prone to failure and, on occasion, spectacular collapse. Contaminated pet food or peanut products, lead paint in children's toys, imploding financial products - the list is well known and growing. But in each case, the cause is essentially the same: a failure to guard against suppliers acting in their own interest.”
The problem with managing integrity is that the unscrupulous supplier doesn’t have a sign on their forehead clearly showing they aren’t honest and don’t have the same set of values as their moral customer. They are often pretty proficient in acting in a very professional manner and giving all the right ethical signals to those they supply. But behind the façade is a ruthless business person whose main driver is to maximize profitability, not just through minimizing costs, but through cutting costs beyond the fair and reasonable to the darn right criminal – and they do it because they believe they can get away with it.  
As Vandenbosch and Sapp mention, “such opportunism often leads suppliers to take advantage of poorly written agreements, or simply break them outright if the risk or cost of getting caught is low. And the deeper they are in the process, the further from the end customer, the less responsibility they are likely to show in the absence of effective controls. Supply chains aren't going to get any simpler. So companies need to dig into the details of their supply systems to understand their risks, and work to prevent problems.”
Unfortunately in the highly competitive world most businesses operate in today means that organisations can realize way too late that they have got in to bed with the wrong supplier, having been ‘hocked’ by the promise of low cost supplies within spec etc.  An interesting example is the milk crisis that ravaged China in late 2008. A year earlier, the North American pet-food scandal showed how the standard test being used to measure protein could be ‘beaten.’ Opportunists in the Chinese milk supply chain used the same procedures to lower their costs. No market participant should have been surprised that this was possible. However, without an ability to recognize new risks and update procedures, corrections are likely only after a failure occurs within one's own organisation – which of course is way too late.
Mark Vandenbosch and Stephen Sapp highlight four pretty obvious steps to check for the integrity and stability of products from suppliers – but steps it possible some organisations overlook in the quest for low cost supplies;
1) Constantly monitor potential risks in the market – where eliminating opportunism is impossible, but that is no excuse for not being vigilant about suppliers and how they meet their obligations. Sometimes managers let their devotion to efficiency prevent them from taking steps to avoid problems, even when new risks are apparent;
2) Make suppliers and intermediaries responsible and accountable – where the most common weakness in a supply chain is what is often referred to as moral hazard: For example, if a supply chain has intermediaries whose compensation is based solely on the volume of orders passing through, there is little incentive for them to root out opportunism beneath them in the chain.;
3) Change the way you test measure – meaning that opportunistic suppliers will test a company's limits in order to find the minimum acceptable standard. Often, a company will allow small deviations again and again, until the exceptions become the norm and threaten the integrity of the entire chain.
4) Understand and accept the role of regulation – where regulation adds to costs and runs counter to the goal of ever-increasing efficiency. But if the costs mitigate or dramatically reduce the risks of failure, then regulation is the most efficient way to curb opportunism and decrease costs in the long run.
The most basic step in keeping your suppliers honest is never to assume anything; to build strong relationships built on integrity and good communication as a natural progression of any supplier relationship; and to have checks and balances in place to ensure that no supplier can undermine their service to you.
Vandenbosch, M. and Sapp, S. (2010). Keep Your Suppliers Honest. The Wall Street Journal. [On-line:]

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