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.
References:
Vandenbosch, M. and Sapp, S. (2010).
Keep Your Suppliers Honest. The Wall Street Journal. [On-line: http://online.wsj.com/news/articles/SB10001424052748704259304575043634035220078?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704259304575043634035220078.html]
No comments:
Post a Comment