When your supply chain is an iceberg

Now we come to learn that the root cause of the Titanic's sinking 96 years ago today was, of all things, poor supplier-quality management.

A recently published book details how the shipbuilding firm Harland and Wolff (still in existence today) in Belfast, Northern Ireland, resorted to using low-quality iron rivets in its rush to nearly-simultaneously launch the Titanic and two other "Olympic-class" super-liners (the three largest ships in the world at that time).

The narrative of how the shipyard's management team created its own supply-chain challenges - and then failed to address them - plays out like a modern-day supplier-network crisis. It also conjures up memories of how quality problems with a seemingly insignificant component on the Space Shuttle Challenger nearly put an end to the entire U.S. space-exploration program.

In proving their 10-year old theory that faulty rivets contributed to the Titanic's quick demise, the authors (who happen to be metallurgists) apparently conducted an extraordinary amount of archival, metallurgical and forensic research. According to a review of the researchers' findings in The New York Times "...troubles began when its ambitious building plans forced Harland and Wolff to reach beyond its usual suppliers of rivet iron and include smaller forges" with less experience in making higher-grade iron rivets.

The researchers found that not only did shipyard managers take risks with materials, but with labor as well. With a full-on effort underway to launch multiple large ships, Harland and Wolff management brought in less-skilled riveters to help finish the job ("good riveting took great skill," according to the Times article).

All these risks weren't taken without some serious hand-wringing. One of the authors of the book told the Times that shipyard management discussed the shortage of skilled riveters at every meeting for six months leading up to the Titanic's launch. How many times have we seen this scenario play out since the Titanic with other products and industries?

It all comes back to the issue of supplier discovery, due diligence and supply-chain risk assessment. Few companies - especially when faced with aggressive, high-stakes product launch schedules - ever invest in critical supplier-investigation activities. But these are the times when having unfiltered market intelligence about your existing or potential new suppliers is most important. Think about it: all the leading cost-, quality- and delivery-management software tools available today would never have revealed the true weaknesses in the Titanic's supply-chain.

Make the effort and investment to assess your supply-chain before it sinks you.

Big Blue Goes Red

A fairly important bit of supply-chain related news went largely unnoticed the other week. Tucked away inside the business section of most newspapers was an article saying that IBM had opened a supply-chain research center (its first) in Beijing. IBM claims it selected Beijing because of China's central role in the global supply chain for manufactured goods. IBM's move, of course, comes on the heels of a major, widely-publicized supply-chain disruptions emanating in China over the past several months.

IBM expects to serve its global customer base by offering centralized knowledge and software tools from its hub in Beijing. This outpost of IBM's supply-chain practice will help its existing clients track supplier performance by integrating data about their products' supply, demand, logistics and, presumably, quality.

We're excited to see that leading service firms are taking the concept of supply-chain intelligence to the next level, combining on-the-ground experiential knowledge, company-specific data and more widely available information. Still, much of Big Blue's focus with its new practice appears to be securing local clients, helping them get up the "supply chain maturity curve" and adding them to its current roster of 7,500 larger global clients. Makes us wonder who's interests they're truly planning to serve.

When we first heard this news, we were hoping to read more about IBM's efforts to promote transparency and visibility into offshore supply chains - certainly, IBM has the minds and resources to do this. This is, after all, what many leading global manufacturing firms are crying out for. In the Wall Street Journal article about IBM's announcement, IBM's supply-chain management director said: "[Foreign companies] want to see into the supplier's supplier's supply chains." Bravo.

Still, before any company can even think of peering more than a layer or two deep into its supply-chain, it better have a good grasp on what's happening with its own primary suppliers, whether the suppliers are down the street or across the ocean. Procurement managers better be sure that the suppliers they've already selected (or will soon select) are capable of meeting basic performance criteria, serving sophisticated overseas buyers and complying with generally-accepted standards of corporate social responsibility (CSR).

IBM is definitely headed in the right direction with the opening of its Beijing supply-chain research center. But for most companies that are sourcing overseas, the best first step would be to simply leverage all of the knowledge they already possess internally.

Doing so would tell you a lot more about your supply-chain than any big name consulting firm ever could - and it would cost your company a whole heck of a lot less. You already know more than you know.

What's in YOUR supply chain, Baxter?

Well, we wouldn't exactly call it "scooping" a major newspaper, but we here at SupplyScope are basking a bit in the glory of having highlighted the complexities and lack of transparency in Baxter's supply chain for its popular blood thinner nearly a full week before The Wall Street Journal's Gordon Fairclough and Thomas Burton brought the issue of China supply-chain transparency to Page 1.

Fairclough, ever the intrepid overseas reporter for the Journal, tromped right into a backwater sub-tier supplier in Baxter's heparin supply chain in rural China, interviewed the owner, snapped a few photos and shot a video of the Yuan Intestine & Casing Factory pig intestine-processing operations. (You may want to view the photos and video on an empty stomach.) What we learn from this article should be enough to make us think hard not only about what's in the drugs we consume, but in the food we consume as well. Baxter denies that the "factory" shown in the pictures snapped by Fairclough is part of Baxter's supply-chain for heparin. Our question to Baxter's supply-chain management team is: "Can you be so sure?"

For those in the field of supply-chain management - no matter what type of finished goods our companies sell - the evidence that continues to emerge from the Baxter heparin fiasco should remind us that establishing an off-shore, distributed supply-chain in places like China requires more than relying on on-shore first-tier suppliers or selecting a known or supposedly reputable first-tier off-shore supplier. It requires constant monitoring of and current knowledge about what's going on in the lower links in the chain. And doing a good job at this requires that sourcing organizations have the tools and invest in the resources that can keep their companies stay out of trouble and avoid negative publicity.

Right now Robert Parkinson, Baxter's CEO, and his team continue to remain mute about the company's blood thinner supply-chain traceability woes (not exactly a wise PR move, guys). In the end, this supply-chain problem is going to cost Baxter a lot of money. It sure would have have cost a lot less in the end to invest in supply-chain mapping and supplier-reputation research services. This is going to be one expensive "lesson learned" for Baxter.

Pigs and Lessons About Off-Shore Supply Chains

What do pigs in China have to do with supply-base intelligence and having the right tools in place to monitor your off-shore supply chain? Actually, quite a bit.

Yesterday news broke that a popular blood thinner sold by major U.S. pharmaceutical company Baxter International could be at fault in at least four deaths and hundreds of illnesses among users of the drug. This put the issue of off-shore supply-chain management back in the spotlight. There is no evidence yet that the deaths or illnesses are directly linked to any element of Baxter's highly leveraged supply-chain. But chances are that such a link will soon emerge.

Baxter purchases the active ingredient for its blood thinner Heparin from a Milwaukee-based supplier called Scientific Protein Laboratories (SPL). SPL relies on a factory in China that it majority-owns through a joint-venture with a Chinese pharmaceutical company.

It is worth noting that the financial and ownership structure of the U.S.-Chinese joint venture makes it nearly impossible to determine which, if any party, could ultimately be held to account for these deaths and injuries if it is determined that tainted heparin was the cause. SPL's joint-venture partner is owned by multiple, related Chinese pharmaceutical entities. And the SPL joint-venture actually supplies key drug ingredients back to the multiple entities that own its local joint venture partner. Still with us? If not, that's OK.

Suffice it to say that this is one huge reason why any company that relies on off-shore suppliers needs to know exactly what is going on within its supply chain. And we're not just talking about knowing the level of incoming and outgoing quality for you suppliers' factories or the levels of compliance with worker-safety and environmental standards (all important pieces of information certainly). We're talking about knowing who you can turn to overseas to get answers, action and remediation when things get muddied up within your supply chain.

Consider the Baxter supply chain for heparin ingredients. Which executive among the seven Chinese firms that have an operating interest in its Chinese joint venture do you think SPL can pin down to get answers, support and resolution? How many will try to hide behind the corporate “veils” that the complex financial structure of the joint-venture affords? Baxter and SPL will soon find out.

OK, so how do pigs fit into all this? Here's how. The key active ingredient in question is derived from the lining of pig intestines. Big deal, you're thinking, this ingredient is widely available – even online through our good friends at Alibaba!

Well, if you're a pig in China these days, you might be a bit concerned about catching a mysterious porcine virus that's spreading quickly throughout the country. And if you're a responsible global supply-chain manager, you'll want to know just about all you can about the key raw material ingredients for your end products.

Is there any connection between the outbreak among Chinese swine and possible tainted ingredients in Baxter's human blood-thinning drug? We can't say yet. But we can assure you that if one of our key products depended on a long, complex and geographically-distributed supply chain, we would want to have intelligence into every level of the supply chain, including:

• any leading information about events that could affect raw material quality (say, a porcine virus) so we could seek safe alternate sources of supply; and

• data about the ownership structure of our key off-shore partners so we would know exactly who to finger and coordinate with if something went wrong.

Operating off-shore supply-chains in high-risk geographies without such information is simply asking for trouble.

Why China Supply-Chain Intelligence Matters Even More Now

The Dollar is weakening, American consumers are feeling less flush these days in light of the housing crisis, the U.S. economy is headed for a recession, according to many analysts, and inflationary pressures in China are pushing up the prices of many goods we consume here, putting pressure on Chinese suppliers to raise prices, making imported goods more expensive, leading American consumers to ratchet back on their consumption....

With all these economic drivers, U.S. importers should expect to see a decline in the demand for Chinese-made goods in the coming months. But here's why U.S. companies will need to hone their China-supplier due diligence activities and increase their oversight of their suppliers in China in the coming months.

A decline in demand from U.S. buyers will likely reveal some fragility in the Chinese supply base. Rising raw-material prices in China will put pressure on Chinese manufacturers to act in ways that could negatively impact their U.S. customers. And a stronger Euro and Yen will lead Chinese suppliers to turn their attention to European and Japanese customers at the expense of their U.S. ones.

If your current China suppliers react to these economic conditions adversely, then you will want to learn immediately about new or more resilient suppliers that could make more stable and reputable supply-chain partners.

Decline in demand for China-made products is bound to produce a shakeout in the Chinese supply base of many industries. Such a shakeout is long overdue. Even Chinese officials are aware of this. Among China's estimated 5+ million export-focused firms, many have suffered the consequences of over-investment (thanks to generous regional or local government incentive plans and favorable domestic tax programs), poor management, lax process control and predicted export demand that may never have fully materialized. The Chinese government has acknowledged that some local “enterprises seek to reduce export costs by exceeding pollution limits” and worker-safety rules. Last October, the Chinese government went so far as to threaten to ban domestic firms from exporting if they flaunt environmental laws. Rising wages and a reduction or elimination of certain subsidies and rebates for firms in China, combined with an erosion in demand from U.S. buyers will only accelerate the shakeout. As a result, in the coming months, for a variety of reasons, many Chinese suppliers will cease operations. Will yours be one of them? What leading or current indicators of supplier performance and reputation will you be watching to know for sure?

Saddled with higher energy and food prices, Chinese manufacturers will attempt to pass through those cost increases to their overseas customers. But not all buyers will be willing to accept the pass-through. Faced with the possibility of losing key customers, Chinese firms will naturally look for ways to reduce their cost structures to compensate for these rising costs. We shouldn't be surprised to see suppliers reducing investment in quality-assurance programs, customer service, IT and other infrastructure as well as environmental, health and safety programs.

And the strength of other global currencies relative to the Dollar (since China loosened exchange-rate restrictions on its currency in 2005, the Dollar has weakened more than 10% against the Renminbi) will drive Chinese exporters to turn their attention to buyers paying with Euros or Yen. Any purchasing professional who has to contend with “mindshare” issues at a supplier will tell you that unless you control a significant portion of a supplier's revenue stream, you will find yourself fighting for manufacturing resources.

The bottom line: for U.S. buyers to successfully manage through these challenging economic conditions, they will need to do two things well: increase their vigilance about the evolving reputation and performance of their current partners, and remain constantly aware of new, alternative sources of supply in China that will allow them to remain competitive and ultimately avoid catastrophic supply-chain disruptions.

Buyers with access to the right set of tools and services to do these things well will continue to enjoy success with their off-shore supply chains. Those who don't invest in these tools and resources are in for a rough spell.

Now that's rewarding!

If you have not yet registered on SupplyScope then you are missing out on a chance to promote your company, network with international suppliers and buyers and expand your list of new business opportunities.

And you are also missing out on a chance to reward yourself with cash prizes through SupplyScope's Reward Points program.

We're giving away $200 USD to the SupplyScope member who accumulates the most SupplyScope Reward Points by 31 January, 2008.*

It's simple... you earn SupplyScope Reward Points simply by doing what you already do on SupplyScope - signing in and using it!

Here are some examples of how easy it is to earn SupplyScope Reward Points:

• Complete your full company registration and we'll give you 20 points to start off with!
• Upload your company logo... 5 more points;
• Get 2 points for each company photo you upload to your company profile page;
  
• Ask a customer to write a review about your company... 7 points;
• Receive a review from a customer... 25 points!
• Invite another company to join SupplyScope... 10 points;
• Invited company joins SupplyScope... 20 points!

And the list of rewarding activities goes on and on.

It's why companies such as Ningbo Fuding Industrial, Hebei Machinery & Equipment, Ningbo Shenggaung Battery, Hebei Metals & Minerals and KongNgai Stamping Tool & Die are leading the race to win the big prize.

Get going now and begin racking up the points for building your company's profile, status and reputation on SupplyScope. And watch how quickly you can rise through the rankings.

We'll post the live rankings of the Top-5 SupplyScope Reward Points Leaders on the SupplyScope home page so you can see who is leading the chase for the big cash prize.

Good luck!

*See SupplyScope Reward Points $200 USD give-away rules for details.

Ginger and the root of "extended" supply-chain challenges

Few consumers give much thought to the supply chains of produce items in their grocery stores. The words "home-grown" and "produce" are practically synonymous and almost always appear together.

But a U.S. government recall of ginger in July reminded us that these assumptions are often faulty. This event, following on the heels of other Chinese-made product recalls in the U.S. highlights the ever-growing need for better information about the supply chain for every type of product.

The Wall Street Journal recently published a front-page piece on the ginger recall. When California state inspectors tested ginger sold by a major U.S. supermarket chain and discovered that it contained a dangerous pesticide that is not approved for use on ginger in the United States, their investigation quickly led them to China, prompting a major recall of China-grown ginger. Follow-on news reports revealed that close to 80% of raw ginger imported into the U.S. comes from China. That's ginger that ends up not just in the produce aisles of local markets, but the dishes at Chinese restaurants, ginger-flavored canned soups and seasoning in frozen dinners, to name a few. Not exactly home-grown produce.

Aside from the revelation that fruit and vegetables (and juices) sold in U.S. stores (and not only ginger) might not be all that "home-grown," was the realization that identifying and monitoring a multi-tiered supply chain that originates halfway around the world is a herculean task given the few current human and IT resources most import-dependent companies have at their disposal and the dearth of reputable sources of information available to help them. After all, this shouldn't solely be viewed as a story about Chinese product quality and environmental and health standards. American companies have created similar health and safety concerns among consumers at one point or another. It's one reason why the Superfund Program exists in the U.S.

In the case of the tainted ginger, there were at least six steps in the supply chain - including points in China and the U.S. - before the root made it onto someone's dinner plate. Six steps might not seem all that bad given the complexity and depth of supply chains for manufactured goods such as electronics components and automotive parts. (By the way, with the weakened US dollar, supply-chain complexity is should now be an issue for China-based buyers, too, as the Chinese increasingly become net importers of US-made products).

So, what's a purchasing manager to do? Whether you're importing toys, pet food, car tires or produce from "low-cost countries," simply hoping for better government enforcement of import-quality regulations won't solve the problem. In the US, government agencies lack the manpower to monitor all shipments of products entering US ports, let alone conduct adequate sampling of the broad range of shipments arriving daily from countries such as China. Even China's quality-control agency, the General Administration of Quality Supervision, has "only" 30,000 inspectors located primarily at the country's ports, border crossings and airports. Consider as a point of reference that nearly all of the 25 million suppliers registered on Alibaba.com are based in China. That's a lot of ground for Chinese government inspectors to cover!

Where does that leave us? There's no catch-all solution for preventing another ginger, toothpaste or vehicle tire recall. But for corporate buyers concerned about protecting their customers and companies from harm and liability, respectively, the most valuable commodity these days in the world of supply-chain management is information or "intelligence" about their supply chains:

• Intelligence about their suppliers and, in turn, intelligence about their suppliers' suppliers since there's no way to know how far down the supply chain a problem might take root.
• Intelligence about their current suppliers and intelligence about potential new suppliers because a buyer can't be certain that a supplier he or she has relied on for years might not suffer a lapse in control or a catastrophic event or that an alternative source of supply might prove more capable in meeting the buyer's quality and delivery standards.
• Intelligence gathered from internal sources as well as external sources because the most capable factory auditor might just happened to have visited a supplier's factory or farm on a "good" day and missed some early warning signs that another employee (or even another customer) might have observed.
• Intelligence as basic as where the supplier is located so buyers can assess the relative challenges of and risks associated with getting raw materials to the supplier and finished product from the supplier to points of distribution and on to end consumers.

Until now, putting “eyes and ears” on the ground at suppliers and gathering and sharing supply-chain intelligence has been an arduous task, something that only the largest of companies could afford to do themselves.

Now SupplyScope is making supply chain intelligence-gathering and sharing affordable. Make that free. SupplyScope offers a virtual supply-chain market intelligence service. Leveraging businesses' increasing adoption of broadband internet in developed and developing economies, attributes of "social networking," suppliers' desires to differentiate themselves in light of the many recent supply chain fiascoes and a desire among buyers to move beyond traditional secondary sources of information about suppliers.

For a purchasing manager using SupplyScope, you'll soon have the tools and information to find out about possible areas of concern in your supply chain well before they land on a customer's dinner plate--and in plenty of time to take action and head off unwanted publicity about your products.

Buyers and suppliers, go ahead and register now. It's free! Pass the ginger.