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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- March 19, 2013 -

Supply Chain News: Recent Scandals Show Abdicating Sourcing to Tier 1 Suppliers Can Drive Huge Supply Chain Risk


Deadly Apparel Fire, Horse Meat Scandal in Europe Show Dangers; Tesco CEO Calls Out Supply Chain Complexity as Root Cause


SDigest Editorial Staff 


Virtualization and globalization have always presented risks to supply managers, but recent events have shown that as supply chain complexity grows, visibility almost always goes in the opposite direction - down - subjecting the supply chain to significant supply chain risk.

Two fairly recent stories illustrate the dangers.

Last fall, a deadly fire at an apparel factory in Bangladesh killed some 112 workers, most of whom were trapped inside the building in areas that either had no outside exits or with doors that were padlocked.

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Tesco says it will source not only beef but chicken and other food products "closer to home" and reduce the levels in its food supply chain, which has become "overly complex," according to CEO Philip Clarke.

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Tragic as that event was, worldwide attention was raised several levels when it was reported shortly thereafter that the facility was producing goods for major retailers such as Walmart, Sears and others, even though it has been cited by local officials for unsafe conditions, and apparently removed from the approved vendor list by Walmart a few months before.

Both Walmart and Sears said they did not know the deadly factory was producing goods for their shelves shelves. How is that possible? Via the murky world of sub-contracting, where pieces of an order to a tier 1 supplier can quickly be parceled out at least in part to other vendors without the original buying company knowing is happening - until the headlines hit, that is.

In Walmart's case, it sent a large order for some 500,000 women's denims to Success Apparel, which sub-contracted out part of the order to the Bangladesh factory, among other manufacturers. The New York Times later reported that a second Walmart supplier, International Intimates, was also using Tarzeen Fashions at the time.

Critics say major apparel buyers often know that these sorts of sub-contracting game are going on, but in the end are most concerned with hitting a price point and a delivery date.

"The first problem is retailers and wholesalers are demanding more and more compliance and more and more protocol. However, they also keep pushing everyone for lower and lower prices," Edward Hertzman, who runs Sourcing Journal, an apparel industry trade publication, told Reuters in December.
"You have one department of the company campaigning for fair wages etc., but then in the very next room the sourcing department is asking for 10-20% cheaper. How do you do that?" Hertzman added.

In January, Walmart issued updated rules on apparel sourcing coming out of the tragedy, announcing it would begin to enforce a "zero tolerance" policy with regard to following its sourcing rules, most notably saying it would immediately cease doing business with any supplier sub-contracting work to other vendors without its knowledge. Before, it used more of a "three strikes and then you're out" approach.

Other changes include new requirements that suppliers must ensure one of their direct employees is stationed locally to monitor factory facilities. Hired "agents" are no longer allowed. (See First Shoe Drops After Bangladesh Fire, as Walmart Tightens Rules for Suppliers.)

Jahangir Alam, an officer for ethical sourcing at Walmart's office in Dhaka until late 2011, told the Wall Street Journal that "with multiple sub-contracts going on, it has become almost impossible for buyers to practice ethical sourcing in the true sense."

Supply Chain Complexity and Opacity Led to Horse Meat Scandal, Tesco CEO Says

More recently, a giant scandal involving horsemeat entering the beef supply chain in the UK and other parts of Europe has ensnared dozens of companies.

Again, as in the deadly apparel fire, sub-contracting by direct suppliers is at the heart of the problem.
The scandal started in January, when at nearly the same time inspectors at UK grocery chain Tesco and Irish government meat inspectors found through DNA testing that a good portion of the meat in the "value burgers" sold by a number of retailers in the UK contained as much as 40% horse meat.

(Sourcing and Procurement Article Continues Below)



Over the following weeks, the scandal continued to grow, hitting restaurant chains like Burger King UK, frozen lasagna manufacturers, and many others. In some cases, it appears the supposed beef in the dishes were 100% horse meat. Some sources reported there may even been donkey meat in some of products.

As a result of all this, Tesco has said it is going to begin expensive DNA testing of all beef it receives from suppliers.

Most of the tainted meat came from Silverc rest Foods, a subsidiary of ABP Food Group. But Silvercrest may itself have been duped by slaughterhouses in other parts of Europe, including Poland, that were supposed to deliver ground beef but at best for a period delivered a beef-horse mean blend.

Another thread says tier 1 supplier Comigel received orders from some food manufacturers and had Tavola, its subsidiary in Luxembourg, source the products. Tavola placed an order for the meat with Spanghero, in the south of France, which contacted a Cypriot trader, who subcontracted a Dutch trader. That company placed an order with slaughterhouses in Romania, which sent the meat to Spanghero.

Got it? How can there be this much margin for everyone?

The pattern is the same as with apparel: tier 1 supplier receives the order from the retailer or manufacturers, then flexibly sources the product from tier 2 or 3 suppliers, with the original company being simply unaware of the actual source of the product they are buying, as the tier 1 supplier arbitrages price and delivery depending on market conditions.

Related to that, Tesco says it will source not only beef but chicken and other food products "closer to home" and reduce the levels in its food supply chain, which has become "overly complex," according to CEO Philip Clarke. "What this complexity in the supply chain has also done is to leave it open to exploitation by rogue elements operating in the processing industry."

There are many other examples from the past. In 2007-08, for example, Baxter International was embroiled in a huge scandal when its drug Heparin (used to treat blood clots) was found to be tainted, leading to at least 81 deaths. The source: tainted supplies from pig farmers in China totally disconnected from Baxter, which was using a company called Scientific Protein Laboratories to procure the base materials. The supply chain troubles cost Baxter hundreds of millions of dollars if not billions.

The bottom line of all this: company, especially in consumer facing industries, simply cannot abdicate supply chain quality and risk mitigation to tier 1 suppliers. And yes, that may mean the cheapest price is often not the lowest price in the end.

Walmart and Tesco's new policies will certainly increase costs and probably consumer prices - but executives should be able to sleep a bit better at night.

Do procurement managers need more to do more diligence on multi-level supply chains? Do you think the practice will end - or will price rule the roost most of the time? Let us know your thoughts at the Feedback button (email) or section (web form) below.

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