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Supply Chain Lessons from the Horsemeat Scandal

Tesco.  Ikea.  Nestle.  Taco Bell.  The list of companies swept up in Europe’s horsemeat scandal keeps growing, as supermarkets and food producers struggle to assure consumers that their beef products are indeed what they claim to be: products made with beef.

Who was primarily responsible for horse meat showing up in “beef” hamburgers and meatballs has yet to be fully established, but one thing is certain: at the heart of it lie both the extraordinary complexity of Europe’s processed meat supply chain and food retailers’ lack of visibility into the operations of their suppliers’ suppliers.

Take Findus’s frozen beef lasagna, a product found by a UK agency to contain up to 100% horsemeat. Findus apologized, but offered few clues into what exactly happened. Still, a journey allegedly involving a Romanian slaughterhouse, meat traders in Cyprus and the Netherlands, a supplier in France and a processing plant in Luxembourg opened the door for the integrity of the meat supply chain to break down.  Although a complicated supply chain isn’t necessarily a mismanaged one, a lengthy supply chain requires a level of oversight that matches its complexity.

The impact on the frozen food sector has been devastating. Consumers haven’t waited to learn the full truth before changing their dietary habits – including some who have turned to vegetarian options. With reputation making up one-third of a company’s market value according to a recent report, food retailers could lose more still.

But it’s not just the food industry that’s exposed to this kind of risk. Some of Boeing’s own engineers have blamed the Dreamliner’s recent woes on the company’s multiple tiers of part suppliers (Boeing denied its supplier oversight was insufficient). Others could suffer a similar fate. Our recent survey shows that 91% of our members only track information on their primary suppliers, and only 36% of respondents do so for secondary suppliers.

The good news?  Procurement executives can take the following concrete steps to significantly reduce the likelihood of poor quality, disruptions, or worse:

  • Looking deeper into the supply chain
  • Strengthening relationships with key suppliers
  • Gaining early warning about problems by setting up monitoring systems

Straight from the Sub-Tier Supplier’s Mouth

Intuit identifies supply risks by asking carefully selected sub-tier suppliers targeted questions.  First, the company determines which of its sub-tier suppliers are most critical to the business.  It also prioritizes vendors who may be facing difficulties – for example, suppliers likely to be hit hard by recent market developments.  Once the company has identified which suppliers to speak to, it then develops a list of subtle, non-confrontational questions likely to yield insight into the supplier’s business practices – and into any hidden future vulnerabilities.

To tackle reputation risks specifically, one member company evaluates exposure based on both the likelihood of the risk occurring and the importance of the product to the brand.  The company then allocates its resources based on criticality according to these two factors.

Monitoring Your Stable of Key Suppliers

Our research shows that most companies primarily evaluate financial risk when choosing new suppliers.  But while this approach can provide insight into a contractor’s past, it won’t give you a complete picture of the current and future state of your suppliers.  Instead, monitor key suppliers for factors such as safety and quality, as well as how they manage their own suppliers.  Looking at your suppliers’ tools for monitoring their own suppliers helps you identify possible problems in your supply chain.  If you find your suppliers aren’t adequately monitoring their suppliers, proactively start the conversation about the best methods of doing so.  Helping suppliers develop robust monitoring processes will strengthen your relationship with them while also protecting your company against risk.

When monitoring critical suppliers, consider developing a list of distress signals to help you gain advance warning of potential problems.  This way, you can be prepared at minimal cost by either working with the vendor to handle the problem or readying an exit strategy in case of disaster.  To create your list, look for patterns among current suppliers as well as suppliers who have already failed.  You can use these distress signals as a series of tripwires.  After the first couple of signals, speak to the supplier about what you’ve noticed and ask what they’re going to do to improve.  If they don’t make changes, consider this a further distress signal.  At this point, you should start talking to competitors and building up a buffer of inventory just in case.  If the supplier sets off more of these tripwires, you’ll be ready to smoothly exit the relationship with new contractors already lined up – and you won’t have to pay a premium to solve the problem.

Beefing Up Audits

You can periodically audit your suppliers, but for most companies it’s not scalable to conduct frequent audits of every supplier.  Consider implementing performance improvement projects: besides helping your suppliers become better partners and advance their own business interests, you’ll also get a more accurate view of your suppliers.

Procurement executives should also consider whether their actions – or those of internal business partners – are increasing their cost-to-serve and inadvertently causing their suppliers to make damaging tradeoffs.  Imagine you’ve placed an order to a supplier but then modify it shortly before the order is due.  Your supplier can’t finish the work in time using the same operating procedures. Since the vendor doesn’t want to miss out on your order, it might be tempted to cut corners and quality might suffer.

Finally, remember that a collaborative relationship is the best way to preempt problems.  Become a customer of choice and suppliers will want to keep you informed of potential issues, knowing that you’re a trusted partner.  What’s more, you’ll become part of the rare 5% of customers who gain access to a supplier’s top performance, meaning you’ll be less likely to experience quality issues.  And if all else fails and you’re hit with a damaging supply chain issue, as a customer of choice, your suppliers will be more likely to actively work with you to fix the problem.

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