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Wednesday, August 27, 2014

Eliminating Supply Scandal

Credit: dan at

Credit: dan at

I receive weekly e-mail solicitations from offshore companies to supply molds for plastics parts. I am not a moldmaker, but write about them and attend moldmaking-related trade shows and other events, which is how my name ends up on lists of equipment contacts. Such communications are made possible by the Internet, which companies now use to contact suppliers all over the world.

The Internet and the virtual marketplace it enables can be an economical and efficient way to develop supply chains — when everything checks out and works properly. As noted in a previous posting, procurement managers are under pressure this year to meet aggressive corporate revenue targets while working with smaller budgets and less personnel. “Reducing spend-costs remains at the top of performance-related concerns …” one study asserts.

But as Guy Strafford of Proxima Group, a London-based outsourcing services provider (North American office is in Chicago), explains in a company blog, virtual supply can lead to problems for buyers — not least of which is a tarnished corporate image from supplier scandals.

This makes it vital that procurement managers collect as much information as possible about the companies they do business with via the Internet, as well as physically inspect a supplier’s facility and those of its suppliers.

A recent example of what can go wrong when due diligence is not exercised was last month’s collapse of a clothing factory in Bangladesh, which killed more than 900 workers.

Industrial procurement managers usually don’t confront the potential for tragedy on this scale. But other factors can affect a company’s reputation and customer base.

Harsh working conditions at suppliers’ factories are one concern. Electronics retailers (notably Apple) learned this last year when contract manufacturer Hon Hai Precision Industry Co., better known as Foxconn, was cited for poor working conditions in its Chinese assembly plants.

Exploitation of natural resources, especially in war-torn areas, is another hot button. The U.S. government’s Conflict Minerals Act requires that companies verify and disclose their sources of the four minerals mined in the Democratic Republic of Congo and adjacent countries. One material, cassiterite ore, is essential to tin production. Companies sourcing tin as a raw material, even for something as innocuous as electronic solder, could face legal and marketing problems if the tin has raw material from a forbidden area.

In his blog post, Strafford cites a Financial Times article that reports 20 percent of businesses polled “hold no data about their suppliers’ suppliers …” His response: “… I am very surprised that … four-fifths of businesses said they do have some data about suppliers’ suppliers.” Based on his experience, he wrote, “numerous businesses simply do not have the visibility into who their suppliers are in general nor their expenditures with them.”

The trend toward “corporate virtualization,” as he calls it, has been ongoing for years and owes to globalization, better shipping, price transparency, and, of course, the Internet. Strafford maintains, however, that management practices haven’t kept pace with this trend, and many companies are losing “visibility and control [in their] supply base, and … increasing … risk.”

As he explains, manufacturing risks are now largely outside a company’s facilities — and often far away.

Which is why it is vital for procurement managers to make certain that the supply networks they create are reliable, conform to best practices as set by corporate policy, and pose no danger to the a company’s ability to develop and market good, safe, and socially responsible products.

Read Strafford’s blog here.

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