Thought Leadership


Horse Meat: Is It In Your Supply Chain?

This article was first published in business2community.com here.

Due to its simultaneously disgusting and entertaining nature the 2013 meat adulteration scandal, or horse meat incident, remains in the news even months after beginning. You might not be in the food industry yourself, but the scandal points out how vulnerable a supply chain with low upstream visibility can be.

Numerous grocery stores and food processors had no idea what they were selling to their customers. Now they’re suffering for it. If you want to avoid supply chain disruptions and inspire consumer confidence, know exactly what is flowing through your value stream.

Suppliers Are An Extension of Your Company

The rise of global supply chains have created consumers that do not see stratification within a value stream. Your suppliers, vendors, and partners are part of your brand and reflect on you accordingly. Their mistakes will be viewed as your mistakes.

If your suppliers neglect their work and mislabel horse meat as beef, you will lose credibility and trust. If your suppliers do not maintain fair working conditions, your public image will suffer.

The only way to avoid fallout from your suppliers’ choices is to be certain of what they are doing in the first place. Without upstream supply chain visibility, you are putting your good name on something you cannot be certain of.

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No One Is Immune

Having a notable brand will not spare you the backlash of supplier errors. No matter how large or well-respected your company is, consumers will notice what the media makes public about your suppliers.

Apple, the largest and most recognized company on Earth, has been troubled enormously by the choices of its primary manufacturer FoxConn. Since 2010 Foxconn has struggled with a number of employees committing suicide within their complexes, citing low wages and lost prototypes. Foxconn’s most publicized response of installing suicide-preventing nets near the base of their tallest buildings has done little to calm consumer outrage since the first tragedy.

Though Apple has seen historic sales numbers since 2010, media scrutiny has been intense and brought out further problems with child labor and unsafe working conditions within Apple’s supply chain. It’s imaginable that this labor issue horse meat in Apple’s supply chain has caused more than one missed sale over the last several years.

Due Diligence Or Investigation

The time it takes to investigate a supply chain problem is lost production time. Few companies have the resources that Apple does to pour into investigation, process reworking, and image recovery efforts. If horse meat turned up in your product, how grave would your set back be?

If there is ever going to be a problem akin to horse meat in your supply chain, you have a choice: will you allow customers to discover the problem or will you root out the problem now by increasing visibility?

When consumers purchase your product, they trust that the labor your employ is fairly compensated and treated well; they assume that your product is exactly what it claims to be; they have faith that you wouldn’t negligently bring them harm. If they discover you are not deserving of their trust, the backlash will be strong.

On the other hand, if you preemptively increase upstream visibility to better understand everything you are delivering to your customers, you will eliminate any unsettling surprises.

Visibility Inspires Trust and Mitigates Risk

Horse Meat: Is It In Your Supply Chain? image Visibility is Key Image by Kara Allyson Under CC Attribution License 300x300

Do your due diligence and you will be setting your supply chain on a firm foundation. Customers are not just buying your product for its utility, they are buying the identity that you sell. If you can show consumers that your ethics run throughout your supply chain, you’ll inspire a great deal of confidence. Visibility lends itself to transparency.

The discovery of horse meat in numerous beef products has given rise to the most notable false step by a business in 2013. A lack of supply chain visibility has been the most prominent scandal of the year.

Don’t surprise your consumers with something they never intended to purchase or support. Increase your upstream visibility now and ensure that your value stream is only comprised of work you would put your name on.

Video – The Importance of Supply Chain Risk Mitigation

We are curating a conversation about supply chain risk at costflexrisk.com.  We put this video together to highlight the impact of supply chain risk in the news.  Please take a look and then let us know what you think at @GSCSOptimize (note, the link goes offsite here: http://costflexrisk.com/mitigate-risk/):

Horse Meat: Is It In Your Supply Chain? image VIDEO Enhance Flexibility 300x175

Is HTC Imploding?

Monday morning April 8, HTC released Q1 profit numbers that were startlingly low. After announcing that they would be forced to delay the launch of the HTC One, the company's flagship smartphone, most analysts were prepared for problems. But not of this magnitude. Delaying the One’s launch by just one month has caused a 98% drop in HTC's profits.

The story behind HTC's record low Q1 earnings offers a lesson in supply chain optimization. The cause of the One's delayed launch was cited a component shortage and an inside source revealed that the company's suppliers no longer viewed HTC as a tier-one customer. What could have caused this corporate giant to fall from tier-one ranks? Improperly aggregated supply channels.

Overly Diverse Supply Chains Are Costly

Late last year evidence was presented showing that HTC was diversifying its channels of supply, attempting to be less reliant on any single OEM. This move was in suit with Apple's decision to remove Samsung components from the iPhone and was likely an attempt to avoid sharing profits with competitors. However, the move to diversify supply channels can have unintended consequences and it seems that HTC is now experiencing some of them.

Simple economics shows that heavily diversifying a supply chain will increase costs. Increasing the number of suppliers you utilize for any single component decreases your order sizes. Unless your production volumes are increasing radically, you will be forced to reduce your order quantities to each specific supplier.

Decreasing your order sizes is a decrease in demand for your suppliers. Larger order sizes allow suppliers to scale their operations and produce your components at a lower cost. Decreasing order sizes makes their own operations less efficient and is likely to increase the costs that they pass on to you.

Suppliers will serve their most important customers first. In the case of HTC, over diversifying their channels of supply likely caused component manufacturers to realize that serving other customers with larger order sizes was more profitable and efficient. HTC may have forgotten that value stream decisions carry consequences upstream as much as downstream.

Aggregate for Advantage

Taking the opposite tack of HTC and aggregating your supply channels rather than diversifying them can have some significant advantages.

While supply and demand might be working against you when diversifying your supply channels, aggregating suppliers allows the mechanics of economics to work in your favor. By reducing the number of suppliers that you utilize, you can increase the size of your purchase orders. Larger orders means greater manufacturing efficiency and reduced costs being passed down the value stream.

Larger purchase orders can also help assure your suppliers of their own importance to your operations and improve relationships. By diversifying your suppliers you do mitigate some risks, but you also show a level of distrust. Conversely, a little loyalty goes a long way and giving your suppliers a reason to believe they will have your business for a long time may help you hold onto your tier-one status.

Diversifying supply channels can have mixed effects. As with most things, there is a golden mean to be found in application. However, in the case of HTC, the implementation of more suppliers in late 2012 has clearly been a costly choice. Posting profits of under $3MM has left analysts wondering if the company will ever truly recover, even as the One finally launches in the next several weeks.

Value stream structuring choices will be some of the most important your company makes. Appropriately aggregate your channels of supply and you'll find yourself with a lean supply chain reliably delivering components at the lowest possible cost.