Supply Chain Transformation Blog

Supply Chain Transformation Blog

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Don’t burn down your customer’s house – and other supply chain advice

Category : Supply Chain

The past few months have provided some alarming headlines across a wide range of well-known products and brands. Reports indicated that homes were being damaged, customers were sickened by their food, and international sanctions were broken by goods producers in very different industries. Manufacturers and distributors are finding themselves dealing with recalls, excess unsaleable inventory, and various PR problems due to gaps in managing their supplier relationships. None of this is intentionally caused by the product manufacturers, but much of it can be managed.

 Each company chooses to source or produce goods in accordance with a guiding strategy. The choice of a sourcing or a manufacturing program can be driven by any number of motives, including:

  • Cost & location
  • Manufacturing flexibility, scalability, and efficiency
  • Environmental or cultural concerns
  • R&D, design capabilities

 

In the cases provided below, the risks being faced by each company are very similar in nature. The benefits of choosing a particular supplier or supplier structure are generally obvious (and immediately so). However, risks to the supply chain can present themselves in several ways and are often ignored or are non-transparent due to a few reasons:

  • Lack of transparency or oversight (Understanding the makeup of the value chain)
  • Lack of experience (New business model or fast growing business)
  • Ignorance/Carelessness (Not caring where raw materials come from as long as the price is right)
  • Lack of trust (A suspicion that methods will not be approved)

 

Here are a few examples that touch on the themes highlighted above:
 

Hoverboards

You know the product. This past Christmas season so-called "hoverboards" were the subject of intense popularity throughout the US. The self-balancing scooters came in a variety of flavors from many manufacturers. The products were available in Toys-R-Us, Amazon, Best Buy, and even mall kiosks. Sales outlets were flooded with what was the new hot item (no pun intended). As more products entered the homes news reports started to circulate that hoverboards were the source of fires due to the batteries and charging units being prone to ignite.

Now hoverboards are banned by public transit, universities, and parents alike. Amazon is offering full refunds for hoverboards and entire shipments of inventories are being left in Chinese ports. So what happened? Manufacturers found themselves in the middle of a patent war among three individual parties, effectively creating a land-grab for market share. Manufacturers could make the product while patent rights were tied up in the courts. Chinese factories in and around Shenzhen were able to quickly ramp up production with very little retooling time. A lightning-fast supply chain was able to get products into consumers’ hands faster than before. As quickly as this ramped up, suppliers were either unable or unwilling to ensure the safety and compliance of the product. Underwriters Laboratories (UL) didn't certify a single product during this time period.

This oversight on the part of many manufacturers and distributors has sealed the fate of hoverboards for the time being. They are banned from use in many public places and shippers are unwilling to move the product due to the risk of fire. A few companies are trying to survive and bring products to market the correct way, however, it's going to be an uphill climb. Swagway is working with the CPSC and UL to certify the products and now includes a UL certified charger as part of the package. Chinese suppliers are ready and willing to sell the hoverboards, however, the onus is on the branded distributor and retailers to ensure effective supplier relationship programs are in place. Why did they have to move so quickly? It seems that many retailers rushed to capture early sales of the popular item during one of the most important retailing periods of the year. It is just as important to have the right Supplier Relationship Management structure in place to ensure compliance with consumer safety standards. A failure to create this structure enabled short-term gains at the expense of long-term growth opportunities for the product segment.

 

Chipotle

Burritos are fast becoming a staple of the Quick-Service Restaurant (QSR) industry in the US. Chipotle is 14th on the QSR 50 and growth was at a tremendous pace until recent quality issues surfaced exposing the company to legal, financial, and loyalty problems. Food manufacturers have been plagued in recent years with food-borne illness issues traced to a variety of companies, all of which are difficult to trace back to the ultimate source.

Wired recently ran an article on the problems affecting the company, including a detailed look at what kind of illnesses affected the customer base across many states. Chipotle has long prided itself on the intense level of care it has placed on its supply chain. The idea of "Food with Integrity" is pervasive throughout the culture (and marketing materials). This core principle means that Chipotle will source with an ethically and environmentally conscious mindset. Partnerships are created with small farms that share the same values with "the health of the planet" in mind.

There is undeniable appeal in limiting our purchases from companies that source from 'industrial farms' - we want to believe that our hard-earned dollars are going to a cause that benefits future generations. The challenge is the ability to effectively scale while maintaining quality and safety standards among an increasingly complex supply chain. It's no surprise that one solution is centralized production which can not only lower the cost to the final customer but also provide a high level of safety conformance. The largest fast food retailers can take months or years to secure supply of simple products, like cucumbers, so it's understandable that a fast-rising QSR like Chipotle can incur associated growing pains.

The challenge is understanding what products represent the highest risk segments for security of supply and product safety, and managing that against the company's goals and mission. Chipotle is changing its practices while continuing to stay true to its mission. Management is now deeply involved with how food is handled placing safety front-and-center. Given time and the increased attention to the procurement and operations structure, Chipotle is likely to win back its customer base.

 

Rip Curl

The popular surf and sportswear brand Rip Curl is under scrutiny in recent weeks. It was discovered that the Australian company's contract manufacturers had outsourced some of the work to an operation within North Korea. Problems with contract manufacturers aren't new and retailers are well-aware that compliance and safety in the garment industry is of utmost importance. Tragedies, like Bangladesh’s 2013 Rana Plaza collapse, are still very effective reminders that vigilance and transparency in at-risk nations will always be a relevant need. The unusual twist in this scenario is that the production has been outsourced to a country under active international sanctions. Further, conditions are described as slave-like and revenues generated here more than likely contribute to a corrupt dictatorial regime.

That's heavy stuff to process. After all, Rip Curl expected their products to be Chinese-made. China's economy is getting stronger worker protections and the country can be considered a reasonable source of supply. The issue we find here is that the relationship may be purely transactional in nature. The contract is drawn up, the order is placed, and goods are received. The responsibility of worker protections doesn't fall on the contract manufacturer but on the company providing goods to the public. In this case that is Rip Curl. The importance of supply chain visibility at the raw material level will not only help us understand the cost breakdown of the product but ensure that the manufacturing is being done in a safe and humane way. Developing partnerships that enhance the relationship beyond the transaction can help prevent non-compliant situations such as this.

 

So where do we go from here?

Supplier relationship management is very challenging, regardless of whether you are looking to take advantage of the latest trend or think about your sourcing along more ethical lines. Supply chains are moving quicker than ever and consumers are changing their buying habits to consider more than just price. A strong relationship can help the business stand on solid footing and provide goods or services that support the strategy and mission of the company. This level of interaction with your suppliers can improve transparency, compliance, quality, and cost as the business grows. Ultimately it ensures the safety of your products, providing both sustainable loyalty and profitability from your customer base.

About the author

Thomas Sobeck
Thomas Sobeck
Thomas Sobeck is a Senior Consultant with Capgemini Consulting's DCOO Practice. He has experience working with global consumer products, packaging, and financial services organizations. His specialty areas include procurement, supply chain, and manufacturing strategy.

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