Risks challenge businesses.
Last week two events occurred that illustrate the risks you can face in operating global supply chains.
The first concerned leather balls used in Australian Rules football games. Like many companies in developed countries, the brand company sources its products from low cost countries (LCC).
If your company approaches suppliers that have low labour costs, the procurement staff are likely to have a buying approach that emphasises price; negotiations will be all about obtaining a lower price. After the supplier accepts a lower price, they will be tempted to use processes that enable their profit margins to be maintained.
In this case, the buyer supplied a document to prospective suppliers which stated, in part, that no child labour was to be used in manufacturing the footballs. Of course, giving the document to a supplier but not auditing the clauses encourages suppliers to use child labour. The practice was uncovered and described by a journalist on the front page of newspapers and lead items on television.
The brand name is now associated with exploiting child labour – not a good image for a product used by many children in wealthier circumstances. In response to the crisis,the company has stated that a procurement staff member is now resident in India; it has opened a new assembly facility and instructed the supplier to employ the parents of the child workers and has recalled the ‘guilty’ balls. Together with statements of apology, it has cost the company more than one million dollars and will cost much more to regain its reputation. So much for saving money through buying ‘cheaply’.
The second event that raised the supply chain risk flag was a fire at a chemical company in Japan which supplies about 20% of world demand for the super absorbent polymer used in babies disposable nappies (diapers). Reuters reported the company producing at full capacity, which also applies to suppliers of the remaining 80% of demand. It is speculated there will be a supply shortage of the polymer material and therefore of the finished products, although one of the major brands said that it had contingency plans through its global supply chains.
Risks in your global procurement activity
These events illustrate that global supply chains and international sourcing contain large potential risks. An important task of specialists in supply chains is to identify the risks, such as country, supplier, product, transport, finance and disaster and initiate action to reduce those risks or mitigate the effects if things go wrong.
The lesson about sourcing from low labour cost countries is that when you are buying, do not expect that agreements will be completely honoured – you must audit every step in the supply chain on an ongoing basis and tell the supplier what you are doing. This costs money and together with transport and inventory holding costs can make buying from low cost countries more expensive than expected; but then, how many companies calculate the total landed costs of internationally sourced items?
When sourcing internationally for a critical material that is only produced in a few factories, the risks of supply interruption are increased. An example of reducing the risk is for the quantity required to be shared between suppliers, but the price could be higher and any priority service for a major customer is lost. Another example is to increase inventory of the material, but that is ‘just in case’ inventory which is expensive to hold. Whatever the approach selected, the increased risks are likely to increase your costs.