Quality? Supply Reliability? Or Management Expectations?

In last year’s CPO Agenda inaugural debate on “Assimilate to Accumulate”, Martin Lockstrom, of the BMW-SMI Center for Purchasing and Supply Management at China Europe International Business School, said that the most difficult thing is not necessarily to manage the Chinese suppliers but managing HQ expectations on these kinds of things.

With all of the issues making the news in recent years with respect to outsourcing from China around supplier quality, reliability, and intellectual property, it’s important to remember that the biggest issue is not always the supplier, who may respond well to sincere attempts at supplier improvement initiatives, but management expectations. It is amazing how many executives still believe that outsourcing will fix all their problems and that, because outsourcing to China has been going on for over a decade, the supplier will deliver high quality and cost savings off the bat. While the irrational exuberence is not at the high it once was, there are still executives who hold on to unfounded beliefs because “it worked for the competition”, failing to realize that the competition may have worked years on supplier development to get the performance they are achieving.

Done right, sourcing from China will pay off, but great results can still take time.

A recent article in Industry Week on “Lessons Learned from High-Profile Product Recalls” had a number of good tips on what to do to prepare for a recall before it happens, but one tip in particular stood out. Specifically, the need for audit trails. Every risk management article these days talks about being prepared, identifying key stakeholders and information requirements, developing communication plans, preparing reverse logistics and fulfillment operations, and evaluating risk vs. cost, but few point out the need for good audit trails down to the component, and sometimes raw material, level.

Without a good audit trail, if a serious defect is discovered across a product line, or one or more food products you are selling is tainted with E. Coli or salmonella, you will have no choice to recall the entire product line because you will have no way to trace the defect back to the source and forward to only the affected units. For example, if all of the tainted soup cans came from a cannery in Michigan, then there is no need to recall the cans from Nebraska and Georgia. And if all of the overheating batteries came from one plant in China, and they were only used in two specific lines of laptops, and you have six, at most you will be recalling one third of the units.

So make sure you can trace each product back through each supplier, component manufacturer, and, in the case of food products, each grower. Otherwise, when a recall does happen, it could be financially devastating.

A recent article over on the CPO Agenda on how “Procurement Success is a Two-Way Street” noted that a recent Efficio grassroots survey found that almost two-thirds of respondents never met with 20% of their suppliers. Now, there are some suppliers, like office supplies vendors, that you never have to meet with because the organization is only using them to source readily available commodities where supply outstrips demand and where another vendor is waiting for the business down the street, but do these types of suppliers really constitute 20% of the supply base? Not likely. I have to agree with the author in that this is a recipe for potential disaster. Considering that, thanks to the recent downturn, small suppliers can often go from financially viable to bankrupt in a matter of weeks, or days (as all it takes is one of their key customers to go belly up), failure is always just around the corner.

In addition, a lack of regular communication keeps the supplier in the dark about your needs, and if the supplier is not aware of projected future demand spikes sufficiently in advance, the supplier may not be able to plan its production schedules accordingly, and you might be left with egg on your face as the company’s hottest selling SKU goes out of stock.

This isn’t to say that you need to meet with each supplier regularly. If the supplier is not critical, or demand predictable and easily communicated in advance, you can simply meet on a quarterly basis and establish a methodology where you push information out to the supplier on a regular basis. But if the supplier is critical, at the very least a status update call should be occuring on a bi-weekly basis just to make sure there are no gremlins in the gears. And make sure communication is agile and happens quickly when something changes, for better or for worse.

For some tips on agile communication, see how “Procurement Success is a Two-Way Street”.