Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archives.
In the May 2009 edition of World Trade magazine, I read that three more global air carriers were found guilty of price fixing by the U.S. Department of Justice. For approximately six years, it looks like a total of 21 rival companies met with each other and conspired to set service pricing. The total fines exceed $1.8 billion, and three executives have been sent to jail.
Ouch … and shame on all of you.
As these air cargo companies were fixing prices they were also robbing their customers of competitive leverage in choosing an air cargo carrier. Price fixing is fraud and is illegal. In the United States, the Sherman Anti-Trust Act and the RICO (Racketeer Influenced Corrupt Organizations) Act can be used to prosecute against organizations that conspire to fix prices.
But the problem goes deeper, because with the price fixing supply chain performance metrics would have been skewed, also robbing the customers of the ability to accurately assess price-for-performance in air cargo shipping. By affecting this – and other – related metrics, customers could not accurately perform analysis to select the best air cargo carrier even while a current carrier was failing to meet performance requirements.
When service companies conspire to set prices, there may no longer the pressure to perform for competitive purposes. So what if performance slips a little? Without competitive prices, a customer may not likely jump from one company to another as long as performance is still within “tolerable” limits.
But here is where the greater problem can lie: As performance slips disruption to the supply chain grows, and costs through the supply chain increase. From empty spaces on store shelves to empty inventory positions, supply chains – whether regional, national, or global – rely more and more on tight timeframes. The impact of a few percentage point slippage in performance can mean lost sales and idle manufacturing shop floors. Compounding these costs, if coverage for poor performance causes buyers to increase stock levels – whether for raw materials or finished goods – this then forces these customer companies to hold higher levels of inventory which decreases cash reserves, robbing the companies of usable cash for other needs.
Expedited shipping to deliver goods to their final destination may now have to be incurred, and while this benefits those particular carriers – who may not have been involved in the price fixed conspiracy – here again the customer companies are forced to utilize cash to cover for the disruption due to fraud.
Higher operating costs increase a product’s Cost Of Goods Sold, which can ultimately be reflected in the higher price the consumer will pay for those goods, unless the company is willing to absorb those costs. However, the company’s profit margins are reduced, which, for public companies, can impact shareholder dividends and stock prices, so there may be reluctance for the company to absorb such higher operating costs because of the negative effect to financial performance.
This fraud is an excellent example of the cascading effect a disruption in one supply chain link can have across the entire length of the supply chain, and even beyond. Fraudsters don’t often consider the negative impacts of their crimes and the number of people that can truly be affected by their actions. Lots of honest employees at a few very large corporations had their lives adversely affected when the unethical and illegal actions of a few senior executives sent these companies crashing down like a toppled house of cards.
Isaac Newton’s Third Law of Motion states that “for every action there is an equal and opposite reaction.” Hmmmmm … I’ll bet Newton never considered how the damage wrought by so few could affect so many, and he might have amended his third law of motion if he had known about supply chains.
Norman Katz, Katzscan