Taming the Sprawl

It takes diligence to conquer the long tentacles of today's global supply chains

BY SARAH FISTER GALE

Few companies can do it all on their own. But companies once comfortable with shipping off projects to partners scattered around the world are now realizing the risk of scandals or market loss when their suppliers—or the suppliers to their suppliers—don't follow the rules.

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It's two weeks before the deadline for a big outsourced IT project when news hits that a hurricane halfway around the world has knocked out the vendor's power supply for at least a week. What's your back-up plan?

Or what if a team member is hospitalized after handling toxic materials on one of your project sites? How quickly can you trace the materials back to their original source and verify all is clear?

And then there's the seemingly inconsequential vendor that makes the $6 screws that hold your processing equipment together for a critical production project. If it goes out of business, can you track down another vendor that makes that part?

Most companies in today's global economy can't answer any of these questions with reasonable confidence, according to a survey conducted in January and February 2008 by global risk advisor Marsh Inc. The survey of primarily North American-based risk managers from global organizations found that although 73 percent of respondents said their supply chain risk levels have increased since 2005, none considered themselves “highly effective” at managing those risks. That's right. Not a single one of the 110 risk managers who participated in the study was highly confident in their ability to manage risks in their supply chains. And a paltry 35 percent considered themselves “moderately effective.”

None of this bodes well for projects increasingly dependent on sprawling supply chains fueled by global outsourcing. Adding to the danger is increased scrutiny by both governments and advocacy groups quick to publicly pounce on any company putting people or the environment at risk—no matter how far back in the supply chain the risk originates.

All those companies once quite comfortable with multisourcing projects to partners around the world are now faced with the looming threat of scandals or market loss when suppliers don't follow the rules.

“The supply chain is the fastest growing area of risk for companies,” says Beth Enslow, author of the study and senior vice president in the supply chain risk management practice at Marsh in Toronto, Ontario, Canada. “The underlying cause for this increased risk is growth in global sourcing among companies of all sizes. Today, business as usual means doing business globally.”

According to consulting giant McKinsey & Co., more than 460 of Fortune 500 companies currently have operations in China, where a cascade of disasters relating to a lack of oversight have resulted in tainted products flooding global consumer markets.

It's not a real confidence booster for companies handing off projects to vendors they barely know—who may in turn be handing off parts of those projects to vendors they barely know.

Doing business globally can reduce intimacy in supplier relationships, particularly when those relationships involve different cultures, business practices, languages and time zones. Companies may have strong ties with tier-one and -two suppliers. But from a risk perspective, the crucial suppliers may be further down the line.

“Identifying critical suppliers through the risk lens is very different from looking at it through the procurement lens,” says Ms. Enslow. “We often see companies establishing back-up sources for major suppliers, but they don't realize that all of those suppliers rely on the same single small tier-three supplier of a small but critical material or ingredient. It creates vulnerabilities they aren't even aware of.”

Project leaders need to clearly define expectations in contracts with rewards and penalties for meeting or missing goals. Of course, they then have to back it by monitoring vendor operations through extensive site visits and frequent audits.

On-site Accountability

To truly conquer a sprawling supply chain from end to end, project leaders must master the art of vendor relationship management.

“The suppliers are the experts. And you have to be able to trust them so you can engage them in your decision-making process,” says Elcio Grassia, Latin American business development director at Havi Global Solutions, a global supply chain management services company in São Paulo, Brazil.

Project leaders have to be willing to put in time on the ground at the plants, building trust and accountability through face-to-face encounters.

“Interact as much as possible. Meet with suppliers at their plants and invite them to your stores or client sites so they can see the end-result of your efforts,” Mr. Grassia says. “It's easier for them to see what's right and wrong when they can witness the final experience of the customer.”

Conversely, it also pays for project leaders to get to know the suppliers' processes—from beginning to end.

“It's a losing proposition to outsource something that you can't minimally perform because you will have no way to manage how it's done or to evaluate the performance of the vendor,” he says.

If you can get control of risks earlier in the supply chain, it makes all systems downstream run more smoothly.

—DAVE THENO, Ph.D., JACK IN THE BOX, SAN DIEGO, CALIFORNIA, USA

But armed with that knowledge, project leaders can gain a better understanding of the constraints, which may impact the decision-making process. Mr. Grassia learned that lesson while working with McDonald's, when, as a distribution manager, he was invited to visit one of his vendor's lettuce farms in Brazil. “At first I thought, ‘Why the heck would I want to do that?’”

But he accepted the invitation and had the first of many realizations about how his supply chain worked. “I saw that if we plant the lettuce today, 60 days from now it's got to be out of the ground and shipped, or it will be dead,” he says. “If you don't understand why those 60 days are important, you will impose inefficiencies on your supply chain that result in lower quality and higher costs.”

He went on to visit the sites of all of his vendors and tapped into that information to add efficiencies to his distribution network. “If I hadn't visited that field I never would have understood that need for balance in the supply chain process.”

Careful observation during site visits can deliver information and solutions to improve processes in ways that vendors may not realize they need, says Kishore Dharmarajan, the Dubai, United Arab Emirates-based author of Eightstorm: Eight Step Brainstorming for Innovative Managers [BookSurge LLC, 2007].

“Any industry can gain an edge by spying on suppliers,” he says. “It is critical for developing better solutions.”

Project leaders should quietly watch vendor operations, taking note of where improvements might be made. Providing mobile electronic tracking devices or other automated tools might help vendors improve project governance, for example.

“Just asking suppliers directly what they need to be more productive will not garner the same answers as watching them in action,” Mr. Dharmarajan says. “Henry Ford told us years ago: ‘If I'd asked people whether they needed a car, they'd have told me they wanted a faster horse cart.’”

Life-or-Death Decisions

At Jack in the Box, it was the company's vendors that came up with many of the fast food chain's most effective safety practices—which were then shared across the supplier network. “The more we cross-pollinate ideas, the better off we are. Everyone benefits,” says Dave Theno, Ph.D., who served as senior vice president and chief product safety officer at the San Diego, California, USA-based company until he retired in September.

The suppliers are the experts. And you have to be able to trust them so you can engage them in your decision-making process.

—ELCIO GRASSIA, HAVI GLOBAL SOLUTIONS, SÃO PAULO, BRAZIL

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All vendors are encouraged to talk to each other and share best practices. One beef supplier recently began using gene probe testing as a more sensitive method to type bacteria using DNA codes, for example. “They cut their teeth with this new technology, but now they are sharing their lessons learned with other vendors where it would be a good fit,” Dr. Theno explains.

Jack in the Box learned the value of vendor oversight in the worst way possible after three children in Seattle, Washington, USA died of E. coli poisoning after eating at one of the restaurants in 1993.

A lack of solid supply chain management and communication strategies turned the event into a brand crisis that impacted global sales for a year, and shook up the entire fast food industry in the process. It also spurred a call to action at Jack in the Box to rebuild its supply chain management strategies with a sharp focus on safety above all else.

Within months, the company's CEO hired Dr. Theno to revamp its network.

“That was a catastrophic failure of the food-safety system,” he says. “When I came in we did a clean slate and reorganized everything around food safety.”

Dr. Theno's team developed a series of evaluation criteria mandating that all vendors prove they meet the company's food safety and sanitation standards as well as traceability requirements. Those that pass the initial phase then go through a food safety audit and perform trial production runs of the product to prove they can do it consistently. And the process doesn't end once they're selected. Vendors are subject to audits on a regular schedule based on the type of product and manufacturing environment. “Even approved vendors still have to be closely watched,” says Dr. Theno.

“If you can get control of risks earlier in the supply chain, it makes all systems downstream run more smoothly,” he says. “If the threat never shows up at your door, it never flows to the customer.”

Companies have to instill a cultural mindset in which economics do not compete with safety in supply-chain decision-making.

“No one will tell you it's okay to put people at risk, but a lot of people can lose their focus when they are faced with multiple supply-chain issues,” Dr. Theno says. “You have to bring them back to focus on what is most important.”

And instilling that mindset is the job of a leader, he says.

“Going to a supplier and saying, ‘We expect you to deliver these specifications or you can't do business with us’ sends a clear statement about where your leadership's head is,” he says. “That laser focus and hard-line stance sets the tone, and it guides decision-making for the rest of the company.”

The chain is also careful not to create vendor incentive programs that may conflict with safety protocols. Before rewarding broad cost-cutting measures, for example, the chain wants to identify where those cost savings will originate.

“While price will always be a competing factor, crises occur when it is the only factor considered in choosing and managing suppliers,” Dr. Theno says. “You have to ask, ‘Are you willing to bet the company on this?’ Because if you mess up financially, it will cost you money. If you have a liability issue, you could lose your brand.”

In Lock Step

Project leaders should be prepared to educate suppliers, sharing information about new or changing expectations with every supplier in the chain, says Tina Bova, manager of supplier diversity and sustainability in the supply chain management group at Baxter Healthcare, a global medical products and services company based in Deerfield, Illinois, USA.

“We haven't had a dedicated person in this role before, but we realized it was something we needed to focus on,” says Ms. Bova, who took on the position in 2008 as part of Baxter's initiative to “green” the supply chain.

Sustainability adds yet another layer of goals, expectations and evaluation criteria to an already rigorous assessment process. Ms. Bova began by defining the base line, surveying suppliers with questions about what they're doing to green their business and what they have accomplished.

“I hope that by talking with them about sustainability, our suppliers will realize this is important to Baxter,” she says.

And it's not just Ms. Bova asking the questions. All of the sourcing and category managers at Baxter have received documents outlining the company's sustainability goals and initiatives, which they are encouraged to share with their suppliers.

Ms. Bova says starting the communication process from within and pushing the message out to vendors will ensure consistency and drive change across the supply chain.

“A lot of this is about changing the mindset of our people so they will bring that message to suppliers,” she says. “It has to be a team approach. We are a global department, and sourcing and category managers have opportunities all the time to speak to suppliers about our goals.”

Whatever the message is, it needs to be consistent—no matter who's doing the sourcing or what the project is, adds Ms. Enslow.

“The whole company has to be in lock step when it comes to best practices for managing risks in the supply chain,” she says. “In a global economy, it's the only way to protect the brand.” *

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

Leadership 2009 www.pmi.org
Leadership 2009

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