The supply chain conundrum

As the horsemeat scandal rumbles on, companies would be wise to carefully consider their relationships with suppliers

The supply chain conundrum

It is unlikely that the issue of supply-chain management has ever enjoyed as much exposure as it has over the last six months. Obviously, using the word ‘enjoyed’ may be a bit wide of the mark when taking account of the events that have led to such coverage. The ongoing horsemeat scandal  has threatened the reputation of some established and respected multinationals,  and equally the future of smaller firms  upon whom some of the big boys have looked to lay the blame. Nevertheless, this has by  no means exempted the likes of Tesco and Asda from responsibility, and one could  argue that the whole sorry saga has been  a welcome wake-up call for British businesses, both large and small.

At the core of the horsemeat scandal is  a catastrophic lapse in supply chain communication. This has engendered an atmosphere of mistrust among consumers towards the supermarkets and wholesalers that sit at the (public-facing) end of the supply chain. While it has highlighted that an effective system of supply-chain management must ultimately stem from the top, there are obviously lessons that can be taken away from the scandal for many of the UK’s start-ups, which commonly sit a few levels down the chain – and this applies to companies in all sectors, not merely food service and retail.

To put things in perspective, a recent piece of research from EEF, the British manufacturers’ organisation, entitled Be prepared: monitoring supply chains; maximising resilience, shows that “the average manufacturer has almost 190 suppliers, virtually all have some of the supply base located overseas and one in five report that at least half of their suppliers are outside the UK.” It adds that, “Even smaller companies can be reliant on in excess of 100 suppliers of parts, components and other services.” 

In summary, it is not feasible for a business to have a direct relationship with every supplier it depends upon, especially when they are suppliers of suppliers, and so on. 

“The complexity of supply chains means that few manufacturers keep an eye on all of their suppliers,” the EEF report elaborates. “In terms of which suppliers companies choose to monitor, the most significant proportion, 60% of companies, choose only to monitor their immediate suppliers. A further 16% choose to monitor their tier one and tier two suppliers. Only 11% of companies monitor their entire supply chains whereas 16% of companies said they did not monitor their suppliers at all.”

One would assume these figures, collated  in June 2012, may change in light of current events. Yet they still paint a picture of how communication is dispersed through the supply chain and reinforce the importance of that dialogue between every single level. If that discourse is lost, it can, as has been demonstrated, have a knock-on impact on consumer confidence.

“You can’t put a value on that loss of consumer trust – that is why to protect yourself against that reputation risk, you have to self-insure because that is a form of prevention,” explains Philippa Foster Back, director of the Institute of Business Ethics (IBE). “But you can do it on a risk basis, because if a large company has got 20,000 suppliers, they may have to put the onus on their primary suppliers, possibly on their secondary suppliers too, probably not their third, but you might ask that your primary and secondary suppliers do their own ethical due diligence and make sure that their reputation is not going to get burnt by the people that they are buying from. I think some of the bigger companies are going to move towards asking their suppliers to gain charter marks that say they are doing their work according to certain principals, and the biggest companies will of course put in their own auditors.”

Of course, that is not to say you should let your judgment become clouded by the trust you have placed in your primary and secondary suppliers. Taking your eye off the ball for one moment can be fatal, as certain supermarkets and wholesalers will testify. 

“Even if you have been working with someone for many years, it is still important  to refresh the understanding of their business practices and what they do,” comments Back. “Don’t just assume what you set up originally is what is happening, because there might have been changes of personnel which often means changes of culture, changes of approach and changes of behaviour which  can lead to problems that you might not think are happening.”

And while it may not be practicable to have  a direct relationship with the tertiary – and even more distant – suppliers, it pays to have as full an understanding as possible of their businesses practices and financial stability.

“I think the first thing is – starting from the bottom of the supply chain – make sure that you know who you’re dealing with,” says Alan Fletcher, managing partner at Newcastle-based commercial law firm Square One Law. “By that I mean you have done your proper due diligence – not on the parties that are supplying you direct, but also their supply chain. If you are being supplied something that you are describing as from the UK, for instance, you need to be able to work all the way down the supply chain and make sure that they are all UK companies with reasonably strong financial covenants, so that you can have a degree of comfort that your description will be accurate.”

Back adds: “How they do their business will, at the end of the day, reflect on your own reputation so if you don’t understand how they are doing their business, you are potentially putting yourself at risk.”

However, as Fletcher admits, not even the most rigorous of checks can bring maximum assurance, as one slip by a single supplier can domino disastrously through the supply chain. He therefore advises businesses to look a bit closer to home to further reduce the risk of things going awry.

“Ultimately you are responsible, so whatever you are supplying, you do need to quality test,” he comments. 

“Obviously, you don’t test everything that goes out the door but you need to ensure that you have tested a reasonable percentage of the goods that are leaving your premises and I don’t think that is often done as much as much as it should be.”

A lack of communication from top to  bottom is one thing, but it is probably also worth digging deeper into the behaviour displayed by the companies complicit in the activities that could potentially threaten the reputation and foundation of your own business. 

Why and how, for example, was horsemeat passed off as beef? Often, it will come down to a set of terms and conditions between the supplier and customer which are either unclear or, more significantly, appear to be tipped in favour of the latter. In fact, such terms may not even exist in some cases, and this is where the buying power of certain customers can squeeze suppliers into submission, and ultimately tip them over the edge.

“I think if people are squeezing suppliers on the cost price all the time, to a point that they have gone beyond break-even and into  a loss-making situation, then they are going to try and cut corners, and they are going  start trying to hide things,” suggests Evan Lewis, managing director of Everything Environmental, a supplier of promotional eco-friendly products. “They don’t want to lose that big business so I believe that is why they are cutting corners and starting  to buy cheaper meat cuts. I think people put  so much financial pressure on their suppliers – and they see them as suppliers not as partners – that they will start to do what they have to do to survive.”

A little bit of reciprocity goes a long way then, especially when your business’s revenue and reputation is at stake. Managing a lengthy supply chain to the greatest possible effect may well entail a significant investment of your time and resources, but as emphasised by EEF in its comprehensive research, “consequences can have greater costs from lost output and productivity or indeed a loss of stakeholder confidence”.

CASE STUDY 1: Paul Lindley founder/chief executive of Ella’s Kitchen

The stringent regulations governing the baby food industry place a legal imperative on those operating in it to manage their supply chain as rigorously as possible. Nevertheless, given the passion with which Paul Lindley runs his global organic baby and toddler food brand Ella’s Kitchen, the need to stick to the rules is a minute part of why he prides provenance and transparency over anything else. The strength of relationships that Lindley has built with his suppliers in all corners of the globe, and the benefits they receive from working with Ella’s Kitchen, is almost a model in ‘how to do supply chains right’.

“As a relatively small company, we put  a lot of emphasis on what we call ‘giving stuff back’,” Lindley explains. “We focus on making sure that it is perceived as a partnership rather than a contractual relationship between a supplier and a customer. Obviously, if something goes wrong along the way, it is our responsibility, but we minimise the chances of those things happening by building on relationships rather than  just building on contractual positions.”

A large part of Ella’s Kitchen’s innovative and admirable approach to supply-chain management is its use of the government-backed Knowledge Transfer Partnerships (KTP) scheme, which allows graduates and academics to manage a significant project within an organisation, with the company paying a third of the person’s salary (the government funds the other two thirds) for a contracted two-year period. Lindley has taken advantage of KTPs for a couple of projects, including one specifically around the supply chain.

“One of the things that has come out  of it is that, for our fruit and vegetables grown in the UK, we now effectively commission the planting of all the produce that we will use. We know the volume that is going to be produced and so right from the seed, rather than from the farm, it is ours. The husbandry or farming that goes on is approved by us as the food grows and gets processed and that is something that, through the KTP, has allowed us to add a greater level of sufficiency and continual improvement in the processing as well as the sourcing.”

CASE STUDY 2: Evan Lewis founder/managing director  of Everything Environmental

An ethical approach to supply-chain management is a core component of  Evan Lewis’s venture Everything Environmental. Set up in 2005, it serves  as a one-stop shop for companies and campaign groups that require branded eco-friendly/ethically-sourced products, to be given away as promotional gifts. Needless to say, the company’s ethical style goes hand in hand with its environmental credentials, and is  founded on a commitment to understanding and building long-term relationships with its suppliers, while continuing to monitor them at every  stage of the manufacturing process.

“When we go overseas – and we produce a lot of bags and the like in India – I will visit the factories because I want to see  for my own eyes what is going on and ask the difficult questions,” says Lewis. “We then employ local, expert auditors to go into those factories who understand the local laws, speak the local languages and know some of the more technical questions to ask of a technical facility to make sure that they are working within the relevant regulations.”

 The fact that 90% of Everything Environmental’s goods are produced in Europe adds another dimension to the company’s ability to have a handle over  its supply chain, as well as enhance its ethical approach in the eyes of customers. “By producing more locally, we have a better understanding of what we are getting,” Lewis explains.

Openness and transparency is very much the name of the game as far as he  is concerned – and at its heart lays a fair and honest approach to price negotiation. “If Indian prices of cotton go up because there are strikes or  a bad harvest and we have to put prices up, then we communicate that with our clients,  but we don’t force our suppliers to stick to the price they gave us the year before when there was an abundance of cotton because that would be ludicrous, completely unethical, and quite unfair,” he comments. “What we never do is force a supplier into a position where they can’t afford to maintain their business on the prices that we are paying for the goods they are producing on our behalf.” 

Adam Pescod
Adam Pescod

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