Beyond the Pressures of Globalization
In this chapter, we have explored just a few of the important new pressures ” globalization, the rise in power of NGOs, and unprecedented shareholder scrutiny ” that a company confronts in a dramatically changing global environment. These are the very real pressures that are forcing companies to rethink the boundaries of their responsibility within the extended supply chain.
But not all pressure for change is coming from external forces. Apart from these formidable external pressures, there are internal structural changes to the modern manufacturing and distribution organization that also compel companies to reassess their supply chain responsibilities and to consider a closer monitoring of suppliers in developing countries . We turn now to these organizational changes; part of a broader supply chain revolution that demands that companies make supplier monitoring and control much more a part of their strategic management policy.
Chapter Two: The Extended Global Supply Chain: New Problems and New Responsibilities
As we saw in the last chapter, there are many reasons companies now, more than ever, need to pay attention to social and environmental issues within their extended supply chain. These include a relocation of the manufacturing base, growing NGO and activist pressures, increased scrutiny by investors, and the instantaneous and ubiquitous nature of the Internet. There are also, however, organizational-level changes that have occurred during the past decade ” part of the supply chain revolution ” that have greatly affected a company s ability to control and monitor product safety and social and environmental issues, and make it more imperative than ever that corporations manage their suppliers more effectively.
A Decade of Shifting Responsibilities
For anyone involved in manufacturing or distribution, it is well understood that over the past 15 years there has been nothing short of a revolution in supply chain management processes and systems. Consider, for example, the plethora of quality and performance techniques such as ISO 9000, Six Sigma, Baldrige, Total Quality Management, vendor-managed inventory, and Business Process Reengineering that have been adopted by most modern companies. With a relentless focus on reducing costs, companies have streamlined production methods using new manufacturing processes and systems. Enterprise Resource Planning systems, Customer Relationship Management, advanced forecasting and planning systems, and e-procurement and online markets and auctions have all helped to revolutionize the way the modern company purchases materials and manufactures, assembles, sells, and delivers products. Although these techniques have often required changes to support tasks in human resources, accounting, or corporate governance, for the most part they all have been focused almost exclusively on improving the production and distribution process: in short, the supply chain.
It is true that not all of these processes, standards, and systems have delivered on their promises, but on the whole, the movement has been effective in reducing inventory carrying costs, shortening product development cycles, increasing product variety, and linking forecasting and planning with manufacturing and supply in a much more cogent way. Equally important, these systems are nearly all based on the premise ” one that has guided supply chain management thinking for the past decade ” that there is a fundamental advantage in shifting responsibility for production, inventory carrying, and holding costs as much as possible to suppliers and distributors .
This dramatic shift of responsibility toward external parties has been effective in streamlining processes, breaking down bureaucracy in the corporation, and reducing the company footprint considerably during the past decade. At the same time, it has resulted in two important strategic changes.
First, effective sourcing and relationship management of suppliers has become an issue of strategic importance for the modern corporation. After all, the impact of supplier performance on a company s bottom line, particularly in an ever-more collaborative and extended global supply chain, is critical. For the average manufacturing or distribution company, purchased materials account for between 40 and 60 percent of total revenues , and more than half of all quality and customer satisfaction issues arise directly from those purchased goods.
As we have seen, however, as a company s success is more dependent-upon the performance of their suppliers than ever before, companies are now also more vulnerable than ever to charges of guilt by association, when those suppliers are found to be guilty of poor environmental, product safety, or employment practices. In short, despite the effort to shift more and more responsibility for manufacturing to business partners , companies have been surprised to find that they have not been able to rid themselves of all the legal, ethical, and quality responsibilities that come with that production process ” even when their suppliers are geographically very distant or organizationally and legally separate.
Equally important, despite all of these important economic and organizational changes, the procurement (vendor-relations) function for most companies has actually changed very little in the past 20 years. The supplier management function still remains, principally, with mid-level procurement officers. Criteria for supplier selection, though possibly reviewed by the chief operating officer, is usually high-level and flexible, left mainly to the discretion of the purchasing department. Strategic sourcing techniques still tend to focus almost exclusively on supplier performance in terms of quality, price, and delivery, which helps little in developing more collaborative relationships or, importantly, ensuring that suppliers are not endangering corporate reputation through illegal or unethical social and environmental practices.
The reality is that, for most manufacturing and distribution organizations, despite all these fundamental changes and growing pressures to monitor and control supplier behavior, the supplier management function has failed to keep up. In short, procurement is still completing operations in much the same way as they did 50 years ago, when suppliers were local and production operations were on-site.
In order to better understand the gap that has grown between the changing needs of the modern manufacturing or distribution organization and the current supply chain procurement practices, it is important to consider three fundamental changes to the traditional supply chain that have come about in the past decade.
Collaborative Planning and Integrated Materials Management. First, as we have seen, in an effort to shorten product cycle times and to increase inventory efficiencies, during the last decade, companies have shifted responsibility for production and materials management, whenever possible, to their suppliers. With that shift in responsibility has also come the need for stronger collaborative alliances. Collaborative planning, supplier managed inventory, shared product databases, electronic procurement, Just-In-Time ( JIT) supply techniques, and advanced planning and scheduling software all create greater efficiencies within the supply chain that require closer buyer “ supplier relations, tying together the various organizations involved much more closely, in terms of both legal and production responsibilities. This means that although costs are shared more widely, so is responsibility and thus blame for errors or failures.
In short, greater dependency and closer collaboration with suppliers brings with it new levels of responsibility because of the closer association. Because you re crossing enterprise boundaries to conduct collaboration, says Janet Suleski, a senior analyst at AMR Research, there s a new, broader set of business ethics, one that takes into account the effect that your decisions have on other businesses. [1 ]
Outsourcing. But consolidation and greater levels of collaboration constitute just one effect of the supply chain revolution that has taken place over the last decade. More important is the continuing trend toward outsourcing to external suppliers huge portions of the purchasing, holding, production, assembly, finishing, and delivery process.
This outsourcing movement began many years ago when companies first began to refocus on their core competencies and to outsource or subcontract activities that required noncore specialist knowledge or production. Suppliers, notes the OECD, are no longer restricted to traditional component suppliers. Suppliers have become complex (technical) solution partners ranging from large multinational companies often larger and more global than the manufacturers to small but nevertheless very competitive design and engineering firms. [2 ]
This outsourcing trend has now reached dramatic levels. Enormous portions of what was integral to a company s manufacturing process in the past is now often completed by other organizations, often in other parts of the world. As we have already seen, companies such as Nike, for example, no longer own any factories themselves, but work with 900 contract factories in more than 50 different countries . So extensive has this restructuring become that, as a result of extensive outsourcing, the very concept of the legal and operational boundaries of company responsibility are now being called into question.
Strategic Sourcing. As a natural result of the combined shift toward collaborative design, materials management, and unprecedented outsourcing, one of the most important and strategic activities facing the modern company has become managing the relationship with its supplier base. More than ever before, the modern corporation depends on its ability to develop and maintain strategic partnerships with suppliers, distributors, manufacturers, and retailers ” to such a level that today, managing those strategic partnerships has become a required core competency. For that reason, supplier management and strategic sourcing, areas once thought to be the exclusive domain of procurement officers, has today become a strategic concern for companies: key to maintaining a competitive operational advantage.
During the early phases of this supply chain revolution in the late 1980s, it appeared that there was little downside to this combined approach of outsourcing, collaborative product management and strong supplier sourcing techniques. After all, shifting production and inventory holding costs to specialized suppliers only made sense. Companies could shed their costly plant and local production workforce and simply contract out manufacturing at a much lower cost with specialized factories in developing nations. Corporations no longer needed to provide costly infrastructure when they could simply purchase or contract with specialist producers to complete great segments ” production, assembly, transportation, disposal ” of the supply chain. By the late 1990s, information technology platforms ” Enterprise Resource Planning (ERP), Supply Chain Management systems, Advanced Planning and Scheduling, Materials Management systems ” were all being developed to allow companies to manage a supply chain with dispersed responsibilities in a collaborative way. Vendormanaged inventory techniques were integrated with Just-in-Time ( JIT) practices and collaborative planning tools. Strategic sourcing modules were created for ERP platforms. In time, this radical extension of the supply chain became so widespread that, as we have seen, many former manufacturing companies no longer engage in these production processes, limiting their efforts almost exclusively to design and marketing.
In North America, says Nicholas Eisenberg, CEO of Ecos Technologies, companies have outsourced more and more of their operations. The things that they used to make ” what most people in the street think a company make ” well, they don t make it. They may put it together, and they certainly market it, but they don t make it. And that actually puts a lot more pressure on companies from a risk standpoint, because it takes them farther away from control of the risk ” and puts the risk outside the four walls. [3 ]
One of the most positive outcomes of this outsourcing movement has been that it has provided developing world suppliers not only with an opportunity to sell to the rest of the world, but also to learn from modern management policies and techniques. Managers in these companies become familiar with the demands of advanced consumer markets and business partners as well as with management practices used for accountability and legal and regulatory compliance, explains the OECD, advocating this type of approach, in part, because of the advantages it brings to smaller, often developing-world, suppliers. These include control of product flow and quality, inventory and facilities management, record keeping and tighter labour and environmental management. [4 ]
But this outsourcing model also has its obvious drawbacks. With this dramatic shift toward dependency on business partnerships has also come an unexpected downside, which is that companies have lost significant control over key issues concerning product safety, environmental, health, and employment quality issues.
For that reason, from an operations point of view, this extended supply-chain, which may include hundreds of subcontractors in multiple countries, requires competent strategic sourcing to ensure that the suppliers selected can be trusted to produce the goods on time, at a high level of quality. Yet, in reality, the effect of the supply chain revolution has had almost the exact opposite effect. Levels of collaboration and scrutiny, difficult to achieve in the early years with local or regional suppliers, have proven to be even more difficult to achieve in a global supply chain strategy. Fearing interference in their management techniques and greater pricing pressures, developing-world factories have tended to keep buying companies, whenever possible, at arm s length. And despite the continued dependence on outsourced suppliers, relationships between U.S. companies and overseas suppliers tend to be more formal, and involve lower levels of collaboration, than ever before. Even large companies such as Nike or Gap Inc. may often only contract for a small percentage of a factory s output, and therefore have much less direct control over the supplier than is often supposed. Short-term contracts and low-cost bids undermine the longer- term relationships that were more typical in the past, particularly with domestic operations.
Not only has that close buyer “ supplier relationship (a fundamental tenet of the supply chain revolution) been undermined, but delivery dependability and quality issues are often rife, and brutal conditions, poor management, and environmental indifference can potentially create liabilities for the buying company in terms of unsafe products, or, as we have seen, guilt through association with social and environmental exploitation. And as many companies have moved toward outsourcing other areas, such as waste management, they can also find liability extending downstream beyond the production process itself. Issues such as dangerous toxic and other waste disposal, use of prohibited or dangerous ingredients such as asbestos or carcinogenic materials, and employee exposure and injuries all constitute not only a potential supply chain delay, but a potential corporate reputation disaster. Accordingly, much of this activity lies beyond a company s immediate operational control.
At present, says Teresa Fabien of PricewaterhouseCoopers, most attention is placed on addressing reputation risks associated with the sourcing of inputs (such as the environmental performance of a cotton farm) and at the manufacturing or conversion stage (such as use of child labour to stitch footballs).
These should not be the only area of concern in the supply chain, she concludes. At each stage of the supply chain process companies are exposed to a range of different reputation risks. Often these risks are overlooked, not identified and therefore not managed. [5 ]
Apart from increased risk, many have begun to wonder if the very fundamentals of the supply chain revolution have been called into question by this drive toward overseas outsourcing. After all, the benefits of outsourcing were thought to be achievable only if companies developed a closer working relationship with their suppliers ” collaborating in product design, sharing demand information so that they could ensure JIT inventory. The very concept of outsourcing was predicated on the idea that a company would be able to create strong, collaborative working relationships with their suppliers, ensuring performance and consistency through strategic sourcing techniques. That is what the strategic sourcing initiative has been all about. With the onset of global outsourcing, however, companies have suddenly suggested that their supplier relations are less important, and that they only have a contractual and distant relationship with foreign factories and farms.
Does this mean that the fundamental ground rules for the supply chain revolution need to be reconsidered? Probably not. After all, the principles of collaboration, quality, systems integration, and inventory management are all still the same, whether the supplier is down the street or on the other side of the globe. The more efficient the manufacturing process, the lower the costs (even if the baseline for wages is 31 cents rather than $24 per hour ).
The reality is that just as with the evolution of supply chain efficiency that has been occurring domestically for the past 30 years, there will be continued pressure on companies to work more closely with their overseas suppliers and business partners to improve productivity and to reduce costs. There is a competitive dialectic that drives companies continuously toward increasing efficiencies and lower costs throughout their supply chain, and that inevitably means that issues such as excess overtime, worker health and safety, product wastage, or union disputes ” all of which add to costs and reduce delivery dependability and product quality ” will need to be addressed. It is ultimately in the interest of the buying company to assist suppliers in these improvements, because companies are even more dependent upon their suppliers for ensuring quality products and on-time delivery than ever before. And given that the advantages of low-wage labor are now available to all (including the competition), companies are already actively seeking to help their tier -one suppliers to reduce costs by adopting modern manufacturing methods and quality controls, and implementing stronger health and safety programs.
This being the case, it will be increasingly more difficult for companiesto claim to investors, customers, NGOs, or unions that they have a strict contractual relationship with their suppliers, and therefore do not share in the operational or legal responsibilities for their abuses . These arguments will be even more difficult to make in the future, as the competitive dialectic relentlessly presses companies to work more closely with their suppliers to gain the sorts of efficiencies that have been at the heart of the quality movement in developed-world operations.
[1 ] Clinton Wider and John Soat, The Trust Imperative, InformationWeek, July 30, 2001.
[2 ] Supply Chains and the OECD Guidelines for Multinational Enterprises, OECD Roundtable on Corporate Social Responsibility, OECD Headquarters, June 19, 2002, p. 2.
[3 ] Interview with Nicholas Eisenberg, August 25, 2003.
[4 ] Managing Working Conditions in the Supply Chain, OECD Working Paper on International Investment, no. 2002/2, June 2002, p. 1.
[5 ] Teresa Fabien, Supply Chain Management in an Era of Social and Environmental Accountability, Sustainable Development International, Edition 1, (no date) p. 29, from the Sustainable Development Commission at www.sustdev.org/journals/edition.02/download/sdi2_1_5.pdf.