Die casting is manufacturing at its most basic and dirty level. Companies that use casting suppliers must allow additional lead time for procuring the castings, as they are typically a long lead-time item. And die casters are known for being generally at the low end of the manufacturing efficiency and innovation scale. According to a North American Die Casting Association (NADCA) report, the number of die caster was expected to drop from 367 in 1999 to 287 in 2008 and the association halfed its dues this year due to the rough economic state of affairs for the industry. Competition from China and the bad state of the auto industry are two factors. But if you thought that dangerous manufacturing conditions exist only in China, think again

Despite the difficulty of the business econonmically, the inherent danger and dirtiness of the casting manufacturing business was revealed recently in an article in the Concord Monitor about a Franklin, NH company, Franklin Non-Ferrous Foundry. The foundry sounds like a scene out of Dante’s Inferno. Thick brown dust containing lead, antimony, cadmium and other heavy metals covered everything in both the foundry and the office. According to the article, workers joke that they don’t dare drag their feet at work for fear of kicking up a cloud of this toxic dust. Workers were not wearing breathing protection and working near bubbling vats of 2300 degree molten metal without any heat protection. The company was slapped with numers OSHA fines for over 57 violations, 25 of which were in the serious category, which means potentially life-threatening.

What is interesting about this situation is how blase the company owner and workers are about the situation. Most seem more concerned about keeping their jobs than worrying about getting sick or hurt by the situation. As one worker said, as he was given a respirator when he started working there, ““I think it’s fun. You learn new things.” And while the owners have been slapped with hundreds of thousands of dollars in fines, it is not clear which fines have been paid. And OSHA cannot shut the company down, only report violations and levy fines. When a Concord Monitor reporter toured the facility recently, the owner told him that most of the violations had been fixed.

So what would you do if you had a supplier that operated like this, endangering its employees and the environment, yet still supplied you with quality parts at a good price that met your specifications? Die casters, particularly North American ones, are a dwindling species. Would you prefer to deal with Chinese die casters, who are likely to be operating like this without any governmental protections for health and safety of its workforce? If a manufacturer needs the parts to run their business, are they willing to do business with whoever can supply the parts without regard to how the supplier runs its business? What if none of the suppliers offered a clearly safe alternative? And, are you even aware of whether you have a directo or sub-tier supplier that runs its business without health and safety protections in place? It’s a tricky question of ethics and corporate social responsibility.

-Sherry R. Gordon

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In a takeoff of the U.S. government’s Cash for Clunkers program, Toys R Us began a program to help get recalled and dangerous children’s equipment such as cribs, bassinets, high chairs, etc. out of people’s homes. I touched on the subject of dangerous toys and equipment in a post a few months ago, Another Supply Risk: Your Neighbor’s Yard Sale, where I wrote about how recalled children’s items are turning up in yard sales. 

Actually, Toys R Us developed the program well before Cash for Clunkers and wondered how their own cash for cribs program was going to be perceived by the public in light of the government program. They are offering a 20% discount off new gear, regardless of what used baby gear is being turned in — a great, socially responsible idea, in my view. In spite of continued efforts to get dangerous, recalled baby equipment out of peoples’ homes, less than 30% of it is returned to manufacturers.

The Toys R Us program will likely be the first of many similar campaigns by other retailers to rid the system of supply chain mistakes. However, I don’t imagine we’ll be seeing moolah for melamine milk or payments for polluted propofol any time soon.

Sherry R. Gordon

Evaluating suppliers can be educational for the supplier. When suppliers are asked to comply with customer requirements that are considered industry best practices, they may have the opportunity to learn more about those practices. You may wonder how a company can end up with suppliers who are unaware of best practices that are customer requirements. For one simple reason: the customer has never clearly communicated its performance expectations to suppliers before. Another reason is that industry best practices are rarely universally agreed-upon, so no two companies are likely to interpret and deploy them in exactly the same way.

In the process of gathering information about supplier performance, customer firms may end up educating suppliers about important topics such as lean enterprise, sustainability, and corporate social responsibility. Since this educational component is always a possibility, it is particularly important to make sure that questionnaires and surveys are free of buzzwords. If the buzzwords are unavoidable, then it’s important to provide clear definitions of them right in the assessment itself.  For example, in a lean assessment that I helped author, we made sure that as much as possible we were not using lean buzzwords. Some suppliers could be deploying components of lean but not in using the exact same tools or methods as their customers. Suppliers should not be dinged for not knowing what an AIW (Accelerated Improvement Week) or HPW (High Performance Workplace) is, terms and techniques that may have been adopted by more well-heeled corporate customers. However, in breaking down these practices into their simpler components, suppliers may learn about specific tools and practices about which they were previously unaware. Or suppliers may discover that they were actually deploying some components of these practices but that there were other aspects not being deployed that would be valuable to adopt.

Another example is Walmart’s Sustainability Index (see pdf of Walmart’s 15 questions on this page). Suppliers are asked about greenhouse gases (GHG) emissions and the Carbon Disclosure Project (CDP), a non-profit registry of company carbon footprints and sustainability efforts. Many Walmart suppliers are likely to become aware of these sustainability metrics only through this assessment process. Awareness is the first step toward adoption. 

The educational aspect of supplier assessment can be an important by-product – giving suppliers valuable improvement ideas, raising performance standards, improving communication between customers and suppliers, and strengthening the relationship.

A recent article in the Manchester Guardian reported on the latest sub-tier supply risk horror story. It is alleged that British supermarket chains Tesco, Asda, Marks & Spencer and dozens of other supermarkets may be inadvertent parties to a different kind of laundering scheme – beef laundering. Greenpeace, after a 3-year undercover investigation, called this situation to the attention of Brazilian authorities, who are investigating reports that major cattle farms and slaughterhouses are sourcing some of their beef from illegal sources. These illegal farms have been deforesting the rainforest to raise cattle. Illegal sources are alleged to have been purposely mixed with legitimate sources in order to hide the illegal beef and leather. This illegal beef is nearly impossible to trace. Apparently Brazilian supermarkets are cancelling contracts with the illegitimate farms, but the British supermarkets are still in the process of auditing and verifying that their meat sources are, in fact, contaminated with illegitimate products.

This situation is disturbing from many points of view. The lack of traceability of the meat is certainly a problem because it is causing deforestation of South American rainforests.  Food safety should also be a critical concern. How does the consumer know that the illegal farms adhere to proper health standards and are not putting sick cattle into the food chain? The meat, leather and cosmetic ingredients that come from Amazon cattle are shipped worldwide, which may mean that many more companies are inadvertently supporting deforestation activities and global climate change.

Sub-tier supplier risk surfaces again. Beef laundering is the latest in a series of unpleasant supply chain discoveries. While such situations may be hard to predict or prevent, they can be mitigated. As companies address supply risk, they need to be continually vigilant about potential risks. And when supply chain problems surface, firms need to act quickly to verify and remedy, if necessary, not wasting time denying the charges. Being proactive goes a long way to avoiding even more damage to the perception of corporations. When the public perceives that a company is not proactive about supply chain risks, the damage caused by poor public perception can easily translate into lost revenue.

A colleague of mine, Sandra Gauvin, an expert in the quality field and writer of the Current Quality blog and newsletter, recently brought to my attention a new disturbing trend in supplier evaluation: suppliers who charge their customers to for the privilege of conducting an on-site audit. In this scenario, a customer contacts a supplier requesting an audit. The customer receives a reply something to the effect of:

“You can purchase our audit report.  The audit was conducted by Acme Audit Company (an independent consulting firm).  The report costs 4.000€ and the advantage is that you can receive it soon.   Or you can conduct an on-site audit of our facility but you will have to pay an audit fee of 10.000€ per day.  However, we have no available audit slots in 2009. 

We don’t have the availabilities yet for 2010, but we can place you on our waiting list. We would then propose an audit date, when we receive these availabilities.”

So if you’re the customer, what do you do? You’re between the proverbial rock and a hard place. There are consortia that negotiate with suppliers regarding audits and can prevail upon suppliers not to charge if enough members of the consortia use a particular supplier. An example of this is Rx-360, an international pharmaceutical supply chain consortium. Otherwise, depending on your industry and whether you have any leverage over the supplier, you may need to buy the independent audit report.

This particular situation is occurring in the pharmaceutical and biotech industry because of the requirement to conduct on-site audits of suppliers for compliance to FDA standards and GMP practices. Some suppliers, even small companies, have to host 50 or more customer site visits a year, despite their already maintaining ISO 9001:2000 or AS9100B registration. From the supplier’s point of view, such visits are costly and time-consuming. So why not charge? Suppliers would rather spend the time improving their processes than hosting customer audits. Some suppliers feel that some customers may not be auditing for valid reasons, but just to “check the boxes” or to get to spend a day out of the office. Charging can be a means of vetting out only the most serious customers.

Is charging customers for audits likely to spread beyond this industry? Also, what does charging customers for audits say about the customer-supplier relationship?  The value of audits that customers have to pay to conduct? For those industries where on-site audits are required, this is a means of capitalizing on that requirement and allowing the supplier to recoup its expenses for multiple site visits. Switching to other qualified suppliers is not so easy in pharma and biotech, given the rigorous industry standards. If companies are looking to develop mutually beneficial relationships with their suppliers, what does charging for an audit do to that relationship? I am interested to know if charging for audits conforms with  the ISM Principles and Standards of Ethical Supply Management Conduct.

Does requiring a payment for a customer audit constitute an attempt to influence the outcome of the audit or the outcome of relationship with the supplier? That is, if you have to pay to play, are you going to forgo auditing altogether, letting the supplier off the hook? Or will you be inclined toward a positive audit outcome because of the need to pay to learn the information to work with a supplier? Would paying over $13,000 to audit a supplier have any influence on your findings? Or how about the ethics of independent consultants charging you to view the supplier’s audit or else getting no audit information at all?

I’d be interested to hear readers’ reactions to this trend.

Back to Sherry’s website.

Robert Handfield’s recent article in the Wall Street Journal, “United They’ll Stand,” promotes the idea of working with financially-stressed key suppliers to avoid pushing them over the brink into insolvency. The author is not advocating bailing them out, as suggested by Debbie Wilson’s in her post, Vendor Vulnerability – Handfield’s Flawed Recommendation. But rather, Handfield advocates several measures to help them get through these difficult times — ways that are also favorable to the customer firm.

The Wall Street Journal article points out that should critical suppliers fail, the ripple effect can end up costing the buying company far more than it anticipates, potentially millions of dollars in service failures and bankruptcies that could adversely impact the customer company. To avoid these catastrophes, Handfield suggests, for example, giving suppliers shorter payment terms. In stretching out payments to help their own cash flow, customer firms appear to suppliers that they are using them as a bank. In return for quicker payment, the buying firm should ask for better pricing. Customers could give reputable suppliers longer-term, fixed contracts with more favorable pricing linked to agreed-upon market indices, suggests Handfield. This could give the supplier the opportunity to stabilize and get additional lines of credit. Suppliers may be willing to give on pricing in exchange for long-term stability.  Handfield makes a number of other suggestions, such as the buying firm not only having its own contingency plans in place and identifying alternate sources, but working with key suppliers to do the same (and of course, choosing the suppliers that you work with in this way very carefully).

Handfield is not suggesting that customers bankroll failing suppliers nor is he suggesting giveaways to suppliers. He is advocating that customers work as a team with key suppliers on creative ways to make it through tough economic times with both sides giving up to get something in return. Critical supplier failures are the outcome to be avoided. This requires communication, give and take, and creativity.  Working with key suppliers in this way is not done just out of the goodness of your heart. The commitment and loyalty engendered by working with suppliers during tough times will pay off financially.

I have personally seen and been the recipient of the philosophy of stretched out payment terms to support the customer’s financials. Those suppliers that can withstand this practice in the short-term will be gone (if not gone, as in bankrupt) as soon as they are able to find customers with reasonable payment terms and performance. I have also worked hard to “go the extra mile” for a customer who paid quickly and to win more contracts from them.  Companies that have reasonable payment terms engender supplier loyalty. T.J. Maxx, for example, has had a practice of paying suppliers quickly as a way to get the best fashion brands to sell them their excess inventory.

In a blog post, Ethical Payment Ethics: The Cost of Squeezing Suppliers, Rajesh Chhabara describes the situation further.  He quotes Tim Cummins, president and chief executive of the US-headquartered International Association for Contract and Commercial Management, a global body with 5,000 members from 1,600 companies: “Our members are under increasing pressure from their [senior] management to renegotiate and extend payment cycle times in view of the ongoing financial crisis.” But he says that smart managers should tell boards that doing so is a threat to the reputation of the company and it may also threaten the security of supply chains. “It is not smart to put your suppliers out of business.”

Using suppliers as bankers can get firms out of financial jams in the short term. But it is neither ethical nor sustainable as a long-term practice. Especially when there are many alternative win-win approaches.