On June 17th, 2010 at midnight, someone got by PR Newswire’s vetting process and issued a fake press release about cereal maker General Mills. The press release falsely claimed that President Obama was launching an investigation into General Mill’s supply chain. The press released was confirmed to be a hoax and immediately retracted. The Wall Street Journal reported that investors and shorted sellers have previously used false rumors as a means to manipulate stock prices. But it is still unclear how this hoax actually occured or who did it.

Several aspects of this situation are interesting. One is the use of a false rumor about a major corporation’s supply chain as a means of harming that corporation. This event illustrates how important the integrity and functioning of supply chains have become to the overall success of a company. But what’s even more interesting is how universal the understanding of a supply chain’s importance has become. Until the last few years, when various supply chain events such as food, drug, and consumer products contamination and other failures became widely known,  supply chains were a weird term that only some manufacturing and purchasing geeks cared about. If you mentioned that you were involved in supply chain management at a cocktail party, people would nod politely, glaze over and change the subject. The general public’s personal interest has increased at least in terms of awareness about how a tainted product might make its way to them or their children. Now the public knows that somehow supply chains make the world go round.  They are recognized as providing an essential, competitive advantage and their failure as causing disastrous results for consumers and corporations alike —  plus a public relations nightmare for corporations.

-Sherry R. Gordon

Looks like it’s really all over for NUMMI, the Toyota/GM joint auto manufacturing venture in Fremont, CA. Last summer, I wrote a post about the strong possibility of Toyota’s closing the plant (NUMMI: Things Are Looking Gloomy). The plant was losing money. Located in a high-wage area, even potential UAW concessions didn’t seem like enough to allow the plant to continue. And now Toyota has decided to close the plant in April as a result of GM’s pulling out of the joint venture when it filed for bankruptcy. Toyota couldn’t do it alone.

Besides the loss of 4700 jobs at the NUMMI plant, the toll on suppliers will be even greater, according to a December 24th Wall Street Journal article (subscription required). According to Bruce Kern, executive director of the East Bay Economic Development Alliance, tens of thousands of people work for first and second-tier suppliers to the plant. His organization is working on finding new business for some of these suppliers. While Toyota plans to continue use the top 25 suppliers, this still leaves many suppliers without their key customer. Many suppliers have had nearly total dependence on the auto industry and have not diversified. It looks like another blow to the California economy from this closing, one that will reverberate through the NUMMI supply chain.

While another WSJ article describes many suppliers to Detroit automakers as surviving the downturn better than expected, though perhaps not well-poised financially for any big ramp-ups, these suppliers appear to be in potentially worse shape. Many of the NUMMI suppliers are small businesses that have not gotten the credit and considerations that saved some of their larger Detroit brethren from bankruptcy. Of course, the threat of the NUMMI closure and its economic impact has been hanging over the supply chain for quite some time. It appears that some of the suppliers have faced the problem head-on as soon as the automotive downturn started and have been proactively pursuing other business opportunities to stay afloat. But how many of the suppliers did not? And how many can get enough new business to survive?

Because NUMMI was focussed on using lean manufacturing principles and practices that were flowed down to its supply base, there should theoretically be quite a few well-run suppliers who could be suppliers of choice for other industries, should they have the capabilities to make the transition to supplying products that take advantage of their core competencies. A few things are working against them, however. Not to make too many gross generalizations, but many manufactures are better at operations than sales. Customer diversification for a small company identified with the automotive industry is a huge challenge. Lean companies will have an advantage in eliminating waste, doing more with less and being suppliers of choice. Lean can help spur growth and give competitive advantage, but only when there are growth opportunities to take advantage of. Lean suppliers may be able to survive longer than their peers, but only if they find enough business to keep them afloat and new customers to enable them to thrive.

-Sherry R. Gordon

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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An article in today’s WSJ, “Companies More Prone to Go Vertical,” discussed the current trend for some companies such as Oracle, Pepsi, IBM, General Motors, Boeing and Apple, to cite a few,  to return to the practice of vertical integration. Vertical integration can be defined as the degree to which a company owns its upstream suppliers and downstream customers and distribution channels. Some of the main reasons why companies may want to become vertically integrated are to mitigate supplier risk, control distribution channels, increase barriers to entry from competitors.  Boeing, for example, acquired Vought’s Dreamliner operations out of necessity to gain control over troubled suppliers and parts that were having an adverse impact on its Dreamliner program.

While companies don’t seem to returning to the old Henry Ford style of vertical integration, they seem be trying to use it as a method of controlling assets and exerting more control over critical parts of the supply chain. Vertical integration seems to wax and wane over time. Perhaps the global economy with its growing supply risks and increased competition is spawning this new wave.

There are, however, many drawbacks to vertical integration. One is decreased flexibility and potentially higher costs. Once a supplier is captive, there may be more control.  However, there is a cost to increased control, including reduced supplier competition and opportunities to engage with potentially more capable suppliers in the future.  And as business needs evolve, some of the integrated businesses may not evolve, may no longer fit or even be a drag on the bottom line. Vertically integrated companies may find themselves with less attractive overhead and cost structures. And they may be entering industries either upstream or downstream that they have less knowledge of and that may not really mesh with or add value to their real core competencies.

The regulatory environment may determine how far firms are able to go this time with vertical integration. And the competitive environment will ultimately help shape and influence the success of this approach.

-Sherry R. Gordon

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

Supply managers and buyers have always had the challenge not just of finding suppliers but finding suppliers who are both high-performing and “best value”. Numerous supplier evaluation and supplier performance management software solutions are now available, where ten years ago very few options existed. Most options that I’m aware of are either SaaS (software as a service) or licensed software solutions that are typically targeted at medium to large-size companies. The choices for software solutions for evaluating suppliers have certainly increased since the days when I was in the supplier evaluation software business. In fact, the whole supplier information and supplier performance management solutions market has heated up as companies are becoming more concerned about the impact of supply risk and supplier performance issues.  For a further description of this market, you can read an analysis that appeared on the Spend Matters blog.

However, some challenges still remain: finding good offshore suppliers and providing small to medium-size businesses with affordable, yet effective supplier evaluation options.  While there are options for finding offshore suppliers or suppliers from developing countries, there are none that I’m aware of that give buyers a good, cost-effective way to know how good these sources really are. 

I thought I would alert readers to a new site for finding and evaluating suppliers – SupplierEvaluations.com. It is based upon a social networking, B2B approach where a community of buyers and supply managers, using an evaluation template and process provided by the site, evaluates suppliers and shares the evaluations with other members of the community. Supplierevaluations.com expects to be operational by mid-September. Users can sign up now to participate when the site goes live.

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.

Some people are heaving sighs of relief that Chrysler is emerging from bankruptcy in the arms of Fiat and that GM is officially in bankruptcy soon to emerge as leaner and meaner entities. However, many are left holding the proverbial bag. Who are they? The unsecured creditors who are lining up to salvage whatever they can from this mess. Two key groups of creditors are particularly important. 

The first group consists of first-tier suppliers. The Chrysler list, for example, reads like a who’s who of the top tier automotive supplier firms: Visteon (owed $25.6M), Cummins Engine (owed $43.9M), Johnson Controls ($50.3M), Ohio Module Manufacturing ($70.3M). The GM list, where the total amounts owed to unsecured creditors is far higher, exceeding $50B, and includes some of the same suppliers as well as many others.

The second group of unsecured creditors includes all the people who have product liability lawsuits pending against these two automakers. People in the midst of product these lawsuits have now joined the ranks of unsecured creditors, lining up alongside the first-tier suppliers who are owed billions of dollars. But in comparison with the first-tier suppliers, these creditors consist of the “little people”. The New York Times profiled someone who lost both legs in a Jeep Wrangler accident and who is in the midst of a product liability lawsuit against Chrysler. With Chrysler’s bankruptcy and sale to Fiat, he is finding that his chances of getting much money from the lawsuit are poor. The bankruptcies are also freezing lemon law cases as well. Consumer advocacy groups are claiming that more people will be injured by defective vehicles because “a critical public-safety protection that has been used to reduce the number of Americans hurt or killed from defective Chrysler and General Motors vehicles,” namely “the public’s right to hold these companies accountable,” has been stripped away, according to Joanne Doroshow, executive director of the Center for Justice & Democracy.

The choices here are between ugly and uglier. Those who have auto safety-related injuries are not the only ones impacted. The suppliers holding unsecured Chrysler and GM debt also stand to severely impact the lives of their own employees and the employees at their suppliers should they be unable to collect their money. Whether public safety is at risk because of the carmakers’ ability to circumvent safety procedures is not clear as the newly-reorganized companies keep the good assets and ditch the bad ones. If the auto companies attempt to and are able to skirt legitimate claims, the tarnish will remain on their new images and fresh starts and impede future success. It makes you wonder whom the bailout is helping. Or whether it is just buying time for those affected by the U.S. automotive industry to retool themselves, rather than retooling the industry itself.

The latest victims of the economic downturn seem to be suppliers in the electronics supply chain. As reported in the May 18th WSJ article “Clarity is Missing Link in Supply Chain“, as business began to contract, Best Buy dramatically cut back their forecasts to electronics companies such as Toshiba just before the holiday season last year, for fear of ending up with unsold inventory. The ripple effect throughout the supply chain was dramatic. As Toshiba reacted quickly and suddenly cut back its DVD player production, other suppliers were impacted far out of proportion to the actual event. This is also known as the whipsaw or bullwhip effect, with suppliers at the end of the chain feeling the harshest impact. The order cutbacks at Best Buy hit the semiconductor supply chain, including such companies as Applied Materials, a maker of the capital equipment used in semiconductor chip production, who had to lay off 2,000 workers and furlough thousands of others. The impact was felt through the supply chain, down to a small machine shop in California that makes aluminum parts for machines semiconductor plants and that had to lay off 75% of its workforce, far out of proportion to the initial glitch, and now is sitting on a year’s worth of inventory.

JIT, the practice that spared the top of the supply chain from being stuck with excess inventories, ending up hurting it. As sales failed to tank as much as predicted and customer demand was actually greater, there was no inventory to sell to consumers. Thus, the ugly side of just-in-time manufacturing was exposed.

What went wrong? First, there was a lack of visibility at the lower links of the supply chain. Could that be prevented? Yes. Communications with lower tier suppliers would help avoid some of the surprises. Supply chain visibility and optimization software would have helped some of the firms get visibility into what could happen upstream and downstream. But then these firms would need to inform and collaborate with their suppliers and help them prepare for the drop in business so that they would not be blindsided and left holding the inventory bag, so to speak, for their customers.

But is this the fault of JIT practices? Not really. The challenge is to optimize service to customers and minimize inventory. It is costly to hold too much just-in-case inventory and in the end, does not pay off in the electronics industry where idle inventory rapidly becomes obsolete.

However, that doesn’t stop the JIT-bashers from piling it on. See, JIT doesn’t work. Get rid of Six Sigma. Lean is useless. That’s the amazing commentary that comes out when supply chain failures occur. People blame the tools, not those who use the tools. As the saying goes, “A bad workman blames his tools.”  There seems to be a lot of pent-up anger over high-performance management systems and tools such as JIT, Lean and Six Sigma as well as a readiness to rush to judgment that it’s the tools that cause the problems. The toolheads like their tools and convince others that the tools are the silver bullet. Many businesses don’t like dealing with the messiness of leadership, culture, change, customer-supplier collaboration and continuous improvement. However, JIT, Lean and Six Sigma are worthless without them.