Horrifying and upsetting, this article about the contract warehouses of online retailers, I Was a Warehouse Wage Slave is a compelling if not grisly read. Mother Jones reporter Mac McClelland goes undercover in a warehouse by applying for and getting an actual job as a picker. The conditions are what one might expect in a low-cost country: dangerously uncomfortable temperatures, workplace hazards such as uncontrolled static electric shocks in picking areas, non-ergonomic conditions for picking that has workers taking 800 mg of ibuprofen to survive, required 10-hour days or longer, and more. One instance of being absent for any reason the first week of work and you’re fired, but you can get in the queue to work there again. Minimum wage. No raises. No benefits. You’re told daily how poorly you’re doing and not meeting your goals. You’re a temp warehouse worker. You’re an important reason why places like Amazon can offer free shipping and WalMart can offer low prices. And how they can beat the competition of local businesses in your community. It’s not just having low cost suppliers. It’s using temporary worker agencies who supply you with low-cost workers. The contract warehouses with sweatshop conditions don’t actually belong to the companies with household names. And the workers are contractors, so they aren’t actually Amazon or Staples employees.

Why aren’t these contract warehouses subject to more scrutiny? First, the employees are all temps supplied by temp agencies. They don’t work for Amazon. But every time you click “Place your order” on Amazon, some temp worker is out of the gate at one of these warehouses, on the run (averaging 12 miles per day of speed walking on concrete floors) to pick your product and trying meet challenging productivity goals to keep his or her job.  

Why would anyone willingly work for such wages and under these conditions? Simply, they have no other options for surviving economically and feeding their families.

So while Americans worry, and rightfully so, about the conditions at Foxconn in China or at factories in other low-cost countries, perhaps they should think about the supply chain right here in the U.S. And while we can’t resist getting a bargain and may engage in “showrooming” (shopping a bricks and mortar store, then buying online instead), we never consider those other Americans on an economic hamster wheel, falling behind as they run in place.

I couldn’t help but think that a contract warehouse would make a good episode of Undercover Boss. But a contract warehouse is part of the hidden supply chain where workers don’t work directly for the name-brand companies – by design, of course – to avoid as we say in the supply risk world, reputational risk.

-Sherry R. Gordon

If you ever thought that you could leave product recalls up to retailers and manufacturers, think again. That was risky enough. Now there’s a new risk, according to article today in the WSJ, that you need to worry about – which suppliers produced the items at your neighbor’s yard sale and whether the items have been recalled. A Consumer Product Safety law passed last year makes it illegal to sell recalled items – even at yard sales. The Consumer Product Safety Commission generally has focused its compliance efforts on retailers and manufacturers and does not have the resources to police yards sales. So your neighbor is in little danger of being arrested for selling recalled and dangerous goods.

Aware that it has limited enforcement resources, CPSC has written a handbook for resellers and would like to get standards incorporated into communities of resellers, such as, perhaps all those who advertise their yard sales on popular internet sites. With the big surge in yard sales due to people trying to raise cash in any way they can, the risk of buying unsafe, recalled items is certainly real.

Most people having yard sales are not purposely trying to pass off tainted goods to their neighbors. Many do look up dubious items on government websites such as www.recalls.gov and try to dispose of them in other ways. But even for the conscientious, it is hard to keep abreast of the latest dangers or even be aware that certain items may have been recalled. Some yard sale sellers and buyers are even using lead paint test kits marketed specifically to consumers. But lead paint isn’t the only danger. Your neighbor’s child may have thrived in the crib that they are now selling at their yard sale, but that crib may not be so trusty after all, as a recent recall focused on the dangers of the classic drop-side models. Or what about window blinds that are part of a recall? Many recalled items will continue to show up at yard sales.

Most consumers have little idea of what a supply chain is, let alone what supply chain risk means.  Short of reporting your neighbors to the authorities, next time you’re looking for a bargain, it would be prudent to take responsibility for your own supply risk due diligence to avoid dubious and possibly dangerous second-hand items.  Caveat emptor has never been more important.

With supplier bankruptcies a daily occurrence, to say that the topic of supplier risk has become hot is an understatement. The challenge is what to do about it.  Someone recently asked me whether there are any KPIs you can use to measure supplier risk. There are, but developing those KPIs is a business process that goes beyond just thinking them up and slapping them onto a scorecard. Because of high concerns about supplier risk, some have begun to use the term KRIs (key risk indicators) instead of KPIs (key performance indicators).

The first thing you need to do is to define what supplier risk means to you and your company. What risks are you concerned about? Which categories of your suppliers have the potential to create risk? An article in Supply Management, “Beyond Low Prices,” advises doing some thinking around what some of your key supply risks are and get risk management plans and contingency plans in place. This can be as simple as brainstorming the likely risks with others in your firm (including those outside of procurement or finance), the probability of the risks occurring and then focusing on those that you have identified as having a higher probability of occurrence.

A small number of risk-related KPIs can be identified to supplement most firms’ cost-related KPIs, according to a recent report published by Oliver Wyman, Capturing the Upside of Purchasing – Related Risks.  According to the report, many companies start out with more qualitative risks and progress to more quantitative risks as the management of risk becomes more cross-functional and shared throughout the firm and identification of, collaboration and communication with key suppliers increases.

So what KPIs might a firm use to get at supplier risk? Here are a few examples: 

• Operational risks: the percentage of single-source suppliers for whom contingency plans are in place; quality metrics to uncover the risks of poor quality; supplier cycle time and on-time delivery
• Control effectiveness: controls that have been bypassed, such as dollars spent on non-approved suppliers or spend under/not under management.
• Cost related – supplier and commodity price increases; cash flow at risk from supplier problems
• IT/data risk: percent of suppliers using encrypted data transfer

As can be seen by some of these examples, these supplier risks are not under the purview of just one function in the customer firms. And at the end of the day, when all heads turn to procurement about the subject of supplier risk, procurement must work to elevate the conversation of risk to the executive level to include other functions and avoid the mission-impossible position of taking on the entire burden.

-Sherry Gordon

Many people are looking for advice about how to create supplier scorecards specifically and how to measure supplier performance generally. 

Listen as Sherry Gordon is interviewed about measuring supplier performance by Sandra Gauvin, Editor of Current Quality newsletter.

In this in-depth interview, you will learn:

• Why you should measure supplier performance
• How to figure out what to measure and how to develop KPIs
• Examples of commonly measured areas
• Why you need to use leading indicators, not just lagging indicators (with examples)
• Why supplier risk has become so critical and ways address it
• How to segment your supply base in order to decide which suppliers to measure
• Common sources and types of supplier information (e.g. scorecards, audits), along with the pros and cons

We’re sure that you’ll enjoy this informative and lively discussion. (This is streaming audio and requires no download. Running time is 67 minutes).

Subscribe to the podcast on my website.

We would really like to hear your feedback about the interview as well as your suggestions about other topics for future podcasts.

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.

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.