Supply Chain Management: Blending Safe Products with Profit

The paper Supply Chain Management: Blending Safe Products with Profits, was written to address some of the complicated aspects of the global supply chain such as, product design and quality, shipping, and materials management.
febrero 05, 2013

 

Donald Kornbleta, Ik-Whan Kwonb, and Dean W. Woodardc

 

The past decade has seen a confluence of supply chain management and product safety. What used to be two different business processes have merged in terms of their planning, implementation, and accountability. With this convergence has come the realization that without effective supply chain management, product safety will suffer. Without an effective product safety system, supply chain management will be increasingly disrupted through consumer and governmental intervention when potentially hazardous products make their way into the marketplace.

 

This dynamic can be seen by analyzing the accepted supply chain model known in the industry as the Supply Chain Operations Reference (SCOR®) model. The elements of this supply chain model are: Plan, Buy, Make, Distribute, Retrieve, and Finance. If we look at each of these elements from a product safety perspective, we can see where the supply chain enhances or detracts from product safety compliance and risk management responsibilities.

 

Plan: Every supply chain system requires a well-designed plan that includes a mission statement, the process and criteria for identifying and qualifying supply chain partners, the manner in which partners will be tested and monitored, and the necessary steps to take if supply chain partners fall out of compliance. This plan bears direct relevance to the elements of a manufacturer's product safety system, which covers: a planning process for product concept and design; risk assessment, including hazard analysis; materials specification; production procedures; testing and certification protocols; supplier auditing; product recall and retrieval planning and management; and documentation. Ideally, the plan is part of a greater organizational design that is based on international standards, such as ISO 9001 for quality, and ISO 31000 for risk management.

 

Buy: Purchasing of materials and components for a finished product is generally part of a supplier's responsibility, which is often spelled out in the supplier-customer contract. Customers often define the materials and component parts, and the supplier has the responsibility to acquire or produce the materials and component parts in compliance with the contractual agreement. However, in many instances, the customer is ordering a finished good that is expected to comply with all applicable regulatory statutes. In either case, the customer needs to make certain that a product safety analysis is included in the final responsibilities spelled out in the supplier contract. Furthermore, there must be agreed upon procedures for testing and auditing to ensure that no changes to the final product take place, unless they are approved by the customer. Unfortunately, there are too many examples of hazardous products that have become so, due to unauthorized component or raw material substitutions. Some of these substitutions were willful in order to reduce the overall production costs of the product and were not in compliance with the customer's specifications.

 

Make: Production is a process under the control of the supplier. A production system that lacks consistency and reliability is a threat to every part of the supply chain, most importantly to the ultimate user of the product. Regulatory agencies have recognized this through the introduction of new testing and certificate procedures that must be attested to by the importer of the product, usually the Original Equipment Manufacturer (OEM) or distributor, who bears the direct responsibility for the safety of product conformity. Most large companies already have processes in place to accomplish this, but additional documentation may be required by regulators. Shifting blame to the supplier will not relieve the retailer of the responsibility to conduct a recall. This has become all too apparent over the past decade, during which millions of products made off shore, have been recalled at the expense of their importing customer, due to a supply chain mishap. Establishing procedures contractually with all parties before a recall becomes necessary and will alleviate last minute frantic negotiations between supplier and retailer. Delays in reporting hazards could place the firm in jeopardy of receiving a civil penalty.

 

Distribute: Once a product leaves the place of manufacturing and moves into distribution, responsibility needs to be spelled out clearly to avoid ambiguous situations that can occur while a product transits or resides in a port for export or import. When a customer assumes responsibility for a product at the point of export from the offshore country or during the import process here in the United States, the supplier moves on to the next shipment. The importer (or domestic manufacturer) from that point on "owns" the product from a financial, liability, and regulatory perspective. Often, contractual agreements allow the customer to look to the supplier for liability participation, depending upon specifically defined circumstances. Attorneys pay careful attention to drawing up contracts for suppliers and customers to avoid ambiguity in the distribution chain. It is essential that all proper certificates and other documentation are completed because the product will be under scrutiny once it leaves its home port.

 

Retrieve: There may be a number of different causes for removing a product from store shelves or for issuing post-market instructions that deal with handling or safety issues related to a product. If manufacturers discover a potential hazard, whether through market surveillance, customer complaints, or other sources, they are obligated to respond to such information through reporting to government regulators. They are expected to research safety issues thoroughly, but that analysis should not delay notification. A prepared company will have a product recall system tested and in place long before it may be needed. Any product retrieval brings with it a certain amount of disruption and confusion; the more preplanning there is, the better the chances are that disruption will be at a minimum.

 

Finance: A company's investments in their supply chain often will make the difference between success and failure. Minimal supply chain investment has the potential to increase the cost of failure directly through expenses associated with the recall and indirectly from damage to the brand, public perception, and social media skirmishes. While the cost of correcting a product that is defective is rarely spelled out in full in a company's financial statements, the elements of cost can be enormous and include: supply chain remanufacture, repair, replacement, or refund, along with the costs of notification and fulfillment of an agreed upon recall. Moreover, there may be legal costs associated with defending a company in litigation or regulatory proceedings. An ineffective supply chain management system is subject to a range of costs that, for many companies, can constitute a material threat. One recent research estimate indicates that the cost of retrieval is 9 to 15 percent of sales, not a small potato in any company's operations.

 

Companies have been managing supply chains for hundreds of years. It's safe to say that most businesses today understand the degree to which the fate of the customer is tied to the effectiveness of the supply chain partnerships that are in place. When you marry the challenge of building and maintaining an effective supply chain with the product safety responsibilities that are part of a global economy, it's clear that the more the supplier and customer are aligned in their interests and communications, a more robust commercial relationship will develop and net better products. Safety and profit are not mutually exclusive processes. They are congruent and can blend effectively in the supply chain world.

 

a Don Kornblet is the product safety adviser to the Center for Supply Chain Management Studies at Saint Louis University.

 

b Ik-Whan Kwon, Ph.D, Georgia, is a professor of supply chain management and director of the Center for Supply Chain Management Studies at Saint Louis University.

 

c Dean W. Woodard, M.S., ABD, North Texas, is the director of the Office of Education, Global Outreach, and Small Business Ombudsman at the U.S. Consumer Product Safety Commission. The opinion expressed by Dean W. Woodard, an employee of the Consumer Product Safety Commission, does not necessarily represent the views of the Commission.