Supply chain reactions

11 February 2013

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The uproar following the ‘horse burger’ scandal has shown how companies need to keep a close eye on suppliers, says Adam Leach.

The newspapers and social media may have had a field day with horse jokes and puns, but for those retailers and restaurants being grilled about their supply chains and having to issue apologies over the ‘horse burger’ scandal, it is no laughing matter.

Last month, DNA tests carried out by the Food Safety Authority of Ireland (FSAI) on one range of Tesco burgers found they contained up to 29 per cent horse meat. Tesco, followed by Aldi Ireland and The Co-operative, removed products manufactured by Silvercrest, the supplier of the meat Tesco found to contain equine DNA from shelves and issued apologies to customers.

Since the story broke, the FSAI has determined the horse meat entered the supply chain via a supplier in Poland, was then processed by Silvercrest – which is owned by ABP Food Group – before being sent to Tesco. Subsequent independent tests by The Co-operative found that burgers supplied by Silvercrest contained equine DNA.

Tesco said the Polish supplier was not on its approved list, that it accepts only meat from UK and Irish suppliers and, as a result, it has cancelled its contract with Silvercrest. Burger King, Aldi Ireland and The Co-operative have also terminated their deals.

Aldi Ireland, Tesco and The Co-operative have committed to carrying out DNA testing on their meat products in future to check they meet the requirements agreed with suppliers and also to carry out more stringent checks on those in their supply chains.

It has prompted investigations by organisations not directly affected, with further unsavoury findings.


Wake-up call

The fallout from the scandal is a wake-up call for many supply chain professionals, and not simply those working in the food and retail sectors.

Stories about conflict minerals in mobile phones or illegally logged timber used in office furniture could just as easily end up as national news, when a supplier changes the specification without permission and the buyer fails to find out before the authorities.

So how can buyers keep suppliers in check, or at least find out when they step out of line?

For Justin Hughes, a supply chain expert at PA Consulting, problems such as these arise in part as a result of the ever-growing scale of supply chains.

“When you get to the level of size and complexity that a lot of these supply chains are, there are a lot of things in tier two or three that you’re not aware of that can bite you,” he tells SM. “People tend to see these things and have to react, rather than having a plan in the first place.”

Hughes says approved supplier lists are important, but they need to be kept up to date to remain valuable. “It’s not something you do once. You don’t put in an approved supplier list and then forget about it,” he says. “I expect the number of companies who know their entire supply chain down to tier three or four are probably in the minority.

“Even for those that do, that information is only ever as good as the point at which it was taken. It can be out of date even within a couple of days, especially with complex global supply chains.”

He adds: “The message that we try to get across to clients is that the process has to be methodical, it has to be constant and it has to be based on a robust framework that continually looks at the information.”

Tom Woodham, director of supply chain consultancy Crimson & Co, also believes some companies may not be vigilant enough when it comes to checking up on suppliers. “People assume that suppliers are going to follow the contract or the code of conduct and many do, but you need to have a robust way of making sure they are.”


Avoiding problems

He agrees that establishing an approved supplier list is important, but auditing and checking that the agreement is being honoured is also vital.

“It [the horse meat scandal] highlights that in any supplier audit process, you’ve got to make sure you’re looking at cost, service and quality because they’re all hugely important and they can all cause huge problems in your supply chain,” he says.

Richard Parkinson, legal director at law firm Pinsent Masons, says the right to audit vendors doesn’t prevent problems unless used. “It’s about having the right of audit and actually using it, rather than like the speed camera that doesn’t have any film in it and everybody knows it doesn’t have film,” he says.

Parkinson, a specialist in supply chain and contract law, believes that to toughen up deterrents to prevent suppliers breaching contract terms or codes of conduct, while also reducing some of the financial risk for the buyer, companies should look to quantify some of the potential risks in their supply contracts.

“Is the supplier simply going to be liable for the profits that you lose for not being able to sell those burgers or products? Or, alternatively, are they going to be responsible for all the press adverts to do the recall? Or the logistics costs and the product costs?

“Buyers have got to look at those things to try to put a value on them to see whether they can calculate liability under supply contracts and actually quantify what they’re in for.”

By tightening the governance around approved supplier lists and audits, buyers can increase the chance of identifying breaches or contraventions, which in itself acts as an additional deterrent for suppliers. This can be increased further by making sure the contract contains clauses that clarify responsibilities and recompense if the worst should happen.

But what about potential underlying causes? Could they offer buyers the chance to develop an early warning system?

Richard Wilding, professor and chair in supply chain strategy at Cranfield University, believes buyer behaviour could be a cause. While not referring to the companies involved, he suggested cost pressure could be a factor in similar situations. For example, over the past year and a half, meat prices have risen by around 30 per cent, much higher than the increase in meat product selling prices.

“When you’ve got buyers that are putting suppliers under pressure to cut costs, they are sometimes caught between a rock and a hard place. You might buy something in good faith, but perhaps you lose the traceability you otherwise would have had,” says Wilding.


Cost pressures

This is an argument that all contributors agree with. While there are other factors involved – and examples of suppliers ‘going rogue’ – all these are against the backdrop of a fragile economy and increased downward pressure through supply chains.

Therefore, one thing buyers can do, with regard to risk management strategies, is to look at where cost pressure is hitting hardest. Find the suppliers under the most strain and you may well find the supplier opting to take a shortcut.

But for Wilding, it is less about trying to find individual breaches and more a sign that a change in behaviour is needed.

He suggests supply chains need to become more collaborative, that if costs need to be cut this should be done with the work and input of all elements of the chain.

“It’s everybody’s responsibility to look for opportunities and make suggestions in order to cut costs in a way that doesn’t impact on quality. I was visiting a [firm involved in a retail supply chain] and asked if they had told the supplier [about an inefficiency] and they said: ‘We don’t talk to the supplier. That’s the job of the big supermarket we’re supplying.’ You need to empower each part of the supply chain.” 


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