Procurement must meet the supply chain governance challenge

20 February 2013
The great horse meat scandal has generated media and political outrage that displays a level of naivety of understanding of the business environment. It also points to process and control failures in procurement and supplier relationship management which are potentially more serious. Press reports point to warnings to ministers that the conditions were in place for such risk to become reality. The warnings were apparently ignored, as they might also have been within firms along the food chain. The simple fact is a lower generic cialis value product has been substituted for a higher one to make profits – though not I hasten to add by the brand owners and retailers. It has been described as a labelling issue, adulteration or passing off. Where products were found to be 100 per cent horse meat, it should be described simply as fraudulent substitution. Someone somewhere in the supply chain has unilaterally altered the specification to the advantage of their margin and the investigation will pinpoint the guilty parties. The reality of this scandal is it is simply another chapter in the story of increasing supply chain risk that has been seen with counterfeit goods in pharmaceuticals, luxury goods, aerospace components, car parts and many other sectors. High value, high margin goods are tempting areas for criminal arbitrage through substitution and passing off of lower cost goods. Extended supply chains with multiple touch points offer plenty of opportunities for such substitution unless they are strictly governed by the procurement process.

In such situations the principle of ‘caveat emptor’ should be at the heart of the procurement function. Research has revealed the majority of companies are not conducting due diligence on their supply chains. But while taking a sustained approach to due diligence and supplier monitoring is vitally important, it must include suppliers’ suppliers as part of the process, particularly where materials are mission critical. For own label products this is the role of the retailer, for brand leaders, it is their responsibility to look down the chain.

A procurement process that drives too hard for a low acquisition cost and ignores the latent risks of substitution and adulteration is deeply flawed. Such risks have their root cause in the pressures for low cost driving low margins and unacceptable behaviours or performance within some suppliers along the chain. The risks can rest uncovered for a time as parties ‘turn a blind eye’ - though it is certain ‘somebody knew’. In many cases it will have been obvious to anyone who took the trouble to look closely. Procurement functions need to step up the challenge of establishing effective governance of the supply chains they put in place, rather than simply blaming their suppliers for non-conformance. The tools and techniques to ensure openness and disclosure, as well as catch problems before they occur are well established in many sectors: critical control points, the Swiss Cheese model and Bird’s Triangle. Through such methods, procurement should be constantly looking for changes that may spell risk. There may be a modest cost to such focus but the alternative of brand damage and weeks of being wrong footed comes at a much greater strategic price. ☛ Alan Braithwaite is executive chairman of LCP Consulting and visiting professor at Cranfield School of Management
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