Tainted Supply Chain — here we go again…

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In the June 18th 2011 issue of the Economist newspaper (look — it’s in a magazine format, it gets issued weekly, it looks, feels, and smells like a magazine — why do they insist on calling it a newspaper…??? That’s my only criticism of the Economist) I came across this short article outlining how industrial plasticisers have been found in sports drinks and soft drinks manufactured in Taiwan. Apparently it’s their biggest ever food scare and might harm the president’s chances of re-election.

Lucky them. Not because they might get a different president (I really don’t know much about Taiwanese politics and don’t follow it closely) but lucky them that this is their BIGGEST food scare to date.

The article states: “The problems have been traced to two upstream suppliers of food additives, Yu Shen Chemical and Pin Han Perfumery. Among other things, plasticisers were substituted for palm oil as clouding agents in drinks….. Insiders have told investigators that products may have been doctored for decades.”

What is going on here? I believe it is quite straightforward and highly predictable when you consider the “system” that is our globalized outsourced supply chain. There are incredible incentives on all companies to outsource, with the main rationale being to “focus on your own core competence” and find 3rd parties to supply everything else. The whole concept of specialization suggests that someone else who focuses exclusively on that sub-activity can do so at an economic advantage and will pass at least part of the economic savings onto you. And as you push that economic and strategic rationale throughout your supply chain, you end up developing very long, complicated supply chains.

So, the logic is pretty simple. But what incentives for performance do we drive through these supply chains? If you reduce it to the main signals we give, each stage at the supply chain says something like the following to their supplier: “You must meet these performance requirements (technical spec, ISO certifications, etc.) and these cost requirements. There will be cost penalties imposed if the product doesn’t meet technical specs, and you will be expected to meet cost reduction targets of 5 to 15% annually. After our initial supplier certification process is completed, we will generally (want to) trust you and so we will allow you to self-audit and self-conform to our non-technical, non-cost requirements.”

In other words, we say “price” and “quality” are equally important, however we painstakingly measure, report, and push on price/cost issues but leave the “quality” stuff to our suppliers to sort out. And, if you relentlessly push this mentality through a long, complex supply chain you will eventually end up with some supplier that is willing to cut all sorts of corners to save costs so they can maximize their profit, even at the expense of the ultimate consumer.

Melamine in the milk supply. Lead paint in children’s toys. Industrial plasticiser in soft drinks. And on a different scale entirely, toxic mortgages in the global financial system.

All of these instances are rooted in the same structural problem that face our modern supply chains. Relentless cost reduction and supply-chain atomization provides strong incentives to supply chain participants to introduce non-transparent risk into the system in the name of profit-seeking.

So, I figure it’s not just the Taiwanese that are lucky — we’re all pretty lucky that we haven’t faced bigger, more deadly instances of toxic products on an ongoing basis. Because unfortunately we’ve designed our supply chains to deliver them.