The Wall Street Journal this morning has a front page article detailing the long and convoluted supply chain that brings ginger from small farms in China to my local Albertson’s store here in California. Although the point of the article was to describe how long supply chains can create control problems for food, there is an analogous message for many other outsourced products.
The path of this batch of ginger, some 8,000 miles around the world, shows how global supply chains have grown so long that some U.S. companies can’t be sure where the products they’re buying are made or grown — and without knowing the source of the product, it’s difficult to solve the problem.
The ginger in question was tainted with a dangerious pesticide, and the FDA, even with the cooperation of Chinese officials, found it difficult to find the source.
Layers of middlemen obscure who actually produces goods, complicating efforts to police the production process. In the case of the tainted pet food that first raised concern over Chinese imports in March, neither the Chinese government nor the U.S. Food and Drug Administration has pinpointed the original source of the problem ingredient, contaminated wheat gluten.
This isn’t just a problem with food. Many hard goods companies also exercise very little control over their supply chains.
Industry analysts say many U.S. companies save money by sourcing in China but are reluctant to spend on vetting supply chains. "You can’t just throw the [orders] over the Great Wall and hope it comes back good," says Kent D. Kedl, general manager for Technomic Asia, a consulting firm in Shanghai. He says companies "need people camped out" in China. Some U.S. companies dedicate hundreds of people to keeping track of Chinese shipments, but others dedicate little to the effort.
Companies with higher end products, such as Apple’s iPod, know that a quality reputation is critical, therefore they exercise a high level of control and oversight over their offshore manufacturers and suppliers. Many more companies, like Mattel, are in the middle tier where defined specifications and procedures are in place, but they aren’t consistently followed. And then there are those that "throw it over the Great Wall and hope it comes back good."
The article then goes into great and sometimes excruciating detail about the ginger market itself. Grocery stores are reacting differently to this latest problem.
Trader Joe’s, a Monrovia, Calif., grocery chain with some 280 stores in more than 20 states, decided to indefinitely discontinue sales of all individual food products from China by year’s end, a spokeswoman says. Safeway Inc., the nation’s fourth-largest food retailer by sales, has stopped selling Chinese-grown ginger and garlic "for the foreseeable future," a spokeswoman says.
Which is similar to the current backlash against Chinese toys. Of course that doesn’t fix the root cause of the problem, which is a lack of supply chain control, a lack of procedures, and a lack of following those procedures. This does not have to take the form of additional regulatory oversight. Just a definition by purchasers of what is expected from offshore suppliers and then monitoring and reacting to compliance. But perhaps the actions of Trader Joe’s, Mattel, and the general consumer will create a free market incentive for improvement. Chinese suppliers that do demonstrate the will and ability to adhere to quality standards, coupled with purchasers that insist on those standards, will thrive. Those that don’t, won’t.
At the same time there’s yet another lesson in the conglomeration of variables that make up "total landed cost" of an offshore outsourced product. It is no longer simply the advantage of cheap labor. Slighly more enlightened companies have considered the cash cost of holding boatloads of inventory on the high seas. The next level of companies consider the potential risk involved in all of that inventory fomr a direct product quality standpoint.
These latest incidents drive home yet another potential cost: reputation. It’s rarely on the balance sheet, except perhaps as some fudge factor called "goodwill." But when consumers stop buying your product thanks to problems at your supplier, it can hit the P&L in a very real way.