Supply Excellence — Outsourcing Supply Doesn’t Outsource Risk

Outsourcing Supply Doesn’t Outsource Risk

October 8th, 2008 · by Kris Colby · No Comments · LCCS and trade, best practices, outsourcing, sourcing, supply management, supply risk

It seems a week can’t go by without yet another product supply safety scare traced to international supply chains. This week’s episode provides some of the scariest headlines yet: Tainted baby formula.

It also points to another aspect of international supply chains that requires increasingly sophisticated oversight by spend management organizations. We typically think of “globalized trade” as large ships loaded with goods docking at our ports. However, one of the fastest growing supply chain activities for global companies is “supply base localization”.

As described in this WSJ article, companies with global operations increasingly rely on local suppliers. This makes intuitive sense; put the sources of supply close to your production facilities and end consumers. However, there are obvious risks associated with outsourcing so much of your supply chain activities. To quote The Journal, “experience shows that a company can test its own operations, and still run into problems with its suppliers.” The further you are from direct control, the more oversight you needed. Actively managing this requires enormous amounts of information, a consistent and rigorously enforced set of standards and tools necessary to manage both.

As with past incidents, the moral of the story for spend professionals from tainted baby formula is straightforward:

Nothing is more valuable than your brand and the faith of your customers
Do not rely on the government to safeguard your supply chain, especially globally
You need to actively set and enforce supplier standards/performance and the spend management organization is the right function to do this.
The costs associated with implementing a comprehensive supplier performance management program are dwarfed by the potential costs of doing nothing

Kris Colby, a Director of Ariba’s Spend Management Services group, recently authored a white paper on the subject of minimizing risk - An Ounce of Prevention: Steps Your Organization Can Take Now to Reduce the Risk of a Product Safety Incident.

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