Is your supply chain gonna kill you?

Jason Busch has an excellent post: Friday Rant: Beyond SarbOx -- Waiting for the Big One to Hit . I'm betting few people want to talk about this particular hot potato. Please don't choke on your early morning coffee. He says:

Then as now [when SarbOx was enacted], companies still lack similar controls and visibility -- but this time the problem lies outside the four walls of the organization. Which makes the problem even more serious considering the increasing levels with which companies depend on global supply chain and financial partners today. Personally, I'd be willing to put a good many chips on the table to bet that the next major regulatory overhaul of the non-banking regulatory arena will occur as a result of a series of very public global supply chain breakdowns. For me the question is not if, but when.

A while back, I interviewed Lisa Nolan who owns factories in China and Taiwan. We talked about how her customers impose pretty strict controls on what her facilities can do and how those factories are subject to inspection:

The biggest problem faced by manufacturers is that each brand has its own compliance rule book. This means there is a separate set of procedures to overcome for each company supplying brands which drives up compliance cost. Some companies are looking towards SA8000 as a way of providing a single international compliance standard for social accountability. Of her own company, Lisa says “We’re still researching to see if that certification is something that would benefit us.”

Given the hurdles, is it all worth it? “Our customers are very protective of their supplier facilities. Many companies take one look and say they won’t bother. We on the other hand have benefited greatly from doing as we’re asked. It’s all about the rewards that go with a good reputation for doing the right thing.”

Social accountability is a big step in the right direction because the outcomes of such initiatives permeate many aspects of production and distribution and ensure companies not only comply but do 'the right things.' But it is not enough and success is almost wholly dependent upon having field staff spread sufficiently thickly to ensure compliance. Also, as Lisa implies, with little or no standardization among market participants, it is almost impossible to consider what might represent best practices.

If Jason is correct and my sense is he is on the right track, then it seems that industry generally has made little or no progress in the last 18 months. So where do the supply chain problems lie?

Jason is the expert:

I'd suggest that the real dangers we face are from a lack of oversight and control of extended supply chain quality, costs and a range of other factors certainly including but not limited to supplier financial viability.

I'll wager one of the key starting points is the fact supply chains break at the point of least resistance - ie the disconnected spreadsheets that get passed between and around companies in supply chain networks. It's so basic as a potential point of failure I'm surprised we've not already seen the supply chain equivalent of 'send three and fourpence, we're going to a dance.'

To Jason's point about financial viability, IFRS is supposed to provide a level playing field upon which, among other things, financial analysts can assess earnings quality. However and using Europe as an example, IFRS implementation has been interpreted slightly differently in each nation state. That need not be a total nightmare but it is a warning shot. In the US, what seemed hopeful in 2008 now appears to be grinding to a halt:

...there has been no movement toward adopting International Financial Reporting Standards in the United States since then–SEC chairman Christopher Cox introduced a roadmap for the conversion last August. And while some recommendations of the Committee on Improvements to Financial Reporting were taken up by standard-setters and regulators during the year the CIFR convened, the SEC has procrastinated on addressing the meatier, more-controversial suggestions that could substantially reduce reporting complexity.

I am aware some tech companies are aching for content to help drive IFRS initiatives. That's all about selling software but the issues surrounding IFRS are far from trivial. I'd argue for instance that the US has a poor idea about exercising and articulating value judgments because so much of reporting is predicated on rules based approaches. This is a topic for a more detailed discussion but I have no doubt the culturally ingrained notion of 'following the rule book' represents a significant barrier.

Then there is the vexed question of implementing supply chain checks and balances. It has been suggested to me the Big Four (PwC, KPMG, Delloitte and EY) are in pole position because of their experience in audit roles. I don't want to go down THAT path too far. They're all in deep trouble over the most basic audit failures. Check out what happened at Satyam and the external audit oversight failures at PWC to get an idea of what I'm talking about. For a damning indictment on the audit business generally, check out Francine McKenna's blog.

Jason's rant makes a good case but I am far from convinced we have the tools or expertise at hand to make life any better. Of course that might change the moment we see a spate of horrifying headlines. Jason predicts:

50 Deaths in 50 Days From Tainted Products

Forged Supplier Insurance Documentation Results in Billion Dollar+ Exposure for Large Multinational

Unhedged Global Commodity and Energy Exposure Bankrupts Manufacturing Bellwether

...and more. Far be it for me to rain on Jason's parade but having seen the lead paint debacle of 2007 fade into the background, you've got to wonder whether what's needed is a spate of failure before companies sit up and take notice. It is not enough that supply chain masters such as Nike should clean up their CSR act. It is a matter for industry as a whole. It's a timebomb ticking merrily away. It's up to industry to decide when it gets defused or face public outrage.