Over the last two decades, many firms implemented various supply chain initiatives to: increase revenue, for example, more product variety, more-frequent new product introductions, more sales channels/markets in new markets; reduce cost, for example, supply base reduction, online sourcing, and offshore manufacturing; and reduce assets, for example, outsourcing of manufacturing, information technology, logistics, and even product design. Supply chains today are more “efficient” but also much more complex than those in the past. As a consequence, they are more vulnerable to disruptions and delays. In some cases, unethical behavior of one supplier along the supply chain can cause serious security risks and even deaths. Here are some examples:
Communication and coordination risk. Complex global supply chains often create major communication and coordination problems. For example, Boeing outsourced the design and development of many critical sections of its 787 aircraft to tier-1 suppliers. However, these tier-1 suppliers subcontract various modules to tier-2 suppliers, who in turn outsource certain components to tier-3 suppliers. With a multi-tier supply chain that has at least 500 suppliers located in over 10 countries, the communication and coordination between Boeing and those nondirect suppliers regarding various product development activities were essentially nonexistent. This is one of the reasons why Boeing’s 787 was launched 3.5 years late and the development cost was $6 billion over budget.5 Further, the lack of communication and coordination is thought to have caused the battery problems that grounded the fleet for a period of time.
Information security. In a multi-tier supply chain, it takes only one unethical supplier to create an IT security breach. In 2011, the U.S. Senate Armed Services identified over 1,800 instances of suspected counterfeit electronics from China that were installed in military systems made by Raytheon, L-3 Communications, and Boeing. Some counterfeit electronic parts can have malware preinstalled in the motherboards, making it extremely difficult to trace and putting U.S. troops at risk.3 In the same vein, when firms (banks, hospitals, and insurance companies) procure their computers and servers with counterfeit electronics, they are exposed to the risk of leaking credit card data, personal data, and intellectual property information to cyber criminals.
Food safety. In Europe, the horse-meat scandal in 2013 heightened the concerns over food supply chain security. While the use of cheaper substitutes to produce food products is unethical, some suppliers would even use harmful or banned substances to produce food products to increase profits. As U.S. agribusinesses and food manufacturers import more food products from China, public concerns arose in 2012 after a series of reports about unsafe food products made in China, for example: melamine adulteration in pet food, hydrolyzed leather protein in milk, and chromium in pill capsules.2
Drag safety. Opaque supply chain operations in the pharmaceutical industry and online pharmacies create opportunities for unethical suppliers to produce adulterated or counterfeit drugs. According to the National Association of Boards of Pharmacy, counterfeit drugs generated over $75 billion in revenue in 2010 and caused over 100,000 deaths worldwide.4 For example, Baxter’s contract manufacturer Changzhou SPL-CZ classified itself as a chemical plant so that it was not under the scrutiny of Chinese State Food and Drug Administration. In 2007, SPL-CZ used chondroitin sulfate (a cheap and unsafe substance) to produce heparin active pharmaceutical ingredients (API) for Baxter and 14 other U.S. companies. This adulterated API was then used to produce the blood-thinning drug Heparin that resulted in several deaths and major recalls in 2008.
ICT for Mitigating Supply Chain Risks
As firms are confronting different types of supply chain risks, information and communication technology (ICT) can enable firms to access relevant and timely information so they can improve communication and coordination as well as to screen, monitor, and enforce ethical behavior of all suppliers along the supply chain. Some examples include:
Information technology for improving supply chain visibility and coordination. Information technology can enable firms to improve supply chain visibility and coordination. For example, Agilent, a premier electronics measurement company, implemented an IT system developed by Kinaxis in 2011 that would allow Agilent to “bridge” different Enterprise Resource Planning (ERP) systems of all suppliers so that Agilent has end-to-end supply chain visibility for real-time communication and coordination. By operating as a “virtually integrated” supply chain, Agilent can respond to market changes in a cost-effective and time-efficient manner.
Information technology for improving track and trace capabilities. To manage, monitor, and secure container shipments, Savi and Qualcomm co-developed an integrated service to provide real-time track and trace capability: Savi uses RFID tags, readers, software, and electronic seals placed on cargo containers, while Qualcomm uses satellites to track and trace the container movement and the seal status information conveyed by the RFID readers and the electronic seals. In Europe, the pharmaceutical industry started a new initiative in 2010 that is intended to fight the trade of counterfeit drugs. Under this initiative, pharmaceutical manufacturers add a serialization code (a unique machine readable “passport” number) to each pack of medicine before distribution, where this passport number is scanned at each link of the supply chain all the way to the pharmacist. By using direct communication links among the pharmacy, the pharmaceutical manufacturer, and the regulatory body, the pharmacist can authenticate the drug, the pharmaceutical firm can know if its drug has been counterfeited, and the regulator can take appropriate actions (for example, product recalls) immediately. In Africa, HP and the African social enterprise network mPedigree teamed up in 2012 to develop a drug authentication effort to combat counterfeit drugs in 2012. Under this effort, pharmaceutical manufacturers add a “scratch-off label” containing a verification code before distribution. When a customer buys the medicine at the pharmacy, the customer scratches the label to receive the code, and sends a Short Message Service (SMS) text message to the pharmaceutical manufacturer via mobile phone so the manufacturer can verify the drug’s authenticity.
In a multi-tier supply chain, it takes only one unethical supplier to create an IT security breach.
Information technology for exposing unethical supplier behavior. Recognizing information access as an important first step to creating public exposure, voluntary groups of activists and NGOs are using the Internet to provide more timely and accurate information about food safety issues in China. In 2012, a group of Chinese volunteers developed websites (http://www.zccw.info), and smartphone apps (http://tinyurl.com/72orssq) to report the latest Chinese food safety scandals (location, food categories, safety issues, vendor identity, supplier identity, and so forth). By providing fast and accurate information about food safety issues on a single website or an app, public exposure creates incentives for vendors to be more vigilant and suppliers to think twice before committing product adulteration. Pushing this line of thinking further, manufacturers may consider partnering with NGOs to expose the identity of unethical suppliers who produce adulterated products on the Internet and mobile phone apps to create the threat of public humiliation for suppliers who produce adulterated products.2
Management Tools for Mitigating Supply Chain Risks
While ICT is an enabler for firms to improve supply chain visibility, supply chain coordination, and supply chain security, many firms should consider the following management tools.
Know your suppliers and their suppliers. Many firms do not fully vet their supplier’s capabilities and their ethical reputation. While ISO 26000 social responsibility standards provide guidelines for establishing ethical standards, a firm needs to conduct audits to ensure these guidelines are being followed by all partners along the supply chain. For example, to secure the government’s technology supply chain, the U.S. Department of Defense (DoD) conducts audits and requires certification of all suppliers along the supply chain—not just its direct vendors. Because it is inefficient for Western firms to conduct frequent audits at various suppliers located in emerging markets, Western firms should form partnerships with various NGOs with local presence who can conduct those audits on a firm’s behalf or provide information about the supplier’s reputation to ensure ethical standards are maintained.
Do not focus only on cost and speed when selecting suppliers. Because most firms tend to award contracts to suppliers with the lowest bid, many suppliers may commit unethical acts in order to ensure profitability after winning a contract with the lowest bid. To break this vicious cycle, a firm should develop a more balanced view and consider different attributes than simply cost and speed when selecting suppliers and the firm should communicate this holistic measure with potential suppliers.
Information technology can enable firms to improve supply chain visibility and coordination.
Provide incentives to discourage unethical behavior. To entice suppliers to maintain certain mutually agreeable ethical standards, firms should develop incentives to discourage unethical behavior. For example, the DoD would penalize their vendors for not buying components from pre-approved suppliers or for delivering computer equipment with counterfeit components. Babich and Tang1 showed that firms can deter suppliers from product adulteration if they defer their payment as follows: pay an upfront deposit to initiate the production, withhold the contingent payment, and release this contingent payment only if no adulteration is discovered by the customers or government agencies over a pre-specified duration. The logic behind this deferred payment mechanism is simple: it allows manufacturers to have more time to learn about suppliers’ product quality by withholding contingent payments.
Conclusion
While many Western firms have ethical sourcing guidelines and their own internal ethical standards, they should not expect all partners along the global supply chain to share the same values and impose the same standards due to different regulations, different environments, and different cultures. To encourage ethical behavior of all parties along the supply chain, ICT is an enabler and the aforementioned management tools are the enhancers. Western firms should rethink the way they manage the whole supplier chain and not just focus on their direct links.
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