Retailers buy products from suppliers, but they don’t always know or care where their supplier is sourcing those products. That kind of willful ignorance can increase the liability of the end user sellers, according to a materials handling industry analyst.
Two recent examples of companies not knowing the sources of the products they sell having disastrous results are the European horse meat scandal the Rana Plaza clothing factory collapse in Bangladesh, both of which occurred last year.
In January 2013, DNA belonging to horses was discovered in frozen hamburgers being sold in British and Irish supermarkets. That discovery led to a major scandal, in which it was revealed that there was a systemic breakdown in the traceability of the food supply chain.
Later that same year, 1,129 people were killed when an eight-story commercial building collapsed in the Bangladesh city of Savar. The building, known as Rana Plaza, was being used to manufacture garments for Western clothing stores including Benetton, the Children’s Place, and Wal-Mart.
Opens Companies to Liability, Criticism
Tony Cragg, senior lecturer at ESLI, a specialist graduate school of Industrial Logistics, said in a recent editorial in Logistics Management that companies not knowing where the products they sell come from opens them up to liability from the courts and potential criticism from consumers.
“These ‘known unknowns’ — in ‘Rumsfeldian’ terminology — are the direct consequence of splitting up and subcontracting of manufacturing on a global scale through a series of intermediaries and agents,” Cragg wrote. “(This is) a Trend which began with companies distancing themselves from any responsibility for manufacturing in the 1990s to focus on their core activities of marketing and design.”
Since 1995, business in the US and other Western nations have been increasing their sourcing from China and other nations where labor costs are substantially lower, according to Cragg. As a result, developing countries have been shifting their focus to manufacturing products that are more appealing to value added retailers, such as textiles and food.
Blurred Supply Chain Lines
Part of the problem lies with Western retailers and manufacturers that have become increasingly dependent on intermediaries to source the products they want in China and elsewhere, so knowing who is actually the ultimate supplier becomes more blurry.
“The more global the supply chain becomes, and the more intermediaries between your company and the original supplier, the less you know about the quality of that component,” Cragg wrote. “Trust is diminished. Bigger companies … are able to invest time and resources into training and monitoring suppliers but this cannot be said for the plethora of small and medium sized Western manufacturers. They struggle to control their global supply chains and they have no idea of who their supplier’s supplier is.”
The consequences of this globalization are that when something goes wrong — as in the horse meat scandal and the garment factory collapse — it can cause permanent damage to the end user businesses.
“First, local suppliers go out of business — with a permanent loss of skills and knowhow — and secondly, the lessons from supply chain disasters in the food sectoer are that the more globally fragmented a supply chain becomes, the greater the risk of quality failures,” Cragg wrote.