Harvesting Cash from Suppliers is Reaping With a Sharp Sword

The Wall Street Journal today reports that Procter & Gamble is planning to extend its payment terms to suppliers by as much as 30 days — from an average of 45 days to a new target of 75 days.
The Journal reports that P&G was following the lead of many other large companies that were keeping their cash longer to help them fund expansions, investor dividends or other needs.
Of course, payment terms have been and always will be an important part of the total cost of ownership of anything in the supply chain. They are tools like many others. But as one of the sharpest of those tools, payment terms can cut two ways.
You may be comfortable that your tier one supplier can find funds at low interest rates to manage the situation without affecting deliveries to you or the overall health of the supplier. But the fact is, the more likely scenario is that tier ones will extend their own terms to tier two, and so on. Eventually, the shock of the change has to be absorbed.
How well do you know the financial health of every company at every level in your supply chain? Can you be sure there isn’t a service provider in your chain that has to meet a biweekly payroll, or some other upstream company that supplies a critical part on a razor-thin operating margin because it’s a startup or has put everything into an R&D effort? If so, you might be sowing the seeds of disaster at the same time you are harvesting what appears to be an easy source of cash.

Like it or not, you “own” your entire supply chain

Wal-Mart, Sears and Disney have all moved quickly to distance themselves from the fire in a garment factory in Bangladesh that killed 112 people — after reporters found items with their logos and other evidence of business relationships in the charred rubble of the building. Associated Press reports that all three companies claimed they had tried to sever ties with Tazreen Fashions Ltd. before the tragedy, and that any production there had been “unauthorized.”
Two important items to note:
1. The unspoken assumption in the coverage is that consumer companies are essentially responsible for their entire supply chain — no matter how far it is from U.S. jurisdictions. Tazreen may have been a tier-three supplier, but no matter to the media. If the smoking sweatshirt has a Wal-Mart label — reporters demand a response from Wal-Mart.
2. In their rapid responses, all three companies appeared to accept that premise as they distanced themselves from the factory and its owner. In fact, according to their statements, they recognized the risk at some level and had tried to sever the relationship before the incident. In a world where communications have such a broad and rapid reach — that’s the only prudent approach. Like it or not, it’s best to know your product’s entire supply chain – from its beginnings as raw material to the time it hangs in a customer’s closet — and be prepared to manage risks of any kind throughout it.

Can U.S. Supply Chains Afford To Be Ethical?

News reports of rebel advances in the Democratic Republic of the Congo (DRC) are stark reminders that the provisions of the Dodd-Frank Act regarding conflict minerals, as awkward as they might be, do address real life and death situations.  As much as we all might want the violence to end, if the conflict is actually escalating it begs two questions:
1. If the pressure of the Dodd-Frank provisions isn’t enough to reduce violence, is it worth the cost of implementing them? The rules haven’t been in place long enough to measure possible impacts, but perhaps it’s already too late.
2. If companies in China or other countries are sourcing from DRC without limitations and therefore at lower costs, have we made U.S. companies less competitive? Can we afford to do that in a competitive world economy?

I don’t have easy answers to these questions, but I think they are important enough to consider. Beyond the specific situation in Africa, can U.S. supply chains afford to be ethical when they have to compete against foreign companies with much lower standards? Especially when critical raw materials are in short supply or are difficult to source.
Although the voices of non-governmental organizations (NGOs) are often annoying, is this a possible useful role for them — to act as country-neutral watchdogs for generally accepted ethical or sustainable standards? Or are the pressures for growth and limits on media so great in countries such as China that they will negate the effectiveness of any whistle-blowing by NGOs?

The World is Moving Faster Than the SEC on Conflict Minerals

Three years after Congress passed the Dodd-Frank Act, the SEC this week finally adopted rules requiring public companies to report on the sources of so-called conflict minerals in any products they manufacture (or control the manufacturing by others).  Here’s the SEC link to the news release and full final rule.
The testimony, studies and lobbying has been intense, so adoption of the final rule was almost anti-climactic. That’s probably a good thing.  The fact is that even without the rule itself, pressure from NGOs (non-governmental organizations), news reports and consumers themselves are pushing manufacturers to take responsibility for their entire supply chain – from the extraction of raw materials to the distribution, packaging and sale of their products (and in some cases — to their post-use disposal).
The issues also go beyond mining that finances violence. Bloomberg/Business Week is reporting on the safety and environmental threats posed by small tin mines in Indonesia. It seems pretty clear that momentum is still towards more scrutiny, not less.
So the smart strategy seems to be the one that some electronics manufacturers such as Apple and Intel are taking — developing industry standards for determining chain of custody, appropriate due diligence and other matters related to socially responsible sourcing. That’s because the answer, “we don’t know” is no longer acceptable in that arena. Reporters and consumers are simply taking that reply and firing back, “Why not?”

Gibson Guitars Strums to the Tune of $700,000 Settlement

The purchasing team at Gibson Guitars learned the hard way that sourcing ebony wood from Madagascar to make fingerboards would raise eyebrows from environmental watchdogs.
The company has just settled a criminal investigation by the U.S. Dept. of Justice by agreeing to pay $300,000 into a reward pool for whistleblowers and $50,000 for the protection of wood species used in guitars. Gibson also surrendered $347,000 worth of Madagascar ebony that was seized from its offices in a raid by the U.S. Fish and Wildlife Service.
Gibson’s position on the matter is that it was pleased it wasn’t charged with criminal behavior; the leverage for the settlement was the Lacey Act, a set of laws that prohibit U.S. companies from importing wood that has been cut illegally in the source country. Gibson acknowledged that it had not acted on information that ebony and rosewood it acquired from Madagascar and India may have been illegally harvested.
In a competitive business environment it is tempting to focus on internal purchasing ethics — e.g. detailed policies about meals, gifts and entertainment from suppliers — and not quite so much on external ethics such as complying with foreign laws.
The Lacey Act may not be well known, but it is pretty clear, and that makes it fair game.
The truth is that “out-of-country” is no longer out-of-sight” or “out-of-mind.” Internet and phone technology, global social media apps easily connect passionate individuals to non-governmental watchdog organizations. No one should expect an ethical or legal lapse to “slip by.” Especially on a product that is played onstage by rock and new age guitar stars such as Tak Matsumoto.
By the way, according to Gibson’s website, the Tak Matsumoto Doublecut Custom Ebony now comes with a fingerboard made from “Richlite®, an extremely durable fabricated material composed of cellulose fiber and phenolic resin, (that) offers the look, feel and tone of ebony in a totally sustainable package.”
Lesson learned, there.

P&G CEO: We want sustainability without tradeoffs

Interviewed by the Wall Street Journal, Proctor & Gamble CEO Robert McDonald said only 15% of consumers will accept tradeoffs (i.e. higher prices) for products that are more environmentally sustainable. The other 85% may appreciate sustainability, put won’t pay more for it. That’s why he says P&G is focusing on innovations that add sustainability without higher prices or compromising other features of its products.
As a way, perhaps, of encouraging others to walk the walk as well as talk the talk, P&G is also making its supplier sustainability scorecards generally available. It might also be a strategy of fishing for new suppliers with sustainability innovations — because that’s clearly the way the CEO is thinking.

Lesson from McDonald’s – Stay Ahead of the NGOs

This animated Chipotle commercial telling the story of a farmer freeing his pigs from pens wasn’t exactly the most attention-grabbing spot of the Super Bowl broadcast. However, it turned out to be a good setup for the recent announcement by McDonald’s that it is requiring its suppliers to end the practice of keeping pigs in gestation pens. Here’s Bloomberg’s coverage of the story.
According to Bloomberg, Chipotle stopped buying pork from producers who used gestation pens (which highly restrict the movements of a reproducing sow) a decade ago, while McDonald’s still owned the restaurant chain.
McDonald’s reportedly came to agreements with major producers such as Cargill before it made its own announcement.
Three lessons emerge from this. One — Do not underestimate the power of activist organizations. I worked with a restaurant chain that was under pressure because PETA was complaining that it unfairly treated fish.
Two — Stay ahead of the curve. McDonald’s made its move ahead of any serious public criticism. Animal rights activists have complained about the practice for years, but no credible threats were made to McRibs in the form of boycotts, occupying booths or blocking drive-thrus. McDonald’s anticipated the trend, adapted its supply chain and then announced.
Third — Manage your communications. McD’s announced the change jointly with an organization that could have been its enemy in a public opinion battle — the Humane Society of the U.S. With that step it didn’t just turn a potential negative into a positive — it simply skipped the negative potential altogether.
In all three ways, McDonald’s showed it recognized the potential influence of activist organizations and knew how to turn that into positive media coverage. Please pardon my saying so, but that’s a clear case of making a silk purse from a sow’s ear.

Conflict Minerals

One year ago today, the SEC released its draft rules requiring public companies to report whether or not their products were manufactured using “conflict minerals” — materials mined in the Democratic Republic of Congo (DRC) or surrounding countries that were being sold to finance lawless militias and violence in the region. The minerals covered are — tin, tungsten, tantalum (the “3Ts”), and gold.
This is a case of establishing a chain of custody all the way from a specific mine to a smartphone I might be using to update a blog. That’s a huge undertaking, and perhaps in deference to that, the SEC has not rushed the rulemaking. Final rules are expected sometime next year, but no deadline has been set.
While the final rules may not yet be clear — what is certain is that they are coming. There is considerable discussion of their final cost to companies and consumers, but the benefits seem to lining up already.  A letter from a UN agency monitoring the violence in Africa told the SEC that “private sector purchasing power and due diligence implementation is reducing conflict financing, promoting good governance in the DRC mining sector, and preserving access to international markets for impoverished artisanal miners.” In other words, even before they are implemented, the rules appear to be working.
And if chain of custody disclosures are working for 3T+G, there is no reason to think they will stop there. Are you ready?

Congratulations ISM Awards for Excellence Winners

Winners of this year’s Institute for Supply Management’s Awards for Excellence have been announced, and they include:

• Delphi Corporation in the technology category
• IBM in the sustainability category
• L-3 Communications in the process category
• Pfizer, Inc. in the process category
• State of Georgia, Department of Administrative Services — State Purchasing Division in the technology category

ADR consultants know of the work from people at several of these organizations, and it’s benchmark class. We’re certain the awards were well earned and we look forward to hearing their presentations at the ISM Conference.

The buck stops … where?

We might all take a lesson from Apple Computer’s dilemma at a factory in China that assembles its slick touch screens for iPads and iPhones. The factory might be far away, and governed by far different worker safety rules, but that didn’t keep Apple off the front page of a recent New York Times with this headline:

Workers Sickened at Apple Supplier in China

If it’s not obvious already, if you work at a company that sells goods to consumers — you can expect to be held accountable for the activities of your entire supply chain — as well as the disposal of your products after use.
Of course, this example also points out one of the risks of deep strategic relationships. If the Chinese company, Wintek had been selling to many U.S. technology companies, Apple might have escaped the headline. But Apple has created a supplier network that it treats as extensions of itself — and as a result, must accept some responsibility when things go wrong.