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Horsemeat scandal: The meat of the matter

THE HORSEMEAT SCANDAL will take some time to rein in. Since January, when the Irish authorities revealed that some products were more equestrian than ruminant, there have been a series of revelations about food companies, supermarkets and even schools providing food that turned out to be not what is said on the label.

As the furore provoked public anger, a host of issues were raised over health, consumer laws and from where exactly the horsemeat had appeared. One factory in France has gone out of business. Products in the UK, Ireland, France, Norway, Austria, Switzerland, Sweden and Germany have been withdrawn from sale. Several retailers have been embarrassed – including one of the world’s biggest: Tesco – along with the world’s biggest catering company, Compass Group. Colin Tudge, founder of the Campaign for Real Farming and author of the book Good Food for Everyone Forever, writes that the food chain is “a disaster that has run out of control”.

But the big question begged by the issue is what was happening between the retailers and suppliers of the meat products. Indeed, even as the scandal engulfed the big retailers, they were trying to shift the blame to suppliers. And it is that complex chain on which attention has settled. What was the relationship between the two ends of the production process that it could go so badly wrong? The issue has supply chain experts saddling up to draw lessons from the scandal. Whatever happened between the abattoirs and stores, the episode is instructive for companies that rely upon intricate supply chains and that are suddenly wondering whether their own systems are tough enough.

“You’ve got to be aware of the risks and that’s never easy, as Tesco has been finding out,” Stuart Emmett, co-author of the book Excellence in Supply Chain Management, told Financial Director.

One way of looking at the issue is to ask whether suppliers and buyers were working closely enough together to ensure that the final product was what it said on the packaging? In recent years, many have concluded that they are not, and changed their approach entirely. Progressives have now stopped talking about the “old” relationship with suppliers where the main activity was an aggressive conversation about price and how it could be cut.

The buzzword now is “collaboration”, a word for relationships defined by their effort to seek mutual benefits for both buyer and strategic suppliers through substantively improved levels of trust and sharing. Closer working like this can lead to closer bonds, product innovation, investment opportunities, improved risk management for the buyers as well as lower costs.

Some collaboration evangelists among supply chain management aficionados could well be feeling that the horsemeat debacle means that their time has come.

Tesco in good company

The country was gripped in January when it became clear that horsemeat was turning up in what should have been beef-only products. But the Tesco is not alone in having well-publicised supply chain issues. Apple, the world’s most high-profile computer company, went through its own tribulations when it emerged workers at the Foxconn assembly plant in China, where iPads and iPhones are put together, were committing suicide at an alarming rate. That resulted in Apple moving to make very public its reaction and eventually staff from the computer giant moved onto the supplier’s site to monitor the working environment.

The fact that a company as big as Apple should act as quickly as it did should come as no surprise. After all, Tim Cook, the man who succeeded Steve Jobs, was Apple’s chief procurement officer. And that’s no coincidence. Cook won the CEO post not just for a having a vision, but because he understood the importance of suppliers to Apple and collaborating with them, not just on price and supply, but also to develop and innovate the company’s product base.

Collaboration between client and supplier has become a focus elsewhere too. When Gartner, the business analysts, put together its 2012 Supply Chain report, Apple came out top but Walmart was the only supermarket among the top performers. The retailer was noted for many things but among them was its collaboration with suppliers on marketing and merchandising. Johnson & Johnson also received plaudits for a supply chain centre of excellence focused on “supplier collaboration as a significant contributor to procurement value contribution.”

Best in show

There are notable other examples. Apple’s approach has already been mentioned but its efforts were emphasised last year by Jason Davis, a professor at MIT, when he wrote about the company for the Huffington Post. In pondering the iPad maker’s list of suppliers, he wrote that “many of these partnerships are intense, behind the scenes collaborations – sometimes lasting multiple years – that involve Apple and another companies jointly designing new products and technologies”.

Another good example is Proctor & Gamble (P&G), which in 2001 launched what it calls its Connect & Develop strategy for attracting collaborative suppliers. By 2015 P&G wants collaboration to generate $3bn towards the company’s annual sales growth. The company likes to cite its progress with Fabreze, a product to freshen up soft furnishings. After a raft of collaboration projects with suppliers, Fabreze had been extended into a range “air care” products turning it into a $1bn brand.

Another frequently quoted example is Toyota, the car maker. Famously, the Japanese company gets very close indeed to its suppliers sharing information and even providing consultancy advice to them on how to run their businesses through what it calls the ‘Toyota Way’. What Toyota wants to do is share “expectations and cultural norms”. Collaboration perhaps doesn’t get much closer because it is aimed at improving the supplier in the pursuit of value. Lower cost may be a consequence, but not the aim.

Benefits, yet reluctance

According to Stuart Emmett, there are huge benefits to be had from collaborating but many companies, though paying lip service to the idea, never really come to terms with it. “There’s a lot of evidence that this does work,” he says.

State of Flux, a consultancy, last year published its fourth Supplier Relationship Management research report. It found that 40% of companies questioned reported savings of more than 8% as a result of collaborating more closely. That’s up from last year’s figure of 20%. The 2012 report also saw more companies report that collaboration brought risk reduction as a benefit while there was also a hike in the number that reported benefits arising from being a “preferred customer”.

But while figures from State of Flux that more people are recognising collaborative supplier management as a professional discipline, there’s also evidence of reluctance to get involved. Or at least a perception that some of the impediments to improved collaboration are as big as Becher’s Brook.

A survey by the international consultancy Aberdeen Group revealed that companies believe there were reasons to collaborate more with suppliers, the biggest being rising costs, increased service demands and a lack of visibility over the supply chain. But it also revealed a worrying list of perceived impediments including a lack of resources (39%) resistance from the suppliers (33%) a reluctance to invest (33%) and ignorance of the potential benefits (11%).

On top of this, a survey by the Chartered Institute of Procurement and Supply found that company leaders – specifically CEOs – remain at arm’s length from their particular supply chain concerns, despite attention being thrown on the issue by the horsemeat event. More than a third of the supply chain managers questioned said their CEOs or boards were “disengaged” on supply chain issues. A statement from CIPS pointed to the risks involved in ignoring the issue, stating that businesses that acknowledge the attention needed for supply chains “will succeed; those that don’t will get found out”.

The big squeeze
There is something else quite intriguing in what the supply chain managers said to CIPS. Just over half believe the horsemeat scandal arose because of supermarkets putting the squeeze on suppliers over costs. Anecdotal evidence from elsewhere suggests the supermarkets are not alone in their attitude. One supply chain insider revealed a finance director had once told him his so-called “partnership” with suppliers was known internally as the “partnershaft” – so intent was it on playing one supplier off against another in a relentless drive to reduce costs.

But the results of the CIPS survey suggest supply chain managers believe there is a different way of doing things. In short, in identifying the “squeeze” as an issue they are saying emphatically that it is old-school.

It’s a point made by others. According to Mel Shutes, a director at procurement advisers State of Flux, the “squeeze” approach has been identified by many commentators as a cause of the horsemeat crisis, but whether it is or not, it is definitely part of old “adversarial” approach to managing supply chains. This is a shame because the past pursuit of an adversarial squeeze could well blight efforts to switch to a more collaborative approach.

Nick Hood, of risk management experts Company Watch, believes that sectors that engaged in the habit of squeezing may have created so much bad blood with suppliers that it will be difficult to develop the “trust” needed to have a more collaborative approach.

But research suggests there are benefits to making the effort. Shutes says that “without a shadow of a doubt, there will always be a risk in the supply chain and you will manage that more effectively if you have a more collaborative and open relationship with suppliers, and they in turn adopt that approach with their suppliers”.

Trust

What makes collaboration so important, the experts say, is trust, because collaboration, whether focused on product innovation or improved service standards aimed at establishing a strategic advantage, will involve the sharing of sensitive information in a way that buyers and suppliers may find unnerving at first. Both may fret that the data could end up in the hands of competitors – another reason why the relationship may have had the mark of a competitive one, rather than two organisations trying to improve each other’s business.

Stuart Emmett calls the effort to trust each other a necessary “leap of faith” even though it might look “illogical” in the classic adversarial context. Others place it at the heart of gauging whether a supply chain is working properly. At State of Flux, the presence of trust between buyer and supplier is a key measure of whether their relationship is working. Indeed, it’s considered part of the essential “relationship characteristics” that will help reduced risk in the supply chain.

But if a company wants trust, it is going to mean a change in focus when dealing with suppliers. Nick Hood insists that buyers need to be watchful of their suppliers’ finances. This is not necessarily so they can spot when the supplier is heading for trouble and find someone else.

That may be important, but there’s a way of viewing the suppliers’ finances as a fundamental concern governing the kind of price decisions that are made. According to Mel Shutes, collaboration and good supplier relationship management also means “sharing more information and being prepared to provide continuity to supplier arrangements”.

That’s a fancy way of talking about paying suppliers enough to keep them in business and providing good service. Duncan Brock, customer relationships director at CIPS, puts the issue more starkly: “Are they allowing suppliers enough margin to do things properly? Margins are tight but at some point you squeeze too much, the supplier isn’t making money and forcing them to cut costs won’t help.”

Mel Shutes adds a further level of reasoning. “The message for finance directors is that price isn’t everything. Good relationships can give control over cost but also managing risks more effectively,” he says.

Good skills

Making this change in approach is not always the easiest thing to do, especially if staff are used to only thinking of suppliers in terms reducing cost. Experts believe it takes someone with quite different skills. They even give it a different name, preferring to contrast old-school procurement or supply chain management with the more modern supplier relationship management (SRM). Taking that step, though, is intimidating and – according to Duncan Brock – it is even more scary if staff haven’t seen it being done well elsewhere. “There aren’t enough good examples of where its working well,” he says.

Finding the right people to manage supplier relations is a “perennial problem”, according to many. For Mel Shutes, the crucial element is having “relationship skills” in a leader able to “succeed by convincing people rather than an adversarial approach”. Supplier management will also need a cross-functional team, including people from finance and other departments.

This leads to one other assertion: that collaboration works best when everyone has bought into collaboration internally before the conversations begin with the supplier. There is no sense in procurement being defenders of the faith if manufacturing or engineering are not buying it, explains Duncan Brock. “It’s about being to take the longer-term strategic view,” he concludes.

It is worth bearing in mind that government and the CBI believed collaboration so important that they launched entire organisation, The Institute for Collaborative Working, as far back as 1990 to campaign and encourage a change in the way companies co-operate.

A paper recently written for the institute by David Hawkins, a 40-year veteran of procurement management, concluded this: “Far from being a side issue, relationships are a fundamental aspect of business process and a key factor in driving business success. As such organisations should understand their importance and strive to embed both structure and leadership in order to exploit the potential benefits.”

There’s a warning here for finance chiefs, too. Stuart Emmet concludes that “they are noticeable by their absence” from the process of driving change in procurement. Perhaps the horsemeat event means it is time for a change.

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