Supply chains today: mad, bad and dangerous

Lucy Mair looks at why they're getting longer and more complex and at the problems highlighted by the horsemeat scandal

When Ireland's Food Safety Authority announced it had found horsemeat in frozen beef burgers in January 2013, finger-pointing at manufacturers began almost immediately. But more shocking than the presence of equine DNA in a number of processed beef products, was the length and complexity of the supply chain to produce a 12p patty.

Where to place the blame for horsemeat being mixed with processed beef in a supply chain spanning several countries and changing hands tens of times from farm to factory to fork, quickly became unclear. Investigations into fraudulent activity on a global scale are ongoing, but the problem of difficult-to-trace activity in complex supply chains is not unique to the food processing industry.

Link by link

Supply chains are the systems and networks of producers, traders, processors, distributors and retailers that transform raw materials into products that are ultimately delivered to consumers. In today's globalised world, it's not unusual for supply chains to cover huge geographic distances: electronics and textiles sold by UK-based companies are manufactured in Asia, while oil and gas are extracted and refined in Russia, Africa and the Middle East before being imported by British energy companies.

Multinational corporations in all industries rely increasingly on foreign markets in their supply chain due to consumer demand for certain products year-round, and because essential resources occur naturally in different parts of the world. But, more often than not, the links in a supply chain are governed by one thing: cost.

A survey of supply chain directors within FTSE-100 organisations by KPMG in November 2012 revealed that cost-cutting is "at the top of the corporate agenda across virtually all sectors and markets." As a result, clothing is manufactured in southeast Asia because labour costs and property prices are far cheaper than they are in the UK. And, although cattle are reared in the UK, cheaper frozen meat can be bought in bulk from eastern Europe where land and labour costs are lower.

Big squeeze

Businesses in all industries are being squeezed by the pressures of the economic downturn and the need to produce and sell their products for less, while the external costs of manufacturing and transporting goods are rising. As a result, supply chain managers are being forced to find savings wherever possible.

Take frozen ready meals for example. As consumers have cut back on spending, buyers at supermarkets and other retailers have been seeking special offers on the ingredients going in to their prepared meals, in order to drive down their prices on the shelves. However, beef prices have soared recently due to the rising cost of grain to feed cattle, caused by a wet summer in the UK, a heatwave in Russia and drought in the US.

Not only that, the cost of energy used in the processing of meat has risen sharply, the price of fuel used for transportation throughout the supply chain has also gone up, and labour costs are steadily rising worldwide. Last year's KPMG report also revealed that the cost of new regulation, increases in VAT and the introduction of carbon taxes are serious concerns for businesses because all will add to the increased cost of their products.

Despite the cost of producing a frozen meal inevitably increasing, supermarkets are trying to offset these price increases by making savings elsewhere. In a survey by the Chartered Institute of Purchasing & Supply in March 2013, more than half of the UK's senior supply chain managers said the cause of the horsemeat scandal was down to suppliers being squeezed by big supermarkets. And Chris Mallon, director of the National Beef Association, agrees. He says supermarkets "adopted a bullying culture aimed exclusively at securing as much farm food as possible, for as little cost as possible, and the result is tortured supply chains that add so much unnecessary cost that short cuts on quality and traceability [were] inevitable.

"One of the most immediate moves should be the elimination of profit-taking middlemen, like processors who add avoidable cost to the supply system [and] reduce the control retailers should have over the origin and provenance of their purchases."

Growing longer

Common sense would suggest that removing the "profit-taking middlemen" and shortening the supply chain by taking out unnecessary links would be the most efficient way of businesses saving money. On the contrary, though, companies have outsourced stages of their supply chain to cut costs which has, in turn, made them longer.

In the processed meat industry, manufacturers and supermarkets have lengthened supply chains - especially for their economy-line products - to allow them to purchase ingredients for processed foods from wherever they are cheapest, depending on exchange rates and prices on the global commodity markets. Operating these complex supply chains depends on networks of brokers, frozen storage operators and subcontracted meat cutting and manufacturing plants. But, this also increases risk of something going wrong along the way, and shifts accountability for quality and safety between a number of intermediaries. The supply chain also becomes vulnerable to fraudulent activity and illegal contamination when a large number of traders are involved and quality controls are overlooked.

A report by sustainable banking group Rabobank in February identified the short-term nature of relationships between traders, manufacturers and retailers in the supply chain as one of the key problems. "The dominant supply chain model is currently structured in a linear fashion, in which suppliers, processors and retailers form short-term partnerships independent from the influence and interests of other members of the chain," it explains. This structure limits productivity and "results in wasteful processes" with economic and environmental costs.

In the case of the horsemeat scandal, the Food Safety Authority of Ireland found that there was "no evidence that [Silvercrest & Rangeland Meats] deliberately purchased or used horsemeat in their production processes or that these companies were relabelling or tampering with inward consignments." As a result, the mislabelling of horse as beef occurred further back in the supply chain, though it has proven difficult to identify where.

Breaking the chain

The horsemeat scandal will prompt businesses in all industries to tighten regulation of their supply chains. Retailers whose products were contaminated with horsemeat have pledged to shorten their supply chains to prevent a similar crisis in the future. However, the Food Standards Agency (FSA) says these plans are unrealistic due to the international nature of the food supply chain today.

But Tesco group chief executive Philip Clarke says the retailer will reduce the number of links in its chains. He told the National Farmers Union: "We do not necessarily mean that the products will come from the farm down the road. In a global environment, that's not possible. But we do mean [the supply chain will be] shorter in terms of the links in the chain. If it does not make the product better for our customers, that link will go. Every link puts distance between agriculture and us, so we want that chain to be shorter."

Rabobank says the solution to issues within supply chains is a "dedicated supply chain structure", in which long-term, cooperative relationships are built between everyone involved in the process. Justin Sherrard, Rabobank Global Strategist explains: "Closer cooperation of this sort will transform the nature of [food and agriculture] partnerships from transactional ones that are centred around chasing price, to a system focused on creating value." In an ideal world, it's a philosophy that supply chain managers across all industries would seek to implement.

Supply chains in practice: the iPhone

Apple Inc. is Silicon Valley's most successful company, and an iconic American brand. Its iPhones are designed and marketed by Apple from its California HQ, but their production is carried out by a number of companies based outside the US. Here, we take a look at an example of the iPhone's supply chain...

California, US

Apple designs iPhones at its headquarters in California. It sends out orders for parts to more than nine companies in five countries to produce its product.

Apple takes advantage of developed supply chain networks by sourcing parts from specialist technology manufacturers across the world. Manufacturing products in the US would reduce Apple's profit margin due to the high cost of labour.

US

Broadcom, Numonyx and Cirrus Logic produce bluetooth, radio, memory and audio parts. Glass for the iPhone is also made in the US, by Corning in Kentucky.

Japan

Toshiba and Murata produce flash memory, the display module and touch screen functions.

Components are shipped from the US, Germany, South Korea and Japan to China, where they are assembled. The cost of transportation is offset by lower manufacturing costs in China, which allows Apple to maximise its profits.

Germany

Infineon and Dialog Semiconductor produce camera, GPS, application processors and other parts.

South Korea

Samsung produces application processors.

Shenzhen, China

iPhones are assembled by manufacturer Foxconn Technology Group. As China becomes increasingly developed, the rising cost of labour, energy and property in China could put pressure on Apple's profits in future.

Apple has had issues within its long supply chain, particularly regarding working conditions at its contractors' factories. In January 2013, for example, Apple's annual supplier report found 106 cases of child labour being used at 11 factories involved in making their products.

Apple stores, worldwide

iPhones are exported back to the US and other markets across the world for sale to consumers. Some remain in China, which has become Apple's second-largest market, behind the US.

The traditional supply chain model is reversed, and the US - the country that invented the iPhone - becomes an importer of the finished, high-tech product.

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