Team Effort: Why Investing in Your Supply Chain is Critical

Back in the 1990s, Stan Shih—the founder of IT company Acer—observed the smiley faced curve – a value chain with an upward slant at both ends and a dip in the middle. Shih argued that there’s value at the being of a product’s lifecycle where new innovations are born, and there’s profit to be made on the retail and services end. But manufacturing—the middleman—typically brings the lowest margins.

It’s no surprise then that industry tends to ship much of its manufacturing abroad where costs can be kept to a minimum.

But in recent years the smiley face curve has flattened out. Why? Because industry is beginning to understand that investing in the “right” approach to outsourced manufacturing and supply chain can yield significant ROI both in terms of efficiency and brand reputation.

Valuable time and money is wasted when a parts shipment is delayed or confiscated or a manufacturing facility is shut down because of failure to comply with regulations around hazardous chemicals, environmental pollutants and source materials. Worse, the damage to your brand can be devastating. Selling garments found to contain toxic chemicals or marketing cellphones made with minerals from conflict mines in Congo is not the way to win the consumer market. Here’s a few royal blunders to prove the point:

The right kind of manufacturing and supply chain management starts with accepting responsibility both for regulatory compliance and ethical practices. The latter is just as important as the former, because doing the right thing even when you’re not required to is always best for your brand. Companies cannot afford to sweep their manufacturing practices under the rug. Neither can they transfer blame onto suppliers.

But developing a stronger, more transparent relationship with your supply chain is not just about the occasional audit and slap on the wrist. Multinational brands need to give suppliers incentives to look for and disclose deficiencies themselves.

An article in the winter 2011 issue of MIT Sloan Management Review explored how to improve the environmental performance of your supply chain. The article looks at Levi Strauss and its zero-tolerance policy toward violations like providing false or inconsistent records. After two or three warnings, the apparel company usually terminates its relationship with a factory. However, suppliers know that if they volunteer the correct data about a problem, Levi Strauss will not give them a zero-tolerance violation and will work with them to fix the problem.

Levi Strauss has developed a proactive—rather than reactive—cooperative relationship with its suppliers, working with them to establish clear expectations and helping them to meet mutual goals.

In addition to this type of nurturing, suppliers need to be given a wider profit margin. Brands tend to want to go the cheapest route and whichever supplier meets the year’s quota at the lowest cost usually keeps the contract. This inevitably leads to the supplier cutting corners, perhaps using lower grade materials or cheaper, often hazardous chemicals.

In short, attitudes towards outsourced manufacturers and supply chain has to change. With a litany of government regulations and the growing social and environmental conscience of the general public, brands can no longer afford to neglect the middleman in the value chain. Instead, developed economies should partner with traditional low-cost labor countries to help grow awareness and raise standards across the board.

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