Managing Supply Chain Quality And Risk

Poor quality products, an unsafe work environment, or failure to comply with regulations ranging from product safety to social responsibility, can cause business disruption, financial loss, costly lawsuits, and long-lasting damage to the brand and corporate image of organizations that are dependent upon supply chain vendor performance. In the extreme, a brand, or even a company's reputation, can be damaged irreparably.

The crisis-catalyst may originate during any step in the supply chain process, from design to raw materials, to production, or transportation. Most often the issue centers on substandard materials or how well components or finished goods were designed and produced. Recently, company reputations have been damaged by substandard social responsibility practices of suppliers, even when the product quality was acceptable.

The quality management policies and practices of suppliers must be aligned with the standards of the company branding or selling the product. These quality management practices should also be aligned with accepted international standards. This is because failures in the supply chain are passed down the line to the firms ultimately marketing the products. Such failures can result in consumer dissatisfaction, regulatory noncompliance and, in some cases, public criticism of the corporate management practices.

There have been numerous, highly publicized cases in recent years from tainted toothpaste to lead paint in toys, to flawed labor practices of manufacturers. Companies are increasingly setting standards of quality management systems and worker treatment for their suppliers to avoid these kinds of problems. Vendor quality management standards are increasingly becoming a contractual condition for maintaining a supplier relationship.

Meeting stricter client and international quality management standards requires some vendors to invest in improving practices, policies, and management systems. Many adopt international standards, especially those of the International Organization for Standardization (ISO), the American National Standards Institute (ANSI), and the American Society for Quality (ASQ) to demonstrate acceptable practices. Additional security standards also may have to be adhered to by transportation, shipping, and logistics firms in the supply chain. While improvements in performance require investment, there are compelling benefits for suppliers to move forward. Adherence to quality management standards differentiates suppliers from competitors who don’t comply and strengthens the relationship between a company and the vendor.

Companies should periodically validate vendor adherence to the required quality management standards by conducting supply chain vendor audits. Audit protocols serve an additional critical role, namely that of identifying and qualifying new vendors. The validation process involves on-site vendor audits that compare actual vs. required policy and practice standards. These analyses enable identification of critical performance gaps and opportunities for improvement. Constant improvement in quality management helps to reduce the risk of costly and embarrassing failures.

Audits help to build confidence that risk is being properly managed. Through these audits, companies can evaluate the quality of a product and compliance with applicable regulatory requirements. Additionally, one can assess adherence to process-management, social and environmental accountability, and workplace health and safety standards. However, this all comes at a cost. Supply chain audits can be time-consuming, require on-site inspection teams, and are most effectively done by designating a full-time, product-knowledgeable team to the effort. Further, vendors are often geographically remote and audit criteria can become culturally complex. These factors can seriously challenge even well-staffed quality management functions, and be virtually impossible to conduct effectively for organizations that are constrained by staff and budget limitations.

Using independent audit providers may provide financial and logistical benefits
In today’s economic environment, most companies are exploring opportunities to lower expenses, reduce staff, or both. As a result, moving all or part of vendor assessment activities to an independent provider may be a financially attractive and more effective option. It allows management to focus scarce internal resources on other mission-critical activities. Similar advantages also may apply to companies growing quickly and finding internal teams stretched too thin.

Regardless of the route taken, generic audits should be avoided, because such efforts rarely uncover the most critical flaws and aren’t likely to meet the company’s unique goals. Independent management system auditors have the process skills, geographic coverage, and certification audit experience to efficiently establish the audit protocols and vendor site visits. Such firms can facilitate the planning process to ensure that effective audit criteria are established and will meet the audit goals of the company. Working closely with the internal team, independent providers bring a fresh and unbiased perspective to audit protocol discussions, as well as the breadth and depth of multicompany, multiregion audit experience. Independent providers are also usually current with changes to the various international standards that will have to be considered.

Audit processes and needs must be defined and reviewed with suppliers
Beyond customization, several other basic planning steps are essential for audit success. Those supervising and conducting the audits must detail all the activities necessary to accomplish the goals and objectives of the audit. Once the audit plan and protocols are in place, auditors should coordinate with the suppliers to make sure that all necessary personnel will be available within the specified time frame, and that the audit processes and information requirements are understood and agreed upon. Failure to provide access to the information or a misunderstanding of the audit process can delay, if not condemn, the audit.

A critical aspect of the planning process is to understand and leverage the information available within any vendor quality management systems already in place. These include systems such as ANSI/ISO/ASQ Q9001-2000. Some business sectors, such as the chemical and petrochemical industries, have developed specialized audit criteria, through the American Chemistry Council (ACC), to deal with environment, process safety, occupational health and safety, security, and product responsibility, among other issues.

Central to defining the best audit criteria, and deciding if there is a need to improve or add controls, are two considerations: First, determine the severity of the effect of a given quality management or regulatory failure; company management should consider the potential consequences with consumers, stakeholders, and regulators; second, determine the probability or frequency of the failure occurring.

Broaden the protocols
The approach of some registrars is to encourage companies to consider broadening the audit protocols to include environmental management systems requirements (ISO 14001), and occupational health and safety management systems requirements (OHSAS 18001). These establish specific requirements related to the identification and management of legal issues related to the environment and safety of the workplace. Even review of some aspects of accounting systems can add valuable insight into vendor practices. Likewise, management is advised to carefully review and consider the social accountability international standard, SA8000, for improving working conditions around the world. Designers based the protocol on the United Nations Universal Declaration of Human Rights, Convention on the Rights of the Child, and various International Labor Organization conventions. The SA8000 standard is intended to help apply these norms to practical work-life situations, including child labor, forced labor, working hours, wages, and disciplinary practices. These conventions encourage management to implement sustainable systemic changes affecting how a business is run. The benefits of adopting the SA8000 standard can include greater consumer and investor confidence, as well as increased efficiency and product quality.

Concluding audit stages need careful attention
The concluding audit stages need especially close attention; for this is where the audit findings are translated into actionable steps for improvement. For example, at ABS QE, the resulting audit report takes into account the extent of conformity with the audit criteria and the gaps of nonconformance, and provides detailed recommendations regarding improvements, business relationships, and risks which may affect the company’s image and credibility. This independent feedback provides a rationale to initiate a “root cause” investigation and propose suitable corrective actions to resolve deviations and concerns. The ABS QE audit group also is able to coordinate with supplier representatives during a root cause analysis so that proper policies and corrective actions are adopted to prevent future nonconformance incidents.

As we move forward into a world of globalization with increasingly complex supply chain relationships and risks, organizations must protect themselves by setting and monitoring the quality management standards of their vendors. Regardless of whether a company is dealing with dozens or thousands of suppliers, supply chain quality management audits require precise planning and experience to be both effective and efficient. Now more than ever, organizations need to have a better understanding of the quality management systems of their suppliers, the extent of associated risks, and the controls necessary to avoid product quality failure and reputational damage. A company’s future may depend on it.