Downstream suppliers become bigger concern
By David Hannon -- Purchasing, 12/14/2006 2:00:00 AM
A recent story originally reported by Bloomberg and Purchasing.com highlighted the need for deep-tier supplier evaluation. Bloomberg reporters exposed a practice in South America where slave labor is used to produce pig iron, which is then used in iron ore and steel. The iron ore produced from that pig iron is eventually bought or used in products from some of the biggest companies in the world, including big steel buyers Ford Motor Co., General Motors, Whirlpool and Kohler.
In a follow-up survey on Purchasing.com, buyers provided their feedback on the issue of deep-tier supplier evaluation. The survey found that the majority of buyers polled (78%) do not have a risk-management strategy in place for suppliers beyond tier one, while 12% said they do have risk management strategies in place for downstream suppliers.
One survey respondent that buys cocoa beans says, “Our company is on the forefront of trying to make sure slave labor is not a factor in what we do. We’re involved with cocoa bean processing in the Ivory Coast and Ghana and we are working on making the conditions more favorable for the workers there. We are currently building new plants and subsidizing housing for the workers in a compound surrounding our plant.”
Several respondents provided examples of times when lack of downstream supplier visibility can impact OEM’s production. Lee Cornell, market area manager at Firstar Fiber in Omaha, Neb., says his downstream supplier of roll stock plastic film was in arrears with their freight carrier and Firstar was expecting a shipment of 12 truckloads of these rolls from the supplier to fulfill its production obligations.
“The supplier’s freight supplier took back their 12 trailers with our product on them and would not release them to us. The material supplier in this instance was responsible for the freight. We even offered to pay the freight to the carrier for these 12 trailer loads and deduct that amount from our payment to the supplier, but since the supplier was so far behind in payment, the freight carrier would not release their trailers. We ended up having to cancel a very profitable order with our customer.”
Ed Rossi, purchasing agent for MRO at Pliva U.S. in New Jersey, says buying globally through brokers inserts an extra tier and limits supplier visibility. He says recently an off-shore supplier of raw materials to both Pliva and a competitor was unable to deliver product to a broker who could not make deliveries to either company. 
Jim Hogan, supply chain manager at Texas-based furniture company Vecta, says one of Vecta’s tier two suppliers of an office furniture component, was sold days before a new product launch. The OEM that had sourced the tier-two supplier had to negotiate product launch with the new company (that had purchased the tier-two supplier), and moved all plant equipment from Michigan to new facility in Pennsylvania.
“Then, the new company was unable to produce acceptable components, so the OEM had to alternate source near term to another supplier with new tooling cost and a higher component cost. The OEM had to qualify another alternate source for a longer term solution with new tooling cost and lower component cost. The product was launched eight weeks late at higher cost and at additional capital tooling expenditure.”
Harry Taylor, a longtime purchasing professional and supply chain professor in Florida, adds that it’s the buyer’s responsibility to, “Know every supplier tier all the way back to the 'dirt’” and include wording in the contract about suppliers they use.
“I have heard two recent cases where a lower tier supplier could no longer meet its demand and the end buyer was flabbergasted to get that call,” he says. “The company was forced to work with its supplier to find a replacement at high cost.”
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