Supply-chain paranoia

If it is true, as former Intel CEO Andy Grove has said, that "only the paranoid survive," there are many issues to be worried about in supply-chain management as 2007 draws to a close.

On the one hand, there is reason for much optimism about the progress companies are making in managing their international supply chains.

There have been dramatic improvements as companies move away from the piecemeal and disjointed management of the separate supply-chain functions, toward the integrated management of the extended supply chain. The separate supply-chain pieces are increasingly viewed as part of the supply-chain "system" that is pulled by demand for the company's products and services. As companies collaborate with all the parties in the extended supply chain, they are far more responsive to changes in demand.

But there are other factors that may complicate supply-chain management in 2008. One is the "catching up" of other developed nations in implementing their own supply-chain security programs. The Custom-Trade Partnership Against Terrorism was the initial supply-chain security program, but now, working within the World Customs Organization's SAFE Framework, there will be a proliferation of programs. The EU nations will formally implement the Authorized Economic Operator program next year, and there are active programs in Jordan, Singapore, Australia, Sweden and other nations.

How will companies deal with suppliers who face demands from customers in different countries to meet country-specific security requirements? As the programs grow, will there be pressure from the public or the government, in the face of a terrorist-related transportation incident or under heightened alert levels, for firms to trade only with members of national supply-chain security programs? Might ports in times of crisis be closed to imports not shipped by certified firms?

Questions about the safety of imported products have given rise to a new set of regulatory initiatives and legislative proposals that delve deeply into supply-chain management.

The Interagency Working Group on Import Safety, established by a presidential executive order, has issued a strategic framework, immediate actions and an action plan for improving import safety. The framework calls for new programs to build safety into the manufacturing and distribution process. It envisions that inspections at the time of the release of the merchandise will be augmented by a "video" model that identifies critical points within the supply chain where risks are the highest, and then verifies the product's safety at those points. This concept parallels Customs and Border Protection's proposed security filing in that it will require importers to provide additional information about processes earlier in the supply chain.

Lurking under the radar screen are questions of crime and corruption in international supply chains that pose legal risks and risks to the brand name and integrity of U.S. importers. Bribery of customs officials to facilitate the release of imported goods is a serious problem in a number of countries. Going beyond corruption at the border is the presence of corruption and illegality in significant areas of international trade such as intellectual property rights violations, the production of counterfeit goods that fail to meet safety specifications, and the laundered use of the proceeds of criminal organizations to finance apparently legitimate businesses. It will be incumbent on companies to know more details about the operation of their supply chains.

Complicating supply-chain operations with China is the growing recognition that China is not a true market economy. Its economy and social structure remain firmly controlled by the Communist Party.

The U.S.-China Economic and Review Security Committee, created by Congress in 2001, reported in November that China's extensive commercial spying inside the U.S. is the greatest threat to America's legally protected technology. The commission reported that China is reversing its trend toward free markets by setting up state-owned enterprises in 12 key industries.

Coupled with the Chinese government's control of the exchange rate of the yuan, we may expect instability in trade relations with China in 2008 that could have a disruptive impact on supply-chain operations in China.

All of these issues become more volatile as the political season moves ahead in the run-up to the 2008 presidential elections.

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