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Lumber Liquidators Terminates Sourcing of China Produced Laminate Flooring

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In February of 2015, Lumber Liquidators, at the time, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America was involved in a supply chain expose.  Approaching 18 months later, the retailer continues to deal with the customer, brand and financial impacts of that disclosure.

In 2015, a broadcast report from CBS News’s 60 Minutes television program turned a public light on the retailer’s supply chain in terms of sourcing and product composition. That report declared that much of the retailer’s laminate flooring that was sourced and produced in China may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.

In May of 2015 the retailer announced that it is suspending all of its China sourced laminate flooring products. The retailer took further action as well. According to its web site, the retailer has systematically enhanced its compliance and sustainability practices across all of its business sectors. That included the hiring of a skilled and experienced senior executive to be the company’s Chief Compliance Officer (CCO), reporting directly to the CEO, John Presley. This CCO has led a team of professionals through an intensive evaluation of policies, processes and of the firm’s supply chain. That evaluation process included:

  • Reorganizing our company to better align processes with a commitment to quality and safety.
  • Installing a new risk assessment and evaluation process of every Lumber Liquidators supplier in every location.
  • Terminating relationships with suppliers who do not meet standards.
  • Adopting a detailed code of business conduct that, among many other requirements, mandates that each Lumber Liquidators employee be accountable for compliance in his or her area of responsibility.

Lumber Liquidators and the U.S. Consumer Product Safety Commission further agreed to a “recall to test” action, which is the term the CPSC uses to describe a testing program where the retailer agreed to initiate an in-home air quality testing program for consumers who purchased Chinese-made laminate flooring between February 2012 and May 2015. That testing program continues and consumers are offered a test kit for no-charge.

The retailer currently reports that tests involving over 1,300 floor samples have been completed without one testing above the designated CPSC’s remediation guidelines.

The latest development came last week when the retailer agreed not to resume sales of its previously sourced laminate wood flooring from supply sources in China.

According to news reports, more than 600,000 consumers bought the Chinese sourced laminate flooring over an estimated four year horizon. That would indicate that there are a lot more flooring installations that have yet to be tested thus far. After consultation with U.S. regulatory and consumer product safety agencies, the impacted consumers have been informed to not remove the flooring, because removal could cause added, more harmful exposure to formaldehyde.  Rather, regulators want consumers to work directly with Lumber Liquidators on additional testing and remediation needs. If the emission level is elevated, the retailer has agreed to work with homeowners to increase the air flow in affected homes or remove a small plank of wood flooring and conduct additional tests, free of charge.

The retailer continues to assure affected consumers that the China sourced flooring meets acceptable standards of chemical emissions.

Readers can gain any additional information and guidelines at this specific CPSC web site.

The financial, brand and other fallout from this incident continues. Shares of the company’s stock have reportedly dropped nearly a quarter this year, and the retailer reported its first annual financial loss in a least a decade. In its latest quarter, the retailer reported revenues down 10 percent with a wider loss.

Consumers directly affected by the China sourced laminate flooring obviously have their own impressions, now having to deal with guidelines that are somewhat less-specific as to remedies.

It is important to reiterate our previous takeaway to supply chain audiences regarding this ongoing incident.  It is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards considerably differ. As business and industry media have acknowledged, there is no apparent recognized national U.S. standard for indoor formaldehyde concentrations and global wide standards vary among agencies. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring and risk awareness.

Lumber Liquidators has learned an important lesson in supplier sourcing and in standards interpretation.  Affected consumers continue to learn an important lesson as-well.

Bob Ferrari


One Year Later- Lumber Liquidators Struggles Continue

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In February of 2015, Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America at the time, was involved in a supply chain expose.  Over a year later, the retailer continues to struggle with the customer and financial impacts of that disclosure.

A broadcast report from CBS News’s 60 Minutes program turned a public light on the retailer’s supply chain in terms of sourcing and product composition. The 60 Minutes report indicated that:

“Much of its (Lumber Liquidator’s) laminate flooring is made in China, and as we discovered during our investigation, may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.”

During its investigation, the news networks placed hidden cameras and conducted interviews of the company’s flooring suppliers. Employees of three Chinese mills indicated they were using core boards with higher levels of formaldehyde to save the retailer up to 15 percent on price. Three mills further admitted on camera to falsely labeling products as CARB 2–compliant.

By May, the flooring retailer announced that it had suspended all of its China sourced laminate flooring products The retailer further disclosed that a Special Committee composed of independent directors, with the assistance of third party advisors, had been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor. In its public update, the retailer indicated:

“From early March through May 1, 2015, BHC sent approximately 26,000 testing kits to nearly 15,000 Lumber Liquidators customers and approximately 11,000 of those testing kits were returned. As of May 1, 2015, over 3,400 testing kits from approximately 2,600 households with laminate flooring sourced from China had been reviewed and analyzed. Of those households, over 97% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization as protective against sensory irritation and long-term health effects.”

However, those actions, although relatively swift in nature, were not enough to convince consumers, and since that time, amid continued fallout, several top executives have departed including the CEO at the time of the incident.

For the quarter ending in March, the flooring retailer reported its fifth straight quarter of revenue declines and much deeper loses than expected. Same store sales declined nearly 14 percent in the recent quarter. The Q1 loss was reported as $32.4 million compared to a year-earlier loss $7.8 million. Expenses climbed 20 percent due to a $16 million charge related to a securities class action and a $13.5 million increase in in legal and professional fees.

The company shares have not lost more than half of their value over the past 12 months.

Once again, there is a need to focus on some takeaways. In its apparent zeal to reduce its lumber costs allegedly by 15 percent, the retailer appears to have paid a far higher price in customer loyalty, in subsequent added expenses and in shareholder value. With no recognized U.S. or global wide standards for indoor formaldehyde concentrations, the retailer was subject to varying consumer perceptions as to the overall safety and standards related to certain lines of flooring.

One year later, Lumber Liquidators remains under the looking glass, providing yet another example of how a supply chain focused disruption or snafu can have much more lingering effects


Chipotle Feels the Financial Impact of its Ongoing Food Safety Crisis

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This is a Supply Chain Matters update commentary regarding Chipotle Mexican Grill, specifically efforts to address its ongoing food-safety challenge that not only threatens the restaurant chain’s value to its brand and to its investors, but on perceived quality risks in its farm to fork supply chain.   Chipotle logo

This week, the restaurant chain posted its first quarterly financial loss as a public company amid a nearly 30 percent reduction in same store sales. Total revenues were down 23.4 percent while net income dropped by $122.6 million. Operating margin dropped to 6.8 percent from just over 28 percent a year earlier due to what was described as higher marketing, waste and food testing costs.

In a previous February commentary, we observed that the restaurant chain had entered a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In our mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources, reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled.

We speculated that the decision to scale back DNA testing may have been brought about by further process and supply chain focused analysis.  Yet, the restaurant chain later announced the hiring of a noted meat industry food safety expert to be its new director of overall food safety.  We questioned whether such decisions for scaling back testing should have been made so early in the process, without the insight or input of the chain’s newly hired food safety expert, and without allowing more time to address consumer concerns regarding uncertainty in food sourcing and handling practices.

Our stated belief was that restoring consumer trust in a badly damaged brand is not a one-time marketing or financial budgeting challenge, but rather a systemic management challenge to address quality and food safety practices among all farm to fork processes and activities.

The chain has since stepped-up training within local restaurants on food safety and food handling practices as well as the assistance of a field leadership program to assist local managers in managing and auditing food safety and handling practices.

Chipotle’s co-CEO, Steve Ells indicated to investors that rebuilding trust with customers would take some time. While we found that that admission insightful and somewhat overdue, we were taken back by a subsequent statement:

We will continue to make it our top priority to entice customers to return to Chipotle through effective promotions and marketing, and when they do return, we’re committed to providing the very best experience that we can to help ensure that they will keep coming back.”

Not a mention of testing and assuring consistent food safety practices as the top priority.

Further noted in business media reports are even further changes in food preparation and sourcing practices after apparent customer feedback indicated a decline in the quality of certain ingredients. Customers complained that produce or lettuce no longer tasted as it should. For instance, now the chain claims to have refined its washing of lettuce which will once again allow local restaurants to cut lettuce locally while still ensuring that it is safe. Similarly, bell peppers will be blanched and sliced in local restaurants rather than the previous change to do so in central kitchens.

On a positive note, customers apparently have endorsed the process for cooking organic beef in vacuum sealed bags within central kitchens because the meat is now perceived to not as dry to the taste.

As Chipotle customers may now be aware, the chain is attempting to incent customers to return by offering free burritos and other promotions. Over 5 million free burrito offers were issued followed by a direct mail promotion distributed to over 20 million households. Judging from the customer traffic statistics to-date, the chain’s most loyal consumers may not be completely convinced as of yet to return, although data seems to point to return by some not as loyal but cost conscious customers. One equity analyst has indicated that couponing is a short-term rather than a more sustainable strategy for restoring traffic.

In recent weeks, both Glass Lewis & Co. and Institutional Shareholder Services, both influential proxy advisory firms have weighed in on management. ISS is recommending a vote against re-election of certain current Chipotle board members at the upcoming annual stockholder meeting in May. The firm questions whether the ongoing food safety issues have exposed a flawed board succession process that nominated directors who have the management skill sets to keep pace with a chain’s size and complexity. Further stated was a failure of risk oversight by the firm’s Audit Committee.

Glass Lewis has reportedly taken issue with the board’s pay-for-performance model. As we noted in our March commentary, senior executive bonuses were recently changed to be pegged to increases in the firm’s stock price alone. ISS has also opined that the majority of discussion with major investors has focused on improving share price and changing executive compensation as opposed to addressing food safety.

The reality of losing the trust of loyal customers is indeed an ongoing challenge and Chipotle management must by our lens, have as its collective top priority means and methods to address food safety and quality from farm to fork. Management compensation not directly tied in some fashion to that goal, and management briefings and direction-setting that continues to lead with marketing and sales tactics are not going to convince this past Chipotle consumer that issues have been addressed and the quality and safety of food is industry-leading. Apparently we are not alone in that perception.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Major Automotive Supplier Component Safety Snafu is Another Supplier’s Strategic Gain

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As far back as 2014, Supply Chain Matters provided commentaries relative to the defective air bag inflator crisis that was impacting multiple global automotive brands. Even then, the product recalls involving airbag inflators supplied by Takata Corp. of Japan were estimated to be in the millions.

In an October 2014 posting, Supply Chain Matters echoed business media reports that brands such as Honda, were undertaking steps to seek out alternative suppliers, not only to provide augmented supplies of air bag inflators required to retrofit millions of recalled vehicles, but also to become a replacement supplier for current and future production needs. We noted that rival air bag suppliers that could benefit from the ongoing crisis included Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which at the time was being acquired by German based ZF Friedrichshafen. We further pointed out that switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.

Flash forward to today and specifically a recent Bloomberg Businessweek report titled: The Company That Came out on Top After Takata’s Air Bag Mess. The report indicates that largest automotive-safety parts company in the world has successfully been able to step in and respond to the Takata focused crisis. This supplier actually began supplying air bags as far back as 1980. Amid the current wave of product recalls, Autoliv produced inflators are noted as emerging relatively unscathed in the crisis.

The overall scope of the defective air bag inflators is massive, with upwards of 60 million recalled vehicles on a worldwide basis. Noted is that about 28 million Takata air bag inflators have been recalled in the U.S. alone.

Autoliv expects to produce 20 million replacement inflators since alternate production began in 2015, and extends through 2017. Once more, the supplier indicated to Bloomberg that it had won about half of all frontal air bag orders for newer cars last year. This supplier is forecasting sales growth of 7 percent annually, a fairly healthy rate for a lower-tiered automotive supplier.

Once more, Bloomberg points to Autoliv’s newer focus on the supply of more sophisticated safety components for autonomous vehicles such as radar, vision sensors and other crash avoidance safety systems ranging from standard sedans to luxury vehicles.  According to a recent Boston Consulting Group study, within the next decade, one in eight cars sold around the world will have autonomous features. Bloomberg reports that Autoliv components are contributing to autonomy features in cars like Daimler’s new Mercedes-Benz E-Class, which can steer itself in auto-pilot mode, brake in emergencies and evade obstructions. The company is also reportedly partnering with Volvo AB in a project called Drive Me that aims to have 100 self-driving cars on the roads in Gothenburg, Sweden next year.

In essence, this alternative supplier is not only benefitting from its abilities to step-up and respond to an immediate industry defective component crisis, but indeed, positioning from a product design strategy perspective to be a preferred supplier for future safety systems in multiple branded global vehicle platforms.

We have called reader attention to the ongoing Autoliv case study because it provides an ongoing example of how a major supply crisis and safety snafu can indeed lead to another supplier’s opportunistic gain. More importantly, thinking beyond the tactical crisis window at-hand with a focus on what will be the alternative technology.


Further Business Media Expose Related to Product Composition

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In mid-March, Supply Chain Matters called attention to a business media expose focused on when a consumer product contains what it is supposed to. The Wall Street Journal had published a report reflecting on the importance of knowing your product, your supplier management and oversight practices along with supporting your core product marketing strategies. Today, the WSJ added another dimension to this topic, one that perhaps has more implications for regulatory oversight.

The March WSJ report focused on actress Jessica Alba’s co-founded company, the Honest Company, which has soared to a reported $1.7 billion in private valuation in less than four years. The stated core mission of this consumer goods company is to offer cleaning products that do not knowingly contain harsh chemicals found in mainstream marketed and sold products. One of the harmful compounds of question is that of sodium lauryl sulfate, referred to as SLS. The Honest Company’s claims to consumer are that its products are free of SLS.  However, in its report, the WSJ indicated that it commissioned two independent testing labs to analyze Honest’s liquid laundry detergent only to determine that it contained significant amounts of the chemical.

Today’s WSJ report (Paid subscription required) reflects on one of largest producers of natural shampoos and skin cleaners in the United States, that being Hain Celestial Group. That company is reportedly in the process of reformulating dozens of products and dropping claims that do not contain SLS. Like Honest Company, Hain had long declared that its products contained no harsh chemicals.  Instead, some products reportedly use the ingredient sodium coco sulfate (SCS), which actually contains SLS.

What adds more interest to this development is the WSJ indicating that it actually commissioned independent laboratory testing last fall on several branded consumer products containing the SCS compound. A product general manager for Hain Celestial indicated to the WSJ that it had begun to review product formulation last spring and decided in November, after being contacted by the WSJ of its findings, to remove the “no SLS” claims on products that contain SCS.

In its latest reporting, the Journal points out that there are no current regulatory guidelines for what makes household and personal-care products “natural.” Instead, producers have termed their products as natural if they are derived from natural ingredients, even they have been chemically processed. The notation that other consumer brands were tested is perhaps an indication that more revelations or revised product claim declarations may be forthcoming.

Our readers might recall that product ingredients and product specifications are increasingly under the public looking glass. Recall the Lumber Liquidators expose in 2015 forcing that company to suspend all of its China sourced laminate flooring products after 60 Minutes, an investigative news television program turned a public light on suspected high levels of formaldehyde from certain China based flooring offered by this retailer.  While not of the same severity of concern related to natural products claims, it does reflect the relationships among product management teams and suppliers. Lumber Liquidators is still dealing with both the consumer perceptual and financial implications of that prior incident.

The takeaway from these ongoing developments is that today’s traditional and social media outlets are holding consumer goods producers to a high standard of transparency as to product formulation and declaration claims. These ongoing revelations run the risk of triggering added calls for more regulatory oversight of producers as well as suppliers, one that obviously the industry wants to avoid.

Thus the importance of a rather close relationship among product design, management, marketing and supplier sourcing teams to insure that there is total transparency of product formulation and composition declarations.

 


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