This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.
At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.
This news is significant for this industry in a couple of rather important dimensions. This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them. The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.
Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease. The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.
The takeaway for consumers is hopefully safer food products in the coming months. For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void. Food safety is every executive’s and every employee’s concern.
Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America, announced this week that it is suspending all of its China sourced laminate flooring products. The announcement comes after the 60 Minutes investigative news television program turned a public light on suspected high levels of formaldehyde from certain China based flooring offered by this retailer. In our prior Supply Chain Matters commentary related to this incident, we expressed little doubt that the situation would continue to reverberate among business headlines, and so it has.
In its latest announcement, the retailer indicates:
“Based on the review to date, it appears that the Company’s Chinese laminate flooring suppliers have sold product to the Company that the suppliers have certified and labeled as compliant with California formaldehyde standards. However, the Company is further reviewing the underlying certification and labeling processes and practices of its suppliers.”
The retailer further indicates that a Special Committee composed of independent directors, with the assistance of third party advisors, has been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body has now engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor.
Since the March disclosure by the 60 Minutes program, Lumber Liquidators began voluntarily offering free indoor air quality screening to certain of its flooring customers, predominately those who had purchased laminate flooring sourced from China. Home air test kits were selected as a quick means to measure the total level of formaldehyde in indoor air from all sources, not just from the flooring. This week’s release further indicates:
“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.”
Lumber Liquidator’s swift actions and response are laudable, but as a supply chain and procurement community we all know, consumers will undoubtedly have their own impressions regarding the safety of flooring sourced from China. Thus, the action to temporarily suspend all sourcing of China based supply, pending a total independent review, makes practical and timely business sense.
To reiterate, beyond the Wall Street, shareholder and legal messiness, this incident 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 are cited. As business media such as The Wall Street Journal is now reporting, there is no 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.
Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.
One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk. In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.
During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.
Now there is new news leaking from Apple’s supply chain universe. Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.
Since the Digitimes report, other Apple community blogs have amplified the report. The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.
Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.
Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains. In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.
© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.
Many of our Supply Chain Matters commentaries related to supply chain disruption and supply chain risk management relate to events that many would not believe would actually happen. This weekend featured the news that even iconic General Electric can be impacted by an unforeseen event, a devastating warehouse fire impacting a massive production facility.
Last Friday, a parts warehouse supporting GE’s home appliance factory complex in Louisville Kentucky was destroyed in a six-alarm fire. Nearly 200 firefighters battled the blaze and as of this writing, local news media reports indicate the hot spots remain. Luckily, there were no injuries since most employees had taken time-off for the Good Friday religious observance. According to media reports, the fire in Building Six raged for hours and required evacuation of the entire 900 acre Appliance Park factory complex. GE has since decided to suspend all production for at least a week while assessment of overall damage to operations and contingency plans are completed.
Appliance Park produces dishwashers, refrigerators, washing machines among other consumer appliances. Already, GE officials have indicated that an alternate space for the Building 6 warehousing operations has been identified and it does not anticipate any disruption for customers. A Wall Street Journal report quotes a labor union spokesperson as indicating that adequate inventory is available at an adjacent distribution center. These are obviously a timely business continuity response.
Ironically, GE had previously agreed to sell its home appliance business to Europe-based Electrolux for a reported $3.3 billion. The deal was expected to close later this year.
Generally, past events of this nature often provide a different picture once full assessments are completed. In the case of this warehouse destruction, assessment will focus on both product manufacturing and service parts supply chain needs. However, manufacturers such as GE have made investments in business continuity response and supply chain risk mitigation.
More news should be forthcoming in the coming weeks.
Global Supply Chain Risk Exposures Report- Continued Reinforcement for More Risk-Balanced Sourcing Decisions
Within its 5th annual Natural Hazards Risk Atlas, risk analytics and advisory firm Verisk Maplecroft calls attention to high profile risk cities that happen to be today’s growing manufacturing and logistics hubs. This atlas assesses the natural hazard exposure of over 1300 global cities, selected for their economic importance in the coming decade. The analysis is somewhat unique in that it not only identifies regions most prone to natural hazards, but further quantifies the socio-economic resilience within these locations. From our Supply Chain Matters lens, it provides a yet another stark indicator that supply chain disruption and risk criteria were most likely not weighted high in past outsourcing or global based manufacturing and strategic sourcing strategies.
According to Verisk Maplecroft: “natural hazards constitute one of the most severe disruptors of business and supply chain continuity, and also threaten economic output and growth in some of the world’s key cities, especially for those located in emerging markets.” Maplecroft indicates that its annual analysis considers the combined risk posed by tropical storms and cyclones, floods, earthquakes, tsunamis, severe storms, wildfires, storm surges, volcanoes and landslides. This report’s executive summary further notes: “Of the 100 cities with the greatest exposure to natural hazards, 21 are located in the Philippines, 16 in China, 11 in Japan and 8 in Bangladesh.”
If you have been following our Supply Chain Matters commentaries related to global supply chain disruptions and risk, these same regions comes up quite often. This blog alone has amassed over 350 commentaries directly related to either supply chain disruption or risk indicators. The Philippines has emerged a hub for semiconductor assembly, high tech production and customer services while Bangladesh continues as the hub for apparel and clothing manufacturing. China and Japan are both major hubs for multi-industry manufacturing and product development. Yet, natural hazards are a more frequent occurrence within specific emerging global supply chain hubs such as Bangladesh, Thailand, Japan, the Philippines and other regions. Such occurrences not only add to major disruption but added insurance and risk mitigation costs.
The continued reinforcement of such risk indices is another important reminder for strategic sourcing teams to actively foster balanced sourcing decision criteria, weighting landed costs with risk profiles. Where higher supply chain risk and disruption indicators are prevalent within certain regions, there obviously needs to be a corresponding alternative sourcing plan in-place.
Lumber Liquidators is reported to be one of the largest and fastest growing retailers of hardwood and laminate flooring in North America. This weekend, a broadcast report from CBS News’s 60 Minutes program turned a public light on this retailer’s supply chain and the consequences are becoming quite troublesome from a brand and financial perspective.
The 60 Minutes report concluded 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.”
All laminate flooring carried by Lumber Liquidators bears a label indicating that it is CARB Phase 2–compliant, referring to the California Air Resources Board, which sets standards for formaldehyde emissions in wood flooring.
The program reported these findings after conducting its own sanctioned tests of select flooring and after interviewing workers among various China based suppliers. An executive director of a nonprofit group was teamed-up with a prominent environmental attorney, to test the Chinese-made laminate flooring. Chinese suppliers were interviewed by a 60 Minutes reporting team posing as buyers and using hidden cameras. 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. The report then concluded:
“While laminate flooring from Home Depot and Lowes had acceptable levels of formaldehyde, as did Lumber Liquidators American-made laminates, every single sample of Chinese-made laminate flooring from Lumber Liquidators failed to meet California formaldehyde emissions standards. Many by a large margin.”
Lumber Liquidators’ founder and chairman, Tom Sullivan, indicated to 60 Minutes that the tests weren’t valid and said the company isn’t required by law to test finished products, as the program did. In a filing with the U.S. Securities and Exchange Commission on Monday, the company reiterated that the testing method on which the CBS program based its report was improper. It said it is fully compliant with California standards. “Our laminate floors are completely safe to use as intended” the filing said.
While this retailer vociferously insists that its flooring is safe and meets certain standards for environmental safety, the initial fallout among investors has been severe. Shares of the company’s stock closed down 25 percent today, and were halted through the morning ahead of a planned news release. A published report from MarketWatch indicates that this retailer blamed the attacks as the work of short sellers, “who are working together for the purpose of making money by lowering our stock price.” This report further indicates that short interest in Lumber Liquidators stock reached 30 percent ahead of the CBS program’s airing, according to FactSet data. The company is reportedlybeing sued by environmentalists, backed by a group of Wall Street short sellers, who accuse the company of violating California’s toxic-warning statue.
Beyond the Wall Street and legal messiness, this incident 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 are cited. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring. Supply chain focused snafus or product quality issues continue to cause reverberations for brand loyalty and investor confidence. The fact that news networks can place hidden cameras and conduct interviews of a company’s suppliers is further cause for concern.
No doubt, the situation at Lumber Liquidators will continue to reverberate among business headlines in the days to come.