When it comes to certain cases related to food safety, the wheels of justice turn mighty slow. But recently, the judicial system has sent a powerful and far-reaching message to the food and other consumer products focused industry and to their respective supply chain partners.
In early 2009, there was an incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by Peanut Corporation of America (PCA). That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.
Four former executives of PCA and a related company faced criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria. The 76 count indictment included charges of conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials alleged that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA).
This week, a U.S. District Court judge sentenced two former plant managers at the PCA Georgia peanut processing plant identified in the 2009 incident to six year and three year prison sentences. Both would have probably faced higher sentences if they had faced trial and not pleaded guilty. Both made deals with prosecutors to testify against Stewart Parnell, the owner of PCA. The Georgia plant’s quality control manager received a five year prison sentence.
Last week, Parnell was sentenced to 28 years in prison after being found guilty on 67 criminal counts. Some noted that the Parnell sentence was too harsh, especially in the light of convictions in similar salmonella related cases.
According to a published AP report syndicated on Manufacturing.net:
“Investigators discovered the Georgia plant had a leaky roof, roaches and evidence of rodents, all ingredients for brewing salmonella. They also uncovered emails and records showing food confirmed by lab tests to contain salmonella was shipped to customers anyway. Other batches were never tested at all, but got shipped with fake lab records stating that salmonella screenings turned out negative.”
Once more, tainted peanut products were shipped up the supply chain to other producers who used them to make snack crackers and other products.
Parnell’s attorneys blamed the scheming on the two former plant mangers. They argued Parnell, who ran the business from his home, was a poor manager who failed to keep up with his employees’ actions.
It may indeed seem that the wheels of justice do turn slow, six years in this case. But a strong and powerful message has been administered, one that will reverberate across food and consumer goods supply chains. Food safety is paramount and knowingly and willingly supporting or advocating the shipment of tainted food or improper quality monitoring processes will have a consequence, one that has taken on even more meaning.
I recently came across a report from business network CNBC that had the eye-gripping title; Why US Manufacturers are Nixing the US for China. The premise of this report was that the combination of applied robotics and the devalued yuan are now lowering manufacturing costs for the global manufacturing hub. This was not the only report we have seen that suddenly trumps the new attractiveness for sourcing in China. However, industry sourcing teams need to be cautious and thorough in their positioning and weighting of manufacturing sourcing decisions.
The argument seems compelling. Chinese factories are cutting prices because their costs are going down as a result of devaluation of China’s currency, not to mention that the current downswing impacting China’s economy has motivated many manufacturers to become more aggressive in preserving existing business or seeking additional customers.
The other compelling force noted was the offset of raising direct labor costs by the shift to more automated manufacturing enabled by robotics. However, a recent posting by China Tech provides a different picture or reality, with the headline: The manufacturing boom in Guangdong is over’: Industrial robot makers the latest to get swallowed up by China’s economic slowdown. A senior salesperson of a leading Chinese robotics firm predicts that only 5 percent of current robotics producers will survive in the next two years because manufacturers do not have the available capital to invest in automation. Apparently many Chinese robotic manufacturers set overly aggressive sales targets and did not factor an economic downturn. Declaring that the export-led boom in coastal region Guangdong is over, exports continue to decline every month.
The specific geography of Guangdong is a key since this was the former lower cost direct labor manufacturing region for apparel, footwear, toys and electronics that can benefit from the application of robotics and automation. Instead, manufacturing has shifted to more interior regions of China, seeking lower direct labor costs.
A separate recent article states that the world’s largest contract manufacturer Foxconn, has throttled back its robotics targets to target 30 percent automation in its factories by 2020. Previous reports had cited a 70 percent target. This report indicates that Foxconn’s Chinese factories, including those in Shenzhen, have 50,000 fully functional robots currently operating. Replicating human tasks in high volumes is not as easy as it seems.
While both outlined factors, the devaluation of Chinese currency and the promise of increased automation to offset increasing direct labor costs would appear to be a compelling argument to once again consider China for manufacturing sourcing, we advise caution for manufacturers and retailers.
The primary lesson learned from the initial wave of strategic sourcing decisions that favored China so many years ago was the one-dimensional view that weighted so many industry sourcing decisions. That sole weighting was the attractive cost of direct labor.
Industries have since learned that intellectual property protection, added logistics and transportation costs and the risks inherent within China and across global distribution networks are all added factors. The same holds true for current decisions, but the assumptions have somewhat changed.
More and more manufacturing has moved to the interior regions of China, requiring added logistics and transportation factors. The global transportation industry has its own set of problems. Ocean container carriers are in a race of survival of the fittest, those with the biggest ships, lowest costs and highest revenue potential. Air freight capacity has been dramatically reduced, and existing air service comes with a premium. Last year’s massive disruption involving U.S. West Coast ports provided a lesson in overburdened port infrastructure and increased transportation risks. Supply chain teams must now balance their transportation risks among both U.S. East and West Coast port entries. For Europe based firms, a massive overcapacity of ocean container vessels on the China to Europe segment has yet to shake out as to which multi-carrier network will garner the most leverage in shipping rates.
China’s leaders are desperately trying to move the economy to one of consumption-based vs. the prior export led, and that will drive capital availability. A consumption-based economy places the priority on China’s own manufacturers and service providers to fuel job growth and compete for business within China. The government has identified strategic industries that will fuel China’s economic growth over the next five years and they will have access to advanced research and needed capital. If you happen to compete in these industries, your business risks are magnified, especially if you source within China. Consider the recent challenges of Western brands competing within China, as their supply chains came under attack for poor quality or sub-standard practices.
Technology is a new imperative, particularly in gaining end-to-end and multi-tiered supply chain visibility across global supply networks.
The takeaway of our commentary is to not be swayed by a singular trend or singular factors. Sourcing decisions continue to require a holistic analysis that not only includes the cost of manufacturing, but the various other factors related to landed costs, inventory investment, security of information and added supply chain risks.
A given in today’s increasingly competitive global economy is that change is a constant, and assumptions prevalent today will be different in the not too distant future.
Industry supply chain teams have hopefully learned that strategic sourcing decisions need to stand the test of landed costs, market access, supply chain resiliency and risk mitigation. While China will remain an important and meaningful source of manufacturing and value-chain capability, industry supply chain teams will require a balanced global approach in sourcing, one that spans cost, technology capabilities, IP protection and risk mitigation.
Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access. In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection. Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.
The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.
Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”
In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co. In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”
As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.
Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.
Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.
Reflecting on the Application of Social Enabled Supply Chain Processes- Bob Ferrari Guest Commentary
In March of 2011, I had the opportunity to join two fellow supply chain management bloggers in a thought-leadership webcast focusing on the potential of the social supply chain. Four years ago, the concept of the social supply chain was relatively new, not well understood, and lacking many specific examples to cite.
Indeed after much market education and early adopter successes, leveraging social supply chain applications to enhance business processes has far more meaning and applied uses. That is especially pertinent to today’s reality of increasingly complex and fast moving globally based supply chain networks.
On the 21st Century Supply Chain blog I provide a guest posting reflecting on what has occurred in this area and how the power and potential of many is being increasingly leveraged within supply chain business processes.
Have a read and share your perspectives and views regarding what has transpired regarding this area of technology.
Bob Ferrari, Founder and Executive Editor
Last week, while on our two-week summer break, we took the time to alert Supply Chain Matters readers to the reports of severe explosions that occurred last Wednesday at the major Chinese logistics center at Tianjin. The reports and video images alone implied to this author that this was a concerning event.
Since that time, the scope and implications of this tragedy continue to evolve.
Reports now indicate that this tragedy has taken 112 lives with upwards of 700 people injured as a result of the two massive explosions. According to media reports, 95 people, mostly firefighters, are still missing. Supply Chain Matters expresses our condolences and concerns for all of the victims of this tragedy.
The video and visual footage of the wide-scale destruction is sobering to view. The China Earthquake Networks Centre indicated the initial explosion had a power equivalent to three tonnes of TNT, while the second was the equivalent of 21 tonnes. The blast zone extended in excess of 2 kilometers.
Yesterday, authorities confirmed reports that hundreds of tons of the highly toxic chemical sodium cyanide were present in the warehouse involved in the initial explosion. A BBC report indicates that the warehouse stored other chemicals including calcium carbide, sodium cyanide, potassium nitrate, ammonium nitrate and sodium nitrate. The warehouse itself was operated by Ruihai International Logistics Co. and questions have been raised as to how much of the chemical was authorized for storage. Chinese media indicates that at least one member of staff from Tianjin Dongjiang Port Ruihai International Logistics, which owns the warehouse, has been arrested.
When burned, sodium cyanide releases hydrogen cyanide gas which is now the overriding concern for residents throughout the Tianjin area as the clean-up efforts continue. According to published reports from the BBC and The Wall Street Journal, criminal prosecutors are vowing to conduct an extensive probe amid a growing concern that regulators often turn a blind eye to enforcement of regulations.
Chinese Premier Li Keqiang has visited the scene and has met with the victims of this major disaster and has indicated that regulators will act in transparency regarding readings of current air, water and soil quality within the area. Nearly 3000 troops with chemical protection equipment are reportedly combing areas outside of the 2 kilometer blast zone for possible hazardous chemicals that were ejected by the explosions.
This disaster occurred in the logistics zone serving Beijing, and one of the busiest ports in China and perhaps the world. The port is a major trading center for commodities and metals and a gateway to the industrial northern regions of China. Reports indicate that shipping containers were tossed into the air like matchsticks and were crumpled by the blasts and a logistics park containing several thousand cars was incinerated by the fireball. Renault indicates that some 1,500 of its cars were lost, while Hyundai indicated that around 4,000 cars on the site may have been lost as well.
While the port remains partially open, operations are noted as restrictive due to continued investigations and checks within the area. Toyota announced that it was closing production lines at its factories near Tianjin until the end of Wednesday, while agricultural machinery maker John Deere suspended work indefinitely. Both saw some of their workers injured by the blasts.
For industry supply chain teams, the implications of the Tianjin disaster will likely continue in the coming weeks or months. As the building tide of widespread sentiment reflecting that regulators have turned a blind eye to industrial safety, there will likely be increased scrutiny of manufacturing and logistics operations, particularly those involving forms of hazardous or industrial materials. Already, China has ordered a nationwide check on dangerous chemicals and explosives.
Similar to the 2013 tragedy involving the Rana Plaza explosion in Bangladesh, the 2015 Tianjin explosion could well be a watershed event concerning industrial safety standards. Anticipate that individual firms and industry groups will be motivated to become more active and involved in assuring international standards of warehouse and factory safety, particularly in areas adjacent to high population areas.
The Tianjin disaster could well turn out to be one that either defines improved safety standards or one that places certain industry supply chains with heightened challenges to assure and attest to individual worker and industrial safety standards. Social responsibility practices will likely again be tested against product margin needs. The final outcome is one yet to be determined, but one that reflects the realities that China needs to maintain its export volumes and global competitiveness.
In June, The United States House of Representatives voted to repeal country-of-origin labeling (COOL) for beef, pork, and chicken and social media commentary regarding the move continues to dominate as an ongoing trending topic. The reasons are obvious- consumers demand and expect knowledge as to the specific sourcing origins of food products. Consumers are right to be concerned and watchful, and the impact of these actions continue to impact food, beverage and consumer product goods focused supply chains.
The original COOL legislation had good intent, requiring meat products sold in supermarkets and grocery stores to specifically indicate where the animal was born, raised and slaughtered. Reports indicate that the original law was prompted by the lobbying of U.S. ranchers who compete with the Canadian cattle industry, and later garnered the interest of consumer watchdog interests.
But this current ongoing process now involves the political and economic implications of other supply chains, in addition to food.
The broader issue involves the World Trade Organization (WTO) which after the initial U.S. legislation was passed, ruled that the labels regarding animal origin would have a discriminatory impact against the two U.S. border countries, Canada and Mexico, and thus a barrier to free trade. Both border countries indicate that the law requires that animals be segregated by country of origin, a costly process that has U.S. wholesale buyers avoiding the buying of export origin meat products.
Both countries are seeking permission to impose what is described as billions of dollars in added tariffs on U.S. goods in retaliation. And there lies the supply chain impact which threatens to change the existing economics and stakeholder interests of cross-border trade.
U.S. legislators are thus caught in what is described as a damned if you do, or damned if you do not conundrum regarding the existing COOL repeal legislation which has now moved to the U.S. Senate for consideration.
In order to seek additional insights regarding the implications of COOL, Supply Chain Matters had the opportunity to recently speak with Candace Sider, vice-president of regulatory affairs, Canada, at international trade compliance services provider Livingston International. Ms. Sider has a significant background in understanding Canada’s regulatory processes involving interaction with federal and provincial officials, regulatory agencies and policymakers.
She explained that Canada viewed the original U.S. COOL labeling requirements as having a $3 billion impact on that country’s cattle and hog industry. During the current arbitration period, decisions are expected to be made as to what commodities would remain on the original impacted list. If the surtax were to be implemented, importation from the U.S. of the subject products could ultimately passed on to consumers. The U.S. government has indicated to the WTO that it disputes Canada’s figures. However, Canada is preparing to lift tariffs on U.S. imports that include in excess of 100 different commodities including products such as range and refrigerator parts, wine, and yes, chocolates.
The WTO is not expected to rule on the U.S.’s latest appeal to the threatened tariff increases until early August, or possibly September. Meanwhile, the implication of the ongoing dispute actually impacts more than just meat-focused supply chains.
Livingston is currently advising its clients to prepare for a number of potential scenarios involving the ongoing trade dispute process invoked by COOL.
Where all of this eventually ends-up is subject to many viewpoints. After all, this is very much a process driven by economic, multi-industry and lobbyist forces.
However, one aspect is clear. The complexity of today’s globally based supply chains takes on many different dimensions and implications. While you might have perceived that legislation affecting packaging disclosure of meat products has little to do with service parts, chocolates and wine, it indeed does. The takeaway is to nurture contacts and resources that can alert your team to ever changing developments and multi-industry implications.