Supply Chain Matters has been focusing on some key themes in this blog, one of which has been the existence of quality and compliance risks in certain industry value-chains.  Since our launching, it did not take long to latch on to the severe problem of the contaminated supplies of the drug Heparin which first appeared in mid-February. We have since published three different posts on that problem, each unfortunately describing more loss of life. [See post 1, post 2, post 3.]

My spouse, a school system executive, called my attention to yet another problem, namely sub-standard steel being utilized in the construction of a gymnasium in San Pedro, California, and who knows where else.  This topic was featured in a recent Lou Dobbs CNN series, and you can view the actual broadcast here.   While I believe that Dobbs tends to go a bit overboard on his rants, the story does bring to light the same parallels that I cited in the Heparin calamity.  Everyone in the supply chain “assumes” that the product meets specification, and when the media latches on to the story, the headlines turn to lack of oversight, inspection, and the negatives of low-cost sourcing. 

In constructing new buildings and/or bridges, government agencies that are mandated to seek lowest bids select building contract projects that invariably source steel from China. Why? Because for steel, “lowest cost” leads to China.

Let’s review some facts around steel supply.  Over three years ago, China’s steel industry was already in an over capacity situation.  In 2005, China was a net importer of 13 million tonnes of steel, but that quickly shifted to being a net exporter by the end of 2006.  In spite of the huge boom of building projects across China, more and more capacity was being added, that more than exceeded domestic demand.   Estimates in 2006 were that there were 300 million tonnes of domestic demand vs. over 420 million tonnes of capacity production. This led to exporting steel to other countries, particularly the U.S..  During this time I know of a rather large school building project was delayed because of the availability of steel supplies coming from China.  When the general contractor was asked whether there were U.S. sourced options for the steel, the answer was no, not at the contracted budget. During that delay, the price jumped 15-20% before the steel actually arrived to the site.  Who knows if anyone actually inspected the steel, since that obviously was not part of the contractor’s stated responsibilities.

So what we have unfolding is yet another example of a supply risk, that can lead to more concerning issues of compliance, product liability and safety.  While the U.S. addresses it’s needs for replacing declining infrastructure in deteriorating bridges, school and government buildings, we now have concerns on the actual worthiness of the structural steel being used to construct these facilities.  In San Pedro California, school district officials indicated that all defective steel was removed from their building. I just wonder how often (and unnoticed) this steel supply problem has been or will be repeated in other cities and towns.

Bob Ferrari