Growing concerns over environmental and safety issues have created a complicated tangle of trade and security programs that now impact importers, exporters and essentially, all stages of product manufacture and distribution. Compliance with new regulations such as the EU REACH and U.S. Importer’s Security Filing 10+2 programs can be both complex and costly, and findings from the survey suggest that companies typically deal with product-related regulations such as registration, labeling and marked, themselves, while outsourcing compliance for product  movement.

Here are a few more survey results I found particularly intriguing:

• 60 percent of the respondents trading in Asia-Pacific cited a growing need for compliance services over the next 12 to 18 months, compared with 53 percent in North America and 50 percent in Europe. 80 percent of respondents said they staff and administer the compliance function internally for North America.

• With regard to use of external compliance services, respondents split fairly evenly between those who retain the function fully in-house (43 percent) and those who outsource at least a portion of it (45 percent). Only 12 percent indicated they outsource the entire function.

• More than half (51 percent) of respondents from companies with annual revenues up to $1 billion indicated they outsource at least a portion of the compliance function, with a third (32 percent) retaining the function in-house, and just 17 percent outsourcing it entirely. By contrast, 38 percent of respondents from billion- dollar-plus companies reported outsourcing part of the compliance function; 58 percent retain it fully in-house; and just 4 percent outsource it entirely.

• 45 percent of the survey participants with in-house compliance departments reported staff additions over the past two years. Only 5 percent reported reductions. Over half said they employ two to eight full-time staff in the compliance function.

• Nearly all of the respondents saw a continued increase in the need for compliance services, particularly in the Asia-Pacific region (60 percent). Nearly a third (30 percent) indicated an increased need for these services in the Middle East and South America as well. Just 7 percent of respondents saw the need for more compliance services for European imports, compared with 27 percent for North America.

• Interestingly, over half of the respondents from billion-dollar-plus companies see a growing need for compliance services in North America, and 75 percent of those in metals and minerals see greater demand in Asia-Pacific.

There’s no doubt that in today’s multifaceted global marketplace, compliance is more critical –and more challenging –than ever before. As these survey results indicate, companies are recognizing that they need to proactively manage compliance in order to stay ahead of the regulatory curve. (See this earlier post for a related discussion regarding the the trend towards an integrated approach to governance, risk and compliance.)

This total is based on an FDA cost-estimate approach: health-related costs are the sum of medical costs (physician services, pharmaceuticals, and hospital costs) and losses to quality of life (lost life expectancy, pain and suffering, and functional disability). It includes the costs of medical bills, lost wages and lost productivity. (Note: These are health-related costs only. An aggregate economic impact total that included losses to food manufacturers and distributors involved in recalls would be significantly higher.)

The Produce Safety Project, an initiative of The Pew Charitable Trusts at Georgetown University, published the new report, Health-Related Costs from Foodborne Illness in the United States.  The report ranks states according to their total costs related to foodborne illness and cost per case for an individual, which is $1,850 on average nationwide. The ten states with the highest costs per case are: Hawaii, Florida, Connecticut, Pennsylvania, South Carolina, the District of Columbia, Mississippi, New York, Massachusetts and New Jersey. Information for every state in the nation is available here.

“The costs associated with foodborne illness are substantial,” says report author Robert L. Scharff, a former FDA economist who is now an assistant professor in the Department of Consumer Sciences at The Ohio State University. “This study puts the problem of foodborne illness in its proper perspective and should help facilitate reasonable action designed to mitigate this problem.”

The findings come after what seems like a long, continuous stream of outbreaks of foodborne illness involving everything from pot pies and peanut butter to cookie dough and pepper.  (And the problems aren’t ending any time soon. Currently, government officials are weighing what some are calling an “avalanche of food recalls” now that Salmonella has been found in the hydrolyzed vegetable protein (HP) produced by a Nevada company and shipped to scores of North American foodmakers over the past five months.)

The Centers for Disease Control and Prevention (CDC) now estimates that approximately 76 million new cases of food-related illness – resulting in 5,000 deaths and 325,000 hospitalizations – occur in the United States each year.

Clearly, gaps in the food-safety system are causing considerable health and economic impacts. Updated, comprehensive food-safety legislation is long overdue, and I’m eager to see lawmakers approve measures aimed at improving the safety of our food supply chain. Of course, the food industry is accountable, as well, and the line between profit and responsible corporate behavior must be reasonably drawn.

Do you feel your company’s supply risk management strategies are providing the value they should? Is managing supplier risk a strategic advantage for you, or is it more just a box to be checked for compliance requirements? And, in terms of supply risk management, where do you think your company stands compared to its peers?

Aravo and The Hackett Group have been working for awhile on a new survey designed to help you gain insights into questions like these,  and I’m happy to report that our co-sponsored Supply Risk Management Performance Study is now open for participation.

This study will run until April 2, 2010 and is available at no cost to participants.

We’re looking for supply risk stakeholders –in procurement, supply chain, risk management, EH&S, or general management –to take part. All study participants will receive a research report and an exclusive invitation to a webcast that will discuss key findings from the research. It’s a great way to learn:

• How to create a “Total Cost of Supply Risk model” that can be used to justify and evaluate supply risk efforts. After all, it’s critical to build a business case to support your supply risk management programs.

• How well peers are dealing with today’s dramatic business volatility via supply risk management.

• Best practices being leveraged by top performers in governance, alignment, process, metrics, and techniques/tools.

• How advanced firms overcome barriers and self-fund supply risk management programs.

• How you can benchmark your supply risk challenges, performance, capabilities, and 2010 plans against peers and top performers in supply risk management.

I sincerely hope that you’ll take a few minutes to participate in our new Supply Risk Management Performance Study. (More details are available here.) The results will help us all learn more about:  1) how companies today are benefiting from supply chain risk management, and 2) the challenges that remain as companies work to create more comprehensive approaches to efficiently mitigate supply chain threats.

Now, ABC News is reporting that U.S. regulators are reviewing more than 60 complaints that the fixes made on Toyota cars recalled for unintended acceleration have not solved the problem.

Toyota says a partial review of these complaints has found no evidence of failure in the electronic throttle system or in the repairs. The company also says it hasn’t found problems in the brake override system.

Still, there’s no doubt that news like this is making a very bad situation even worse.  As Toyota technology chief Takeshi Uchiyamada told ABC News, “The Toyota brand is in a deep crisis.”

How did we get to this point, where long-revered Toyota supply chain management strategies are now a cautionary tale? What lessons can be learned from this devastating series of global safety-related recalls?

The Economist offers a fantastic recap in its recent article, “The machine that ran too hot.”

According to the article, Toyota’s woes stem from an overstretched supply chain, which in turn was a consequence of the carmaker’s breakneck expansion that started in 2002. The company became increasingly dependent on suppliers outside Japan, seemingly downplaying the fundamentals of collaboration and perhaps discounting the difficulty of aligning manufacturers scattered across the world. Plus, Toyota not only continued to trust in its sole-sourcing approach, it pushed the concept even further, gaining unprecedented economies of scale by using single suppliers for entire ranges of its cars.

In short, Toyota took its single source strategy to risky extremes without proper risk management oversight, and we now know that the company needed much closer monitoring of the critical supply-base, particularly tier-two and tier three suppliers. (CTS Corporation, the throttle-pedal manufacturer identified as one of the causes of “unintended acceleration” in some Toyota vehicles, is a tier-two Toyota supplier.)

This entire debacle is sure to become a text book example of the types of problems that can be avoided through comprehensive risk management oversight.  Generally, companies pay the most attention to tier-one suppliers, but as the Toyota example illustrates, relationships with tier-two or tier-three suppliers can also be extremely critical.

(This initiative, officially known as the National Security Presidential Directive 54 and Homeland Security Presidential Directive 23, was originally established by the Bush administration back in January 2008.)

The five-page declassified document outlines twelve major proposals designed to help secure the United States in cyberspace, and it’s significant that among this list of a dozen priorities there’s recognition of the growing risks associated with today’s complex global supply chains, particularly those in the commercial information and communications technology marketplace.

From the summary description:

Initiative #11. Develop a multi-pronged approach for global supply chain risk management. Globalization of the commercial information and communications technology marketplace provides increased opportunities for those intent on harming the United States by penetrating the supply chain to gain unauthorized access to data, alter data, or interrupt communications. Risks stemming from both the domestic and globalized supply chain must be managed in a strategic and comprehensive way over the entire lifecycle of products, systems and services. Managing this risk will require a greater awareness of the threats, vulnerabilities, and consequences associated with acquisition decisions; the development and employment of tools and resources to technically and operationally mitigate risk across the lifecycle of products (from design through retirement); the development of new acquisition policies and practices that reflect the complex global marketplace; and partnership with industry to develop and adopt supply chain and risk management standards and best practices. This initiative will enhance Federal Government skills, policies, and processes to provide departments and agencies with a robust toolset to better manage and mitigate supply chain risk at levels commensurate with the criticality of, and risks to, their systems and networks.

Cybersecurity czar Schmidt said he hopes declassifying this information will answer some privacy concerns and lead to stronger partnerships with the private sector in fighting the growing threat of cyber attacks.  While most analysts feel the summary document falls short on details and therefore does not adequately address privacy concerns, I do think Schmidt is right about using this declassification as a means to build awareness and strengthen partnerships regarding the security of the systems and networks we all depend on these days.

After all, as Michael Jacobs, who served as information assurance director at the National Security Agency until his retirement in 2002, points out, many products entering the supply chain –even the ones used to protect computer networks and systems –now require increased scrutiny because their origins are masked or otherwise obfuscated by complicated life cycles and acquisitions.

Put another way, what Jacobs is saying is that it’s time to ask yourself this critical question: Do you know who wrote the code you’re using?  Now, more than ever before, companies need to adopt supply chain risk management policies to ensure that they better understand the origins of the products they’re relying on, the motivations of the products’ originators and the threats, vulnerabilities and consequences intrinsic to today’s global cyber-marketplace.

According to the report, the overall economy grew for the tenth consecutive month during February. Plus, economic activity in the manufacturing sector grew for the seventh consecutive month, and employment numbers showed growth for the third month in a row.

The 11 manufacturing industries reporting growth in February — listed in order — are:

• Machinery
• Paper Product
• Apparel, Leather & Allied Products
• Computer & Electronic Products
• Miscellaneous Manufacturing
• Transportation Equipment
• Textile Mills
• Plastics & Rubber Products
• Electrical Equipment, Appliances & Components
• Fabricated Metal Products
• Food, Beverage & Tobacco Products.

By contrast, the following five industries reported contraction in February:

• Wood Products
• Furniture & Related Products
• Primary Metals
• Printing & Related Support Activities
• Chemical Products.

“The manufacturing sector grew for the seventh consecutive month during February. While new orders and production were not as strong as they were in January, they still show significant month-over-month growth,” says Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee. “Additionally, the Employment Index is very encouraging, as it is up 2.8 percentage points for the month to 56.1 percent. This is the third consecutive month of growth in the Employment Index. With these levels of activity, manufacturers are seemingly willing to hire where they have orders to support higher employment.”

Interestingly, no commodities were reported in short supply, and copper was the only commodity reported down in price. What a difference a few days can make. Now Chile, the world’s largest producer of copper, is reeling from the earthquake over the weekend, and analysts remain uncertain about how production and price will be affected.

Many more details from the February 2010 Manufacturing ISM Report on Business are available here.

The survey, which polled more than 7,400 privately held businesses (PHBs) across 36 economies, also showed that:

• Businesses in some of the world’s more mature economies are suffering the greatest decreases in employee numbers, including Ireland (with a balance of -54 percent), Spain, Denmark (both with -38 percent) and the US (-33 percent). By contrast, emerging markets enjoyed some of the biggest increases in headcount during 2009, including Vietnam (+54 percent), India (+33 percent), Botswana (+31percent) and the Philippines (+29 percent).

• Fortunately, on the whole, 2010 looks brighter for employees. Businesses in 29 of the 36 economies surveyed expect to increase staff numbers this year, a global balance of +20 percent (compared to -4 percent in 2009). The most optimistic businesses were in Vietnam (+60 percent), Brazil (+59 percent), Botswana (+50 percent), Australia and India (both +47 percent). European businesses, however, were far more pessimistic than their counterparts elsewhere in the world. PHBs in Ireland, Italy (both -14 percent), France (-10 percent) and Spain (-8 percent) continue to expect to cut jobs.

• Even if companies begin to hire again, Grant Thornton’s data shows that they’re not expecting to significantly increase employee salaries. 36 percent of businesses plan to offer employees no pay rise or reduce pay, compared to 24 percent in 2009. More than half (51 percent) of employers indicated that they plan to increase pay by inflation or above during 2010 –but that’s down from last year when 64 percent made the same claim.

• Half of the PHBs surveyed indicated that they needed to introduce measures to avoid redundancies. These efforts included reducing working hours (11 percent) and redeployment of staff (10 percent), as well as pay cuts, career breaks, reduced benefits and laying off contract staff.

There’s no doubt that employment trends have an impact on supply chains. Production levels may be affected, and as I pointed out in yesterday’s post, the fundamental integrity of your supplier network may be threatened by a single employee –particularly one who’s strained economically, disgruntled, or worried about losing his/her job.

Employees quit. They strike. Sometimes they get sick and can’t work. And occasionally, an employee who’s an integral component of your supply chain will lie, cheat and steal in a manner that could threaten your company’s entire future.

Think I’m exaggerating? I’m not. For proof, take a look at “Bribes Let Tomato Vendor Sell Tainted Food,” an article published last week in The New York Times.

In the article, reporter William Nueman reveals that federal agents have uncovered a startling, widespread scheme of corruption in the food industry. SK foods, one of the nation’s largest tomato processors, is at the center of the plot because according to federal prosecutors, SK Foods’ owner and others there offered bribes to a handful of corporate buyers in exchange for lucrative contracts and confidential information on bids submitted by competitors.

In addition, SK Foods also allegedly shipped its customers millions of pounds of sub-par bulk tomato paste and puree, using falsified documentation to mask the problems. “Often that meant mold counts so high the sale should have been prohibited under federal law; at other times it involved breaching specifications in the sales contracts, such as acidity levels or the age of the product,” Nueman reports.

Purchasing managers from Kraft Foods, Frito-Lay, Safeway and B&G Foods have pleaded guilty to taking the bribes. But, many more companies (over 55, in all) received shipments of tainted product. Some detected problems; many others did not, allowing the contaminated tomato paste and puree to be used in products sold to consumers.

Nueman does a fine job of laying out the details of the case, and he also points out the many levels of concern raised by this far-reaching supply chain scheme. For instance, now federal agents have broadened their scope to look at allegations of collusion and price fixing involving SK Foods and other tomato processors. News of corruption like this also makes it crystal clear that food manufacturers need to be more aggressive about monitoring the quality and safety of their ingredients. And, it shows us all once again, that the integrity of our supplier networks are fundamentally and critically dependent on the integrity of our employees.

According to The Wall Street Journal’s blog “China Real Time Report:”

Various domestic media reports put the labor supply gap at around a million people in Guangzhou and neighboring cities such as Dongguan, legendary centers of China’s export boom in the past three decades. Numerous assembly lines and construction sites are sitting idle while anxious employers have raised salaries by more than 30% but still can’t attract enough applicants.

Shen Hong, the author of the post, suggests that at least part of the problem may stem from the fact that new-generation migrant workers aren’t interested in tough basic jobs like construction any more.  The Chinese government has reformed policies and modernized farming to such an extent that rural jobs now compete favorably with work in the city. In addition, second-tier inland cities are experiencing economic booms of their own, and workers may prefer these alternative locations simply because they’re closer to home. Lastly, China’s improved standard of living, in general, means that young workers are less apt to accept the hardships of working in the city, Hong says.

PC Mag is also reporting that this “mysterious” labor shortage may affect the prices of LCDs and products that depend on them. The article points out that Asustek Computer has already rearranged it outsourcing, and that optical disk drive maker Lite-On is reporting  that its factory in southern China is running short of about 800-1,000 workers, about 10% of its regular personnel.

Will this labor shortage affect your inventory control?

The research, conducted by Deloitte’s Global Benchmarking Center, was designed to quantify store operations and general and administrative (SGA) cost-improvement opportunities in retail. The study included more than 60 high-profile retail organizations and analyzed retail-specific functions such as store operations, merchandising, supply chain and marketing across 120 different performance metrics.

I found it intriguing that, in addition to their strategic supply chain management, Deloitte also found that low-cost performers differentiate themselves from median performers with:

• In-house IT investments. The study found that outsourcing is not necessarily generating lower costs, as the low-cost performers achieved a 36 percent lower IT cost through lower labor and technology spend compared to the median.

• A diverse advertising mix. The low-cost performers spend more on visual merchandising and online advertising than traditional print and TV/radio, which account for only 25 percent of their spend, compared to 93 percent in the median group. The low-cost performers consistently place a higher percentage of their advertising spend on efforts that directly target the customer, such as loyalty programs, in-store displays and online activity.

• Process innovation. The low-cost performers have 27 percent lower finance costs than the median. These retailers effectively leveraged finance process innovations that lead to cost savings, and use efficient technology and shared services to drastically reduce transaction costs and labor requirements.

• Smaller assortment and targeted merchandising spend. Fewer stock keeping units (SKUs) typically translate into less inventory complexity and less demand on labor, and the study found that the low-cost performers manage 35 percent fewer SKUs compared to the median. In addition, they spend 84 percent more on store operations technology, contributing to lower process costs.

• Greater staff investment in customer-facing areas. While retaining their low-cost performer status, participants in this group spend six percent more on store operations per billion in sales than the median. The low-cost performers focused their spending on customer-facing areas and achieved cost reductions in non-customer-facing areas.

“Equipped with benchmarking data and analysis, retailers may be able to identify potential opportunities to reallocate costs, such as moving spending from traditional back-office functions to new areas for investment such as marketing, IT and supply chain,” says John Rooney, principal and retail sector leader for Deloitte Consulting LLP. “When mapping out a specific plan for cost improvements, retailers should consider focusing on actions that balance immediate, strategic and long term initiatives, which may enable organizations to stay on a forward track even during more challenging business cycles.”