Quality and Risk in supply chain management

Poor quality products, an unsafe work environment, or failure to comply with regulations ranging from product safety to social responsibility, can cause business disruption, financial loss, costly lawsuits, and long-lasting damage to the brand and corporate image of organizations that are dependent upon supply chain vendor performance. In the extreme, a brand, or even a company's reputation, can be damaged irreparably.

The crisis-catalyst may originate during any step in the supply chain process, from design to raw materials, to production, or transportation. Most often the issue centers on substandard materials or how well components or finished goods were designed and produced. Recently, company reputations have been damaged by substandard social responsibility practices of suppliers, even when the product quality was acceptable.

The quality management policies and practices of suppliers must be aligned with the standards of the company branding or selling the product. These quality management practices should also be aligned with accepted international standards. This is because failures in the supply chain are passed down the line to the firms ultimately marketing the products. Such failures can result in consumer dissatisfaction, regulatory noncompliance and, in some cases, public criticism of the corporate management practices.

There have been numerous, highly publicized cases in recent years from tainted toothpaste to lead paint in toys, to flawed labor practices of manufacturers. Companies are increasingly setting standards of quality management systems and worker treatment for their suppliers to avoid these kinds of problems. Vendor quality management standards are increasingly becoming a contractual condition for maintaining a supplier relationship.

Meeting stricter client and international quality management standards requires some vendors to invest in improving practices, policies, and management systems. Many adopt international standards, especially those of the International Organization for Standardization (ISO), the American National Standards Institute (ANSI), and the American Society for Quality (ASQ) to demonstrate acceptable practices. Additional security standards also may have to be adhered to by transportation, shipping, and logistics firms in the supply chain. While improvements in performance require investment, there are compelling benefits for suppliers to move forward. Adherence to quality management standards differentiates suppliers from competitors who don’t comply and strengthens the relationship between a company and the vendor.

Companies should periodically validate vendor adherence to the required quality management standards by conducting supply chain vendor audits. Audit protocols serve an additional critical role, namely that of identifying and qualifying new vendors. The validation process involves on-site vendor audits that compare actual vs. required policy and practice standards. These analyses enable identification of critical performance gaps and opportunities for improvement. Constant improvement in quality management helps to reduce the risk of costly and embarrassing failures.

Audits help to build confidence that risk is being properly managed. Through these audits, companies can evaluate the quality of a product and compliance with applicable regulatory requirements. Additionally, one can assess adherence to process-management, social and environmental accountability, and workplace health and safety standards. However, this all comes at a cost. Supply chain audits can be time-consuming, require on-site inspection teams, and are most effectively done by designating a full-time, product-knowledgeable team to the effort. Further, vendors are often geographically remote and audit criteria can become culturally complex. These factors can seriously challenge even well-staffed quality management functions, and be virtually impossible to conduct effectively for organizations that are constrained by staff and budget limitations.