The House Energy and Commerce sub-committee on Oversight and Investigations had some of the nation’s top food company CEOs on the witness stand this week. Congress’ look at the record breaking recall of 143,000,000 lbs of beef, piled on top of the tainted vegetable stories of the last year, serves to highlight another example of supply chain risks gone bad.

The attention this issue got when it was microscopic bacteria on vegetables was nothing compared to the graphic footage of abuse at a California cattle ranch, which experts believe actually posed little threat to consumers (including school children), who ate the beef. The public and the Federal government are giving food safety their attention now…leaving the industry with two choices:

1. Leave no stone unturned and protect your brand - “trust but verify” the pieces of the supply chain with more stringent selection of suppliers, increased product testing, real supply scorecards for vendors and regular site visits.
2. Do nothing and let government regulators tighten safeguards while the press probes you with expose reports for a (literally) hungry, yet scared audience.

I don’t know what’s going through the minds of the CEOs on the witness list or at the hundreds of other companies in their supply chains. But, if it were me and I was paraded before Congress in an election year and scolded by Rep. DeGette that voluntary recalls by the food industry is like letting the “fox guard the hen house”, I’d be implementing some tighter controls quickly and publicly. Minimizing risks in your supply chain is critical. And it’s always better to do it yourself than leave it to regulators and politicians.

Kris Colby, a Director of Ariba’s Spend Management Services group, recently authored a white paper on the subject – An Ounce of Prevention: Steps Your Organization Can Take Now to Reduce the Risk of a Product Safety Incident.

Mehdi Hassan, blogging for South Asia Biz, recently highlighted a Forrester report on the growing dissatisfaction with IT outsourcing in India. As Hassan points out, firms are struggling with the falling dollar, unrealistic expectations, scalability, possible tax code changes and believe it or not, scarcity of top IT talent.

I couldn’t agree more with the assertion that the correct response to this situation is to reset internal expectations. I would also add that companies should take proactive measures on what they are able to affect. While companies are not able to control or change factors such as the falling dollar and rising costs in the target country, they can do quite a bit to attract and retain top talent - one of the biggest drivers of success in an offshore initiative.

It’s interesting how many organizations overlook the significant impact the human element has on their offshore operations. If we look specifically at the establishment of an International Purchasing Office (IPO), for example, we find that many companies invest their time and efforts into building out a vision, creating a budget, and locating office space. The assumption is that they can then hire experienced professionals and the low cost story proceeds happily forward to its fairy tale ending.

The reality is that there is a lot of competition for talent in not only India, but in all of the traditional low-cost countries of the world. Therefore it’s critical that organizations develop a comprehensive plan that incorporates:

1. A well thought out recruiting framework that includes a planning phase to assess such things as the current job market, acceptable salary levels and cultural nuances (performance bonuses, benefit packages, perception of titles, etc.).
2. A strong organizational design component that provides a clear growth path for individuals and has a well established governance model. This gives new employees a sense of belonging, purpose and pride. It should also clearly outline roles, responsibilities, performance expectations and metrics - and how it all ties back to the overall mission.
3. A thorough plan on how to build out capabilities - in other words, a solid ramp-up and training plan. Most new offshore offices are comprised of >80% new hires. Additionally, a strong training plan enables an organization to hire less experienced, but talented individuals - which is a degree of flexibility that is much needed in many of the tight job markets.
4. The right tools and support network.

The real key is to ensure that you are building out a complete organization, whether it is a call center, purchasing office or something else entirely. This is something organizations can control. At the end of the day, people are people all over the world. So if you build a great organization, you’ll be able to find and, more importantly, keep great talent.

Carol Pilarski is a Consulting Manager in Ariba’s Spend Management Services group. Her current focus is on supporting customers’ LCCS (Low Cost Country Sourcing) initiatives. Carol’s unique background includes eight years with Ariba, a period in Sony Electronics’ Rotational Program, the rank of Captain in the US Army and a degree from West Point.

The dip in soybean production caused by farmers gravitating to ethanol production got you down? Well, the 2/25 issue of Business Week (sorry it’s print only, but a PDF version of the article is here) highlights another potential shortage you might see in 2008: Television ad time.

The shortage is caused by the need for Presidential candidates to broadcast their message to us in those tasty bite-sized nuggets, the 30 second commercial:

Politicians are expected to spend $3 billion on TV ads this year, according to TNS Media Intelligence and the Campaign Media Analysis Group. The spending spree, up from $1.7 billion in 2004, will do more than raise the prices in the $26 billion TV spot ad market, where rates could double in contested battlegrounds such as Ohio and Florida.

Leave it to Spend Management leader Hewlett-Packard to offer strategies to manage this short term capacity constraint and prove that good sourcing is not just for procurement any more. Scott Berg, HP’s global marketing chief plans to use good sourcing practices in a non-traditional market:

1. Increasing the use of substitutes: HP will shift their focus to spend more on internet and radio ads.
2. Identify spot pockets of unused capacity: Berg’s team will identify local TV markets where candidates have dropped out of races, leaving inexpensive ad spots available for opportunistic buyers.

Obviously TV ad time isn’t a “commodity” many of you are regularly purchasing, but HP’s silver lining approach to market conditions shows that Spend Management isn’t just a procurement department goal. And you’ve got to admire their flexibility and creativity in adapting to external events. Certainly not bad goals no matter what you’re purchasing.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the White House Office of Management and Budget (OMB) where he analyzed the fiscal implications of Federal policies.

Henry Ford must be smiling. After decades of outsourcing manufacturing, engineering, and other responsibilities to suppliers stateside and in low-cost regions, The Big Three automakers are beginning to bring sub-assembly back in-house.

Beginning this spring, Ford Motor Company — the birthplace of Henry Ford’s vertical integration manufacturing model — will be the first to take back assembly work, starting with the instrument panels for its Ford Taurus and Lincoln MKS sedans. General Motors and Chrysler also plan to in-source select sub-assembly work, although neither automaker has revealed definitive plans yet.
Detroit’s motivation for rethinking their long-held outsourcing strategy is twofold:

1. Make good on promises in a new United Autoworkers (UAW) labor contract
2. Counter supply risks associated with an increasingly financially troubled auto-parts industry.

Specifically, the latest hard-fought labor contract includes a two-tier wage structure that pegs wages for new-hires at $14-per-hour, about half the going standard and on par with those of outside auto-parts suppliers. The deal also includes lower benefit costs. In return for these concessions, The Big Three have agreed to in-source thousands of jobs for sub-assembly work that is currently performed by third-party suppliers.

Ford Group Vice President for Global Manufacturing told USA Today earlier this week that Ford was looking at every part and product “to see what may be candidates” for in-sourcing. He added that the decisions for bringing assembly work in-house will go beyond labor costs, and include assessments of capital investment, production availability, material prices, and logistics.

Meanwhile, Chrysler, which suffered a production shutdown recently when a plastics injection molder for its vehicle interiors — Plastech Engineered Products — filed for bankruptcy, provides tough evidence how the move to in-source could help offset undue supply risks. Having bailed out the supplier twice in the past year, Chrysler is now seeking to pull its tooling and manufacturing equipment out of Plastech’s facilities.

Truth be told, in-sourcing flies in the face of conventional supply management approaches in the manufacturing sector, which has in recent years rushed to lower costs and curtail inventory and capacity risks by outsourcing a greater portion of production to suppliers. So, one has to speculate whether automakers would have embraced in-sourcing were it not for concessions in the UAW labor agreement.

While Detroit tries to put a good spin on their in-sourcing experiment, the reality is that the move will likely exacerbate already tenuous relations between The Big Three and the supplier community. And, auto-parts suppliers that lose more business or experience increased pricing pressure by competing with in-house assembly workers, could be at even greater risk of financial decline. Expect things to get a lot worse in the automotive supply chain before (or if) they get better.

Over the past year, Supply Excellence has been tracking a growing trend for companies to rethink their sourcing strategies. For example, General Motors has made re-sourcing a cornerstone of its (ongoing) turnaround plan. And just last week a major food and beverage company told me it was rethinking supply lines for core ingredients.

Mattel’s Chairman and CEO Bob Eckert recently told the Financial Times that his company is having second thoughts about its China sourcing strategy.

While most of the interview focused on how the toymaker allayed consumer concerns after recalling 20 million hazardous toys last year, the question that caught my attention had to do with China. Eckert said his firm was contemplating shifting supply out of China.

However, the move has little to do with product quality issues from the region. In fact, Eckert wisely said quality issues were the responsibility of Mattel’s own procurement and manufacturing groups: “Countries don’t make products; people do…We’ve had manufacturing problems in other markets [besides China]. So the important thing is for companies to take responsibility for their manufacturing process.”

Instead, Eckert said Mattel’s decision to shift supply from China had more to do with rising supply and manufacturing costs in the region. (Although as noted here, last year, in an attempt to appear safer than Mattel, other toymakers stampeded to bring their manufacturing back on shore.) “The toy industry has moved several times over the past decades. At one point we manufactured heavily in the United States. The toy industry’s been in Taiwan, in Hong Kong. Now it’s in the southern provinces in China. I see the economic forces moving the industry either further inland in China or perhaps to Vietnam.”

Indeed, labor and manufacturing costs in “low-cost” regions like China and India have been rising steadily due to increased demand and rising wages. Such factors are making near-shore locations – such as Mexico for the U.S. and Eastern Europe for Western Europe – more attractive for sourcing. In fact, many Asian and European companies are now viewing the U.S. as an affordable sourcing market.

Sure, China still offers a cost advantage over these more developed regions, but the delta is shrinking. And, when weighed against transportation costs, cycle time benefits, and access to major consumer markets, these near-shore locales are becoming more appealing sources.

The message to supply managers: there is no optimal supply region. Changes in market dynamics and your company’s business strategy, will force you to constantly reevaluate and balance your supply portfolio based on costs, performance, and risks.

Toys “R” Us and Wal-Mart announced last week that they’ll be tightening their safety requirements for toy suppliers. Both retailers will institute mandatory third party testing to safeguard against lead paint and Babies “R” Us will cut their phthalate threshold by 85%. Great moves from PR and supply chain risk perspectives. But is it enough to truly protect the companies and their customers?

This is a great example that much work remains in the supply risk management field even after the volume of headline grabbing recalls in the press has declined. In order to create the safest and strongest supply chains, retailers and consumer goods companies are ratcheting up their efforts. They had to - consumers were demanding it (and regulators weren’t far behind).

As you know, we feel strongly that increased testing is only part of the solution. In addition, companies need to accelerate efforts to:

• Set the right expectations with current and potential vendors
• Hold them accountable when mistakes are made
• And most importantly, get better visibility into what’s going on inside of their supply chains

These critical steps are certainly not new… or quick and easy. But with the speed that information travels in today’s consumer climate and ever-longer supply chains, managing risks is a business and brand protection imperative.

Kris Colby, a Director of Ariba’s Spend Management Services group, recently authored a white paper on the subject – An Ounce of Prevention: Steps Your Organization Can Take Now to Reduce the Risk of a Product Safety Incident.

Many of you loyal SupplyExcellence readers know that I joined Ariba when they purchased my former employer, Procuri, in December. One benefit of the move is that I now have regular exposure to Ariba’s category and commodity experts who track rapidly changing supply market dynamics.

As a former analyst and self-proclaimed news junkie, I can’t get enough of the insights and research that come out of this group. I’m pleased to announce that I’ve convinced some of these experts to share their voices and analysis on this blog. And I am honored to share the SupplyExcellence microphone with this esteemed group.

In the coming weeks, I will be introducing my co-hosts as they pen their inaugural posts on the latest commodity trends and category strategies. I expect that their regular contributions will give SupplyExcellence a new dimension and provide a valuable resource for supply market information. I also hope that their experienced — “been-there-done-that” — opinions will make this blog the SquawkBox for supply and spend management professionals.

Through these pages, you’ll have increased visibility into how they read, interpret and analyze the news, trends, data and events that impact their particular categories. Their voices will be a great addition to the community we’ve built. So, I hope you’ll enjoy reading and debating their insights as much as I will.

I was fortunate enough to spend last week crisscrossing Europe, meeting with procurement executives about their supply management challenges and initiatives for the coming year. It quickly became clear from my discussions that, while Supply Excellence has focused (possibly myopically) on the impact of the declining U.S. dollar and economy have had on American companies, European firms have not been insulated from these effects. Far from it.

In fact, during my visit, news broke that gross domestic product (GDP) in the European Union slowed dramatically to less than half a percent last quarter. (Bleak growth indeed. Yet, still a notch above the anemic 0.2% GDP growth in the U.S. during the same period.) Pundits said growth in the EU was hit by a comparatively strong euro, higher interest rates, and aftershocks from declines in the financial sector.

Yet, European procurement execs were most troubled by continued upticks in supply prices. Inflation in the region hit a 14-year high, reaching 3.2%.

In fact, rising commodity prices and tightening supply markets were top of mind for several of the CPOs and supply execs I met. (Other issues focused on program adoption, skills augmentation, and spend visibility – all issues I will grapple with in later posts.) And for good reason.

According to a Daily Mail article last week, prices U.K. manufacturers paid for raw materials were at record highs, with overall commodities index prices up more than 19%. Key culprits include a 70.3% hike in crude oil prices and a record 36% increase in food prices.

The pinch of inflation stretched across the continent too. One Nordic-based food and beverage company exec I spoke with stated plainly that “rising grain costs are killing us.” He said his team is actively rethinking its sourcing strategy for these commodities, augmenting local supply with new – albeit possibly more unreliable and cycle time challenged – supplies from Asia. “We’ve got to constantly reevaluate our sourcing approach” to counter rising costs.

Another sourcing manager from a European transportation firm indicated that the climb in fuel prices has magnified pressures for his team to reduce costs in other areas.

Overall, European procurement execs view the economic crunch as a mixed blessing. On the one hand, it elevates the visibility and strategic clout of their groups within the enterprise. Yet, this greater attention begets greater expectations for quick and sustained returns. These dynamics reaffirm the old saw: supply managers hoping for greater visibility and support within their organizations should be careful what you wish for.

In his ongoing quest to unite the blogging community, Sourcing Innovation blogmaster Michael Lamourex recently called for supply and spend management blogs to pen a post on socially and environmentally responsible business practices. My response: it’s nice of you to finally hop aboard the sustainability bandwagon.

Michael, SpendMatters Jason Busch, and others chastised me this time last year when I proclaimed 2007 as The Year of Sustainable Supply Practices. They ridiculed my comments that sustainable sourcing and supplier management approaches that were good for the environment were even better for the business. Now, with the economy hinging on stagflation, commodity prices soaring, and the ice caps melting, I’m finally glad to see that these naysayers have finally come round to the reality that environmentally and socially responsible business and supply practices translate into cost savings, competitive advantage, and, ultimately, profits.

Best of all, sustainability doesn’t need to be complicated. Simple steps in the following areas to deliver quick returns to your organization:

• Recycling and Reuse Programs: Wal-Mart and others have saved vast amounts of money merely by shrinking and reducing packaging and reusing crates and pallets. This not only reduces waste but it also cuts shipping bills dramatically. Others like, Hewlett-Packard have used recycling programs to successfully offset rising material costs. And Kellogg’s recycles 80% of its waste, including converting food waste into animal feed.
• Energy conservation: Adobe Systems is saving millions of dollars each year by retrofitting its existing buildings with energy efficient incandescent lights and power-control systems. Sun Microsystems has taken aim at power-sucking IT equipment. “IT on average spends 25% of their budget on power,” said Ken Leinweber, Strategic Sourcing Manager, Procurement and Operations Strategy at Sun. “Innovating products and solutions that use less power is critical to the environment [and our operating budget].”
• Responsible operations and employees: Tech giants like Microsoft, Google, and Salesforce.com incentivize employees to engage in environmentally and socially responsible practices. For example, Microsoft has launched incentive programs to encourage employees to buy energy efficient vehicles, created ‘green buildings’ and is using solar power systems to power offices. By the company’s estimates, 11,000 of its workers commute to its Redmond, Washington headquarters via some ‘green’ method, such as mass transit, bike, or car pool. Like Microsoft, Salesforce.com encourages employees to support local charities and social causes by giving each employee paid time off for volunteer work.

Many companies are now using internal conservation efforts as an example to encourage suppliers to embrace sustainability. Wal-Mart Airbus, HP, and others have begun measuring the socially and environmentally responsible practices
The message to supply managers was best summed up in a BusinessWeek issue last year: Imagine a world in which eco-friendly and socially responsible practices actually help a company’s bottom line. It’s closer than you think.

Tim Cummins is at it again. With the help of 800 organizations spanning the globe and thousands of negotiators, IACCM has published its Top Ten Most Negotiated Terms in 2007.

Although the survey has more than enough respondents to make it valid, Cummins points out that the results will typically be skewed towards companies and negotiators with global perspectives and influences, because that, in general, is the IACCM audience and member list.

And the results, please..(drum roll)

1. Confidential Information / Data Protection
2. Indemnification
3. Price / Charge / Price Changes
4. Intellectual Property
5. Termination (cause / convenience)
6. Warranty
7. Service Levels
8. Payment
9. Delivery / Acceptance
10. Confidential Information / Data Protection

For those avid Supply Excellence readers, do you think this looks like a duplication of last year’s results?

If so, you’re not alone.

Cummins points out that it seems long overdue for negotiations to increase their focus on the mechanisms that will drive successful outcomes as the chart tends to look the same year after year.

So is this good news (indicating dependability and good risk management), or bad news (indicating a community that is failing to keep pace with the times and which is thereby either out of touch, or perhaps failing to address the risks of today’s market conditions)? What do you think?