Southwest Airlines has the reputation of being lean and mean, the mother of the point-to-point low cost business model that decimated legacy carriers (leaving those of us in Pittsburgh with a very large and expensive puddle jumper palace). Their clairvoyance in hedging the price of jet fuel has helped keep costs low and fuel their growth across the country. While the impact of the fuel hedge might be diminishing, Southwests’ strategy in dealing with another cost problem finds them in hot waters.

The FAA has announced that it will seek a $10.2 million fine against Southwest for keeping unsafe 737s in the air in 2006 and 2007. As product safety concerns have been receiving more attention, from foods to toys, this has created a great deal of discussion within the spend management community about purchasing’s role in managing supply risk and product safety.

While the hand wringing and thinking is interesting, one has to wonder if a function that had used its ability to drive financial value through reduced price and cost can at the same time, be the owners of this sort of risk. When savings drives incentive compensation and is the currency of the realm of influence, and disruption of operation is a death sentence, is it surprising that some companies have looked the other way when there is lead in the paint… or in this case cracks in the fuselage?

It’s not hopeless and Spend Management organizations will play a role. They are in the best position to observe supplier behavior and provide the information that organizations need to identify high-risk behaviors, and drive risk analysis into the decision making process. But managing risk is like protecting people against terrorism - it is hard to get credit for things that don’t happen. With growing demand, competition for raw materials and a generally rising cost environment, the pressure on cost is not going away. So Spend Management organizations could find themselves as the keepers of corporate integrity.

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.