Wednesday, May 30, 2007

Managing Reputational Risks across the Global Supply Chain (By Jarvis)

In the wake of well-publicized poisonings from pet food, toothpaste and drugs, China is now widely believed to have a food safety problem.

And the “Brand China” trust problem threatens their place in the global supply chain. Do you find yourself checking the country-of-origin labels in the fruit and vegetable section at Costco? In the same vein, one wonders how long it will take for pet food brands to begin touting “all-American made” ingredients.

What’s happening in China highlights a key principal applied by the Trustmeisters here in the Reputation Garage: Trust problems are at their heart organizational performance issues. To mitigate the risk of a serious trust event, you must put reputation into a performance management framework – managing it with the same rigor applied to other performance issues, such as quality and cost control.

And, yes, China is taking action. Step one in their trust recovery program: Show that you are serious about the corruption that led to the problems, in this case by sentencing to death the head of your food and drug oversight organization. To maintain decorum, we’ll give no comment on this one, but we could! Step two: Increase public protection by setting up a national food recall system. Step three: Communicate concern and your willingness to work and dialogue with interested parties across the global community.

China’s fix is of course reactionary – these are moves taken to dampen an escalating crisis of confidence amongst both producers who source in China and their downstream consumers. It will take months and years before the effectiveness of any changes is known.

The more important question for would-be brand Trustmeisters is this: How confident are you in your ability to police the behavior of your overseas suppliers? If the answer is “not very,” then be prepared for some potentially nasty consequences.

Just look at the impacts of the recent crisis on the U.S. pet food industry:

1) A costly recall.

2) Announced programs (expensive ones presumably) by some companies to test all of their ingredients.

3) Widespread bad publicity that has not only damaged brand trust, but also alerted consumers to the fact that many pet food brands are really just re-marketers of the same globally-sourced ingredient mix. This will likely send more pet food brands into the off-price commodity bins at places like Wal-Mart.

4) According to today’s Wall Street Journal, weaker companies may not survive this crisis, and we should expect to see further consolidation in the pet food industry as stronger players capable of imposing more rigorous quality control gobble up the also-rans.

A word to the wise: China’s recent problems will not be the only road bumps over the course of what many economists are calling China’s century. Which is why we never tire of saying it: Hope is not a strategy. If you haven’t put the issues of trust and reputation into a performance management framework, what are you waiting for?

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