Opinion: When the pressure to cut costs comes on, the temptation to cut corners grows’

On 15 January a year ago, British consumers woke up to the revelation that Irish food inspectors had found significant amounts of horsemeat in beef burgers and other processed foods stocked by several UK supermarkets. The resulting scandal was followed by the usual crisis management measures, with the big retailers promising to improve their testing, be more careful with their sourcing and launching marketing campaigns to regain consumer trust. But a year later, sales have not recovered, with frozen ready meals still 6% lower than in December 2012.

What particularly concerned consumers was that the horsemeat contamination was not confined to one brand or one retail outlet. Rather than being limited to a single guilty party, the horsemeat scandal made it seem that the industry as a whole could not be trusted. Despite the attempts of unaffected retailers to differentiate their products from the rest, that distrust has lingered on.

The reason for many different brands being affected lay in the complexity of the supply chains in the European food processing industry. No matter the branding of the final product, somewhere down at the end of the line manufacturers were sourcing cheap ingredients from the same suppliers, maybe half a continent away. Moreover, when, through fraud or ignorance, horsemeat appeared in the supply chain, that fact became immediately apparent, trashing the idea that one product was in some way different because of its branding.

This problem is not confined to the food industry. The drive to seek out suppliers who provide the best combination of reliability and cost makes it inevitable that firms will end up looking to the same people. While it may be possible to negotiate exclusivity one or two steps down the line, somewhere there will be a company that is selling to several clients, probably because it is the cheapest. When the pressure to cut costs further or fulfil orders faster comes on, the temptation to cut corners grows. Where that results in a scandal, the entire industry can be affected – the innocent together with the guilty. 

The various sweatshop scandals in the textile industry continue to haunt fashionable brands. First it was child labour; then came the collapse of the Rana Plaza building in Bangladesh in 2013, which killed more than 1,100 workers. At least 20 European and US clothing brands had links to that factory. Such is the nature of the global, integrated supply chain.

It is not just risk to reputation that arises out of this tendency of the supply chain to end up in particular geographies or particular low-cost environments. Natural disasters pose an equal threat. Thailand produces about 25% of the world’s hard disk drives; the 2011 floods there caused huge disruption to IT firms’ production schedules. The tendency of Japanese car manufacturers to source from Thailand also meant that the entire sector was disrupted. Business interruption cover can go some way to mitigating such losses, but it will not make up for the reputational damage.

It is not as though risk managers aren’t aware of the problem. Enterprises take endless initiatives to police their supply chains by inspecting factories or joining schemes to improve working conditions. Elsewhere, they build resilience by diversifying their sourcing, seeking out back-up suppliers or even buying up as much of their own supply chain as they can. But so long as competitive pressures force companies into undercutting wherever they can, the risk remains. There is no easy solution.