In the cases mentioned above there were instances of litigation. By October 2006, the Montreal-based Mega Brands, maker of Magnetix, a construction toy made in China, had paid $13.5 million to settle four lawsuits and 10 claims related to Magnetix injuries (because of fatal consequences due to magnets ingested by children). This could have potentially been much higher if the scope of the damage had been extended (reaching billions of U.S. dollars).
2.) The intangible/indirect costs:
- Loss of market share (Sanlu stock value decreased up to 2/3 due to the melamine-tainted milk scandal in China)
- Subsequent loss of sales
- Negative impact on a brand or company's image
- Cost to rehabilitate company reputation
- The collapse of an organization
Supply Chain Management Challenges
Paradoxically, whereas outsourcing decisions are mainly driven by cost reduction considerations, this strategy could lead to often-unconsidered costs if there is a recall of products. Some of the most respected and well-run companies in the world have experienced massive product recalls: General Electric, Dell Computer, Nestle, Kraft, Johnson & Johnson, General Mills, Campbell's and Nike are just a few examples.
These companies issued recalls as a result of a lack of control of key components in their Supply Chains, i.e. suppliers or contract manufacturers, which are often wrongly excluded. Basically, the control of the quality of products is vital but remains a huge challenge in a more complex and composite environment where companies have to deal with several layers of remote suppliers that hardly control their own suppliers.
As a result, the impact of the total recall cost (direct and intangible) on the supply chain, in the long run, could make companies re-consider their make-or-buy strategic decisions, or at least, in the shorter term, force them to review their procurement strategies to combat efficiently such catastrophic issues.
When a company is facing a massive product recall, the challenge lies in its ability to efficiently manage the recall logistics in a real crisis environment. This is often compared to reverse logistics but on a larger scale (with sometimes more than a hundred million units to be handled) with many stringent constraints (such as timeliness, especially when public safety is at stake).
However, this is only the tip of the iceberg, and the hidden part of this huge challenge is the upstream preparation of building a robust mitigation plan to avoid or minimize the impact of such risks before they occur.
The Essential Approach in the Supply Chain Risk Management: SCOR 9.0 Model
The Supply-Chain Operations Reference (SCOR) model is a process reference model that has been developed and endorsed by the Supply-Chain Council (a non-profit consortium) as the cross-industry standard diagnostic tool for supply chain management. This model enables companies to address, improve and communicate supply chain management practices, spanning from the supplier's supplier to the customer's customer.
As an essential approach in the supply chain risk management, SCOR.9 integrates a comprehensive set of processes, tools, best practices and metrics to identify, assess and mitigate any potential disruptions in the supply chain in order to reduce their negative impact on the company.
The model is composed of four phases (See Figure 1: The Four phases of the definition of a Supply Chain Risk Management Strategy):
Phase 1 — Risk Identification:
The objective of this key phase is to identify any potential risks that could affect negatively a company's supply chain.
Based on a description of the entire supply chain (supply chain SCOR mapping), the risks identification is conducted through analysis of historical problems, industry trends, assessment surveys, site audits or other specific methods (Delphi, cause-effect diagrams or critical path method) .
Then, a list of the relevant supply chain risks is established to highlight potential threats, such as raw material shortage, equipment breakdown, suppliers' failures or product liability. (See Figures 2 and 3.)
Phase 2 — Risk Assessment:
From the list of identified risks, a qualitative and quantitative evaluation is conducted to assess and prioritize the probability of occurrence of each risk and its impact on a company's supply chain.
This assessment can be performed with the support of specific tools (Failure Mode Effects Analysis, Fault Tree Analysis or Event Tree Analysis), "what-if" simulations, financial models, SCOR metrics or experts' opinions.