all expect them to look after their entire value chains, especially where international outsourcing is involved.

 

Increasingly, analysts are placing a premium on information provided about environmental, social, and governance issues, expecting greater visibility into the performance of supply chains. Today, the market is telling us, a combination of factors affecting supply chains can make—or break—reputations and fortunes.

The impact is especially significant on big-brand retail and consumer companies that face the challenges of supply chain interruptions while being held increasingly accountable for environmental impact, employee health and safety, and other corporate social responsibilities.

 

Wal-Mart, for example, now requires that its 200 largest Chinese suppliers adhere to a strict social and environmental code of conduct, enhancing energy efficiency and disclosing information about every factory involved in the production process.

 

Addressing suppliers in Beijing last fall, Wal-Mart CEO Lee Scott said: “A company that cheats on overtime and on the age of its labor, that dumps its scraps and its chemicals in our

rivers, that does not pay its taxes or honor its contracts will ultimately cheat on the quality of its products.”

 

The tenuous nature of many supply chains was illustrated dramatically by the recent instance of contaminated milk products originating in China. Milk that sickened thousands of Chinese children was also used as ingredient in candy consumed in the US and other countries.

 

Manufacturers of other consumer products are no less vulnerable. Companies with major brand names and reputations buy not only raw materials from scattered farms but also processed ingredients that flow through separate manufacturing points before being absorbed into the final product.

 

“We’ve always bought commodities from every corner of the world, but the sourcing of refined food ingredients is a relatively new development. Suddenly we’re sourcing carbohydrates and protein,” said a senior food company executive interviewed by PricewaterhouseCoopers. A pharmaceutical industry veteran concurred: “Now everything from the active pharmaceutical ingredient to the finished product can be outsourced. It is hard to control everything, especially if the technical expertise is located far from the manufacturing base. The risk has increased tremendously.”

 

According to some estimates, more than 4,000 product recalls were administered by regulatory agencies in 2007, with the US Consumer Product Safety Commission (CPSC) and the US Food and Drug Administration being particularly active. In 2000, these agencies had announced fewer than 500 recalls. The CPSC said that most of its 2007 recalls were of imported products and that “the large majority” came from China.

 

STRINGENT NEW LAWS RAISE STAKES As a result of the 2007 recalls, Congress passed the sweeping new Consumer Product Safety Improvement Act of 2008. It increases the CPSC budget, imposes sharply higher penalties for violations, mandates a variety of pre-marketing testing procedures, and establishes a national database through which the public can report grievances. State attorneys general also have new powers to enforce these regulations. This new legislation both heightens the risks to companies