chain of fools?

Neil Caudle

Exporting our supply chains was more than foolish; it was dangerous.

Aleda Roth studies sustainable supply-chain practices and corporate social responsibility. The goal, she says, is to improve quality of life—not only for Americans but for citizens in China and other emerging markets, who may not have a voice. “We need a new mindset about global supply chains,” she says. “Their complexity makes them risky, especially when low cost is the dominant concern.”

Trust. You will not find this word printed on the label when you pick up a package of food. But trust is a necessary ingredient in every product we buy. We assume it is wholesome and safe. And it is, right?

Not necessarily.

This is scary stuff. But Aleda Roth, professor of supply-chain management, did not set out to frighten anybody. She was just doing the job she had done for two decades: studying supply chains and explaining how they work. These days when she studies the chains, especially the long ones behind the food we eat, she finds time bombs.

“I had a number of hunches based on my experience and the data I’d gathered,” Roth says. “Something seemed to be wrong with offshoring so many jobs. Why is the U.S. importing so much of its food, at astounding rates over the past decade, from emerging markets like China, which now supplies nearly twenty percent of our food and ingredients?

“I thought, ‘I don’t care what the economists say. I don’t care what the world press says.’ My common sense says there is something amiss. So the scientist in me says, ‘Let’s apply science to this.’”

A supply chain is, at first glance, deceptively simple: a series of steps that transform raw materials into the products we use. But over the last couple of decades, Roth says, many supply chains have grown long and convoluted, increasing safety risks. In January the Coca-Cola Company detected an unapproved fungicide in orange juice imported from Brazil. In this case, a U.S. company found and reported the problem. But hazards in imports from China are harder to detect, Roth says.

Inscrutable links

Let’s take one example, which we will call The Globe-Trotting Hen. A farmer in Mexico raises a chicken and sells it to a slaughterhouse. The slaughterhouse freezes the carcass and sells it to an exporter that ships it to China, where a Chinese plant processes and packages the hen and then hands it off to another firm, which ships it to a port in the U.S., where the FDA inspects only about one percent of the imports before they reach the market. What part of this chain inspires trust?

“Ironically, while food imports have soared almost fifty percent in the past five years, the number of inspectors has dropped twenty percent,” Roth says. “And the FDA doesn’t appear to require that exporting countries have standards and safety systems equivalent to those required in the U.S.”

The Globe-Trotting Hen is not an exception. It is becoming the rule. And some sizable links in the supply chain remain inscrutable, because a factory in China is not an open book to Western eyes, especially if those eyes are focused on cost, not quality.

Last year Roth and her coauthors, John Gray and Michael Leiblein from Ohio State University, published their study of offshore manufacturing in the pharmaceutical industry. In their analysis of data from the U.S. Food and Drug Administration (FDA), they found that drugs manufactured in Puerto Rico were significantly riskier, from the standpoint of quality control, than the same drugs manufactured by the same companies’ plants in the U.S.

“Because the pharmaceuticals industry is heavily regulated, quality should be important to the manufacturer,” Roth says. “If we’re finding problems in a heavily regulated industry, then what must be happening in industries that are not as regulated? And if inspections are negligible?”

In November 2010 viewers of the CBS show 60 Minutes learned that a GlaxoSmithKline (GSK) plant in Puerto Rico allowed bacteria to contaminate some drugs and used the wrong mix of ingredients for others. One of the company’s subsidiaries later pled guilty to distributing adulterated drugs. This was not an isolated incident, Roth says, and the problem was not unique to GSK. Roth’s research found that operations managers, pressured by executives to cut costs and accelerate production, did not pay enough attention to the details of maintaining quality at every step, especially when they were doing business in a foreign country.

To dig a bit deeper into corporate decision making, Roth took a fresh look at data she’d collected a decade before. “The executives back then were looking at cost and not quality in their outsourcing decisions,” she says. “Now, this was very puzzling to me, because it’s a well-established principle in business management that cost and quality are correlated. You can’t have low cost without having good quality, because poor quality leads to significant waste and rework. Plus you have the costs of recall, disposal, liability, goodwill, and all the rest.”

Why would a company risk it? Roth’s research with her Clemson doctoral student and coauthor, David Hall, provides an several answers. “Partly, it’s the bandwagon effect,” Roth says. “If everyone is doing it, it must be good. And if I don’t do it, I’ll look bad. Plus there are powerful internal rewards for cutting costs. It’s become the mindset—let’s just go for cheap and assume we’ll get it right.”

When Roth talks about quality, she does not mean products that are necessarily more costly or luxurious. She means products that conform to the consumer’s expectations. The aspirin tablet is safe and relieves your headache as expected, is manufactured according to specifications, and free of contaminants—that sort of thing. This is called conformance quality, and without it a company would not survive very long. At least that was the theory. And yet in her data Roth found compelling evidence that quality was, in practice, consistently taking a backseat to cost. Apparently, executives—enthralled by the perceived low cost and market advantages of offshoring—were underestimating the operational risks.

“We found from rigorous, empirical studies that sourcing managers were systematically overconfident in their abilities to manage quality when outsourcing production,” Roth says. “Individuals are making decisions on the basis of cost and are making assumptions about quality. But maintaining quality isn’t easy, even in the U.S. In fact, it is very, very hard. And you can’t rely on audits and certification. Quality requires a commitment that is difficult to manage from afar, especially when your offshore employees belong to a different culture, with different values and a different language.”

As offshore partners go, Puerto Rico is not the riskiest, not by a long shot. That distinction probably belongs to China, the 800-pound gorilla of global trade.

Lady, Aleda Roth’s Chinese Crested Powderpuff, is fine now. But her illness, caused by contaminated dog food, inspired a quest.

Lady: The Chinese Crested Powderpuff

Before we wrestle that gorilla, let’s go back to 2006, when a dog named Lady, Aleda Roth’s Chinese Crested Powderpuff, fell ill. (No, the irony of the breed name is not lost on Roth.) Lady was mopey and lethargic, and the culprit was probably melamine, a coal byproduct, that had contaminated vegetable proteins imported from China for use in pet food. Ingested melamine causes kidney disease.

“We had Lady tested,” Roth says, “and she had elevated kidney enzymes. So I had to find something she could eat. But there was one contract manufacturer making more than two hundred brands, and this toxic stuff was in all of them, in one small ingredient, something at the very end of the label. So I started looking for dog food without this stuff in it. I couldn’t find it. And in the process of searching, I realized how much human food was coming from China—at that time, about 20 percent of our ingredients for processed foods. So I thought, is this problem with pet food the proverbial canary in the coal mine? What about people?”

On a melamine-free diet, Lady improved and is fine now, but her illness had launched Roth in a daring new direction. What if all kinds of contaminants from China were hiding like stowaways in human foods? There was plenty of reason to suspect they might be. Of the 152 consumer products recalled by the U.S. Product Safety Commission in 2007, 104 were made in China.

In 2011 Consumer Reports found levels of arsenic in apple juice that exceeded federal standards. More than 70 percent of apple juice concentrate consumed in the U.S. now comes from emerging-market countries, including China, with varying levels of regulations and enforcement. (The Juice Products Association says there is nothing to worry about.)

Benxi City, Shenyang Province, spring 1996. China’s pollution controls have failed to keep pace with its rapid industrialization. Photo by David P. Hunt.

Cover-ups and corner-cutting

Consider for a moment two cornerstone principles of supply chain management: transparency and traceability. Transparency lets us see exactly how the sausage is made. Traceability lets us track with certainty the path of a product and all of its ingredients along the supply chain. Both qualities are scarce in China, where delays and cover-ups are standard procedure any time a defect rears its ugly head. Without transparency and traceability, Roth says, there is no trust. Roth knew about the well-publicized hazards in Chinese-made goods. And she knew that some Chinese plants used materials banned in the U.S., including highly toxic lead paint, which was found on imported toys. In 2006 drywall made in China began to emit corrosive gasses that attacked metal wires and pipes and made occupants sick. What if these were not isolated incidents? What if they were the norm?

To learn more, Roth began delving into the murky world of Chinese business, where she and her coauthors found a culture obsessed with profits and hypersonic growth. With the tacit approval of their local governments, some Chinese companies take pride in cutting corners. An American food producer with an operation in China told researchers that she could maintain quality in her plant but was being undercut by low-cost competitors in China that broke the rules with impunity.

With few controls on pollution, much of China’s air and water are so dirty that producing anything there, food especially, risks exposing it to environmental contaminants. According to a 2008 National Geographic report, about 50 percent of the Yellow River is biologically dead. More than 65 percent of the river’s water irrigates farms. The U.S. Department of Agriculture found that China is among the world’s highest users of chemical fertilizers per hectare, and some of the chemicals applied there have been banned in the U.S. Cancer-causing chemicals used in preserving dried apples, fish containing banned antibiotics, and mushrooms laced with illegal pesticides have turned up in food imported from China. In mainland China, tainted ingredients have been found in products ranging from pharmaceuticals to cooking oil.

“This is what keeps me up at night,” Roth says. “I’ve been to China at least once a year for the last half dozen years. Along with the pace and magnitude of its majestic modernization, and the rise of so many out of poverty, there is a corresponding dark side—its unprecedented levels of pollution. The only time I saw a blue sky was during the Olympics, when they shut down the factories for months. But they had to set up a separate supply chain to feed the athletes. Even the Chinese don’t seem to trust their own food.”

Why are American companies scrambling to do business in such a place? Roth and her doctoral students have been working to answer that question, not with economic theories and assumptions but by collecting information about how actual sourcing managers make decisions in American companies. Conventional wisdom has it that labor costs drive the choice to go offshore, but Roth’s research with Nick Anguelov, her doctoral student in policy studies, and her colleague William Ward in economics, suggests much more.

“We are still examining the data in the textile industry—once a major job source in South Carolina,” Roth says, “but it looks like we will find that many companies go to emerging markets to avoid U.S. pollution controls.”

In China emissions have accelerated dramatically since 2002 and now outpace the U.S. rate. Anguelov’s dissertation found evidence that pollution from textile and chemical plants is relatively high in China, where the flow of foreign investment in those industries has increased.

When she adds it all up—the quality risk in offshoring, the overconfidence of managers in their purchasing decisions, the bandwagon rush to outsource production to contract manufacturers and avoid U.S. regulation—Roth says the evidence points in one direction. “U.S. companies have been offshoring way too many jobs for the wrong reasons,” she says.

One of the consequences of such choices has been the rapid loss of American industries and jobs. Roth is a member of the executive advisory board on the Council on Competitiveness’s U.S. Manufacturing Initiative, a group that includes CEOs of companies, presidents of universities, and heads of research labs. Their task is to look at the nation’s manufacturing “ecosystem,” Roth says. The group’s report, MAKE: An American Manufacturing Movement, contains a national manufacturing strategy the group shared with the president, members of Congress, governors, and stakeholders in industry, education, and labor.

“How do you keep your markets if you’re not making anything?” Roth asks. “Factories were once the hub of so many communities, and now a lot of them are gone. We risk losing the fabric of what I would call innovation and skill competence—our competitive edge. Most people don’t understand how much innovation takes place in manufacturing and its process interplay with product innovation. And now we appear to be doing to our community farmers what we did to our factory workers.”

All of this has happened almost overnight.

“We began outsourcing jobs in the early nineteen-nineties, when we had this so-called best practice named business-process engineering,” Roth says. “Companies were reducing jobs and getting very lean, and then they started offshoring and outsourcing. In effect, they were ‘hollowing out’ American manufacturing and jobs. I’m not saying that we should never offshore or outsource. But we should understand the serious, unintended consequences of going overboard.”

A deficiency of skills

Before he died last year, Steve Jobs, cofounder of Apple, told his biographer that the reason he’d built factories in Asia was that he could not find enough engineers in the U.S. Roth blames, in part, the K-12 school systems in the U.S. that were set up for the agrarian era, many of which fall woefully short in science and math.

“Another reason is that we used to have skilled labor in this country and had great continuity,” she says. “Vocational and technical training in high school and junior colleges were more prevalent, and this provided an entry point into manufacturing. Afterwards training was continuous in most competitive companies. Now, with so many jobs being offshored, we have escalated the skills deficiency, resulting in a big disconnect.”

That’s too bad for the farmers and factory workers, but why should the rest of us care, so long as we’re finding bargains at the store?

For one thing, the pollution we export to China will not remain there, Roth says. It will follow the goods to our shores. Methylmercury, produced when factories burn coal without adequate controls, is a probable carcinogen that may attack the nervous system. Its potentially toxic particles travel thousands of miles in the atmosphere and descend as acid rain and snow. Roth’s new research addresses the potential that food products tainted with minute amounts of heavy metals and other chemical toxins may be reaching our markets daily, especially in foods imported from China and other emerging markets where air and water pollution are severe. Seafood is especially risky, but so is rice and who knows what else. The FDA does not routinely test for heavy metals in imported goods, and many of the companies Roth contacted indicated that they relied on the FDA for such testing. We have little idea how much toxic load arrives directly in our food, animal feed, clothing and other products—and much less what the cumulative effects might be on people and the environment.

But even if the FDA could increase its testing, testing alone would not protect the U.S. food supply, Roth says. Food is not like computers or cell phones. In the electronics industry, a factory can test every device and make sure it works as it should. But to test a piece of food, you have to destroy it, and it is impossible to test for every possible contaminant.

“You just cannot do one-hundred-percent testing with food,” Roth says. “You have to go back to quality principles. You have to do it right the first time.” Research with her Clemson doctoral student, Tracy Johnson-Hall, found that more than 38 percent of food recalls occurred after the expiration date, when most of the food had already been consumed.

It’s only natural that Roth has zeroed in on the public-health risks in the supply chain. Before she moved into business management, she was an epidemiologist and then head of the statistics department of the American Nurses Association. With a foot in both worlds, she can round up data from various sources and generate a plausible hypothesis about how a business practice might affect public health.

Reports of arsenic in imported apple juice prompted FDA testing in 2011. The agency found that 95 percent of samples tested were below 10 parts per billion (ppb) total arsenic, a level considered safe. Two samples from China, however, contained higher levels—47 ppb in one and 23 ppb in another. A December 16 statement from the FDA expressed confidence “in the overall safety of apple juice consumed in this country.”

Where would she look first, if she were doing epidemiology today? Imported apple and other juices, much of which comes from China and underdeveloped regions, where chemical contaminants are most likely. Roth has a hunch that autism and kidney disease in children and the elderly may be associated with such imported foods. The trend in autism bears a striking resemblance to the trend in imported apple juice, one of the first drinks a child consumes, and Roth thinks the possibility of a connection should be investigated.

She wants to help executives better understand the risks to food from imports. “Airing such possibilities in public will not be welcomed by global food conglomerates that see food as a commodity, seeking the lowest cost,” Roth says. But she is not the kind of woman who pulls her punches, especially when the nation’s health and economic future are on the line. A dark-eyed Italian with fierce energy, Roth may have found, in this topic, the fight of her life.

She doesn’t have a lot of corporate allies in the fight, so far. Their incentives for outsourcing and offshoring have been so lavish as to be “perverse,” Roth says, and only a few CEOs will pause to consider the downside risks. The federal government seems unwilling or unable to stand against a tsunami of imports, if doing so would upset big business and raise the price of goods. Even the U.S. military now finds itself at risk from defective imports. As Congress learned during hearings last fall, counterfeit parts and defective electronics made in China imperil U.S. troops. Will Congress hold companies accountable? That remains to be seen, especially with the constant push for less regulation, Roth says.

Faced with such questions, policymakers generally turn to macroeconomists, the people who study economics on the global scale. From a macro point of view, decisions are all about money. Corporations will keep chasing the lowest possible direct costs of production, and for now that means factories in Asia.

The “outsourcing trap,” Roth says, will, over time, make it exceedingly costly and difficult to bring production back to the U.S. And Roth thinks the macro researchers see only part of the picture. She studies people and how they make decisions—not at a theoretical level but in the real world. And where in the real world does she find a shred of hope?

In the American consumer. Statistically speaking, that consumer is frequently a woman. “The American woman is our society’s first and foremost decision maker,” Roth says. “She selects the house, the car, and the neighborhood. She buys the groceries, the medicines, and the clothes. Her choices, day in and day out, will steer the economy, for better or worse.”

At the moment, Roth says, American consumers are shopping for bargains, and who can blame us? Every dollar counts. Sure, we hear media reports about hazardous imports, but our government and the companies we trust have dismissed these hazards as anomalies, and we prefer to believe this is so. Why would we ever suspect that a package of Whole Foods frozen vegetables labeled “California blend” actually came from China? (After ABC News reported this fact last year, Whole Foods changed its sourcing.) On the positive side, Roth says, consumers in greater numbers are asking for fresh, healthful food, including foods grown locally or in the U.S. on organic farms.

Where was this tomato grown?

At some point, though, if supply-chain hazards persist, the American consumer may stop trusting brands, Roth says. People all over America will awaken to the fact that many industry conglomerates place short-term profits first. And then we will have a nation of Aleda Roths. Roth has a reputation at her local food market for asking the manager meddlesome questions such as, “Why does the label on this tomato not say where it was grown?”

The bottom line, Roth says, is that while food and drug companies, and government agencies, argue that we have the safest food and drug supply in the world, it’s not good enough if a product’s production cost is the single biggest factor in decision making. There are costly risks in that line of thinking, even in domestic production. In 2010 the U.S. Center for Disease Control (CDC) estimated 48 million foodborne illnesses a year; of these, 9.4 million are from 31 known pathogens, and the remainder are from unspecified sources.

“We know that food-borne pathogens alone are costing more than a trillion dollars a year,” Roth says. Some food-borne illnesses are due to improper handling, not nonconformance in manufacturing, but the point is that cutting corners can be costly, for business and for health. “So while long supply chains are a big problem, we cannot be complacent about domestic production either,” Roth says.

Whether the source of supply is domestic or foreign, Roth wants free choice in her purchasing, but she also wants full transparency in food-ingredient sourcing. “I want to know about the prospects of heavy metals and other contaminants in imported foods from countries with low standards and poor enforcement. Armed with this information, I can make informed decisions for me and my family.”

For now, that information can be hard to find. When Roth asked for sourcing information from hundreds of food companies, she found only a few willing to reveal the country supplying their ingredients. The consumer, she says, will have to insist.

“I read every label,” Roth says. “I want to know where the food was made and where its ingredients come from. If I cannot determine this, I just don’t buy.”

Roth is planning a book that will help both businesses and consumers avoid risky products by understanding their path to market. Her advice for now: buy local. Her goal: safer products, healthier people, and an end to the wholesale export of American jobs. It’s a tall order, but Roth intends to contribute, as a scholar and a woman.

“I think American consumers will figure this out.” Roth says. “We will vote with our pocketbooks.”

Aleda Roth is the Burlington Industries Professor of Supply Chain Management in the College of Business and Behavioral Science. Roth’s recent article, “Unraveling the Food Supply Chain: Strategic Insights from China and the 2007 Recalls,” won a Citation of Excellence Award from Emerald Management Reviews.