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Supply Chain Management

If you produce and export food or non-food products to the EU or provide services to EU companies, you may be requested to meet certain requirements or provide information that can affect your internal business management. These requirements relate to an overall business concept, commonly referred to as supply chain management (SCM). They can, for example, relate to the use of dangerous substances, environmental management, labour conditions, quality management and the use of ingredients and components. But also as a result of the current awareness on sustainability issues in Europe, EU companies have incorporated environmental and social aspects in the way they manage their supply chain. This document describes what supply chain management is, how it may influence you as a company and provides you with suggestions and tools how to implement supply chain management yourself.

Relevance Due to ongoing globalisation and strong competition in the global markets, EU companies increasingly outsource production processes and services to companies in other countries that can produce better or more cost effectively. Furthermore, they are searching for ways to make enterprise operations more efficient. Each EU buyer is responsible for the products and services that he provides to EU customers. However, the quality or safety of a product or service depends on every actor involved in the supply chain. With more actors involved, it can be a challenge to answer EU customers needs, to assure a responsible handling of products and services, and to increase efficiency, all at the same time. To tackle these challenges, many EU companies have turned to a systematic management structure, commonly referred to as supply chain management. Many EU companies nowadays consider the tools and techniques used in supply chain management essential to achieve high levels of operational performance and efficiency throughout the supply chain. As a result of this, EU companies are increasingly including requirements in their buying policies. For suppliers in developing countries this can mean that you may be expected to fulfil specific demands. Moreover, you may need to pass on some of the demands to your own suppliers (e.g. suppliers of raw materials, packaging materials or equipment). Pro-active behaviour, such as implementing effective management and control structures in your business, can help you to be more responsive to EU companies needs. Azo dyes in clothing: passing requirements down through the supply chain A garment producer who wants to export his products to the EU has to make sure that the garments comply with the EU legislation on Azo dyes. In this respect, he needs to ensure that the fabric he buys to manufacture his products, is Azo dyes free. To accomplish this, he needs to pass the Azo-dyes-free-requirement on to his fabric supplier. Furthermore, his EU buyers will likely ask him to confirm that the garments are indeed Azo free (e.g. via written declarations or testing certification). What is supply chain management? All actors, including suppliers of components of a product, involved in moving a product or service from its source to the final consumer (the EU customer), shape the supply chain for that product or service. A supply chain can have relatively many or few actors involved. For example, for some products, ingredient suppliers and manufacturers are the same, making the supply chain rather short. In other cases, there are several ingredient suppliers, packaging suppliers, wholesalers and traders active, making the supply chain longer and more complex. To operate as efficiently as possible, it is important to coordinate the following three flows, as they move in a process from the raw material supplier to all other actors in the supply chain up to the final (EU) customer:

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Product flow: includes all physical movement of products from the raw material supplier to the final customer, as well as customer returns. The production from raw materials to the final product and all related issues are included, for instance work conditions and environmental effects. Information flow: includes the transmission of orders and status of delivery. Financial flow: includes payment schedules, title ownerships and credit terms.

Supply chain management involves coordinating and integrating these flows both within and among companies. How relevant is supply chain management in Europe? Actors at varying stages of a supply chain perform different activities. However, there are a number of consistent themes that, when adopted by all actors, help drive progress. These themes are quality, costs, time and continuity of supply, and information and communication (use of technologies). Above all, products placed on the market in the EU need to meet EU legislative requirements, which usually relate to guarantee product safety. Failing to meet these requirements may lead to the removal of (a batch of) products from the market. The image of the EU company is also at stake, because of possible negative media coverage. It is therefore in the interest of the EU company to be able to assure EU governments and EU customers of an appropriate quality. This means that the products and services you provide to the EU buyer are at least in compliance with EU legislative quality requirements, and with product safety requirements, which represent an important aspect in the EU policy on consumers protection. Illegality in the supply chain Scandals in the past about illegality in the supply chain have lead to severe financial and reputational damage to big multinational companies. Examples are major sportswear, garments and furniture companies accused of buying products of factories in developing countries that do not respect labour rights or illegally dump chemicals. Nowadays, EU companies are increasingly put under pressure to make efforts to avoid illegal activities in their supply chains. As a consequence, EU companies are more active in investigating the legality of the sourcing and good handling of their products and services as well as other business activities. For suppliers in developing countries, this can mean that your EU buyer will ask you to confirm that you act according to the local laws of your country and/or to check your suppliers performances as well. Sectors in which illegality has been increasingly criticised are agriculture, forestry, mining, fishery, textile industry and tourism. For more information on illegality, refer to the related document.

To become or remain competitive, EU companies are always looking for ways to reduce costs involved in their purchasing process. These costs include the costs of acquiring, receiving, storage and transport of products, as well as the costs associated with product verification and quality control. Any supply chain disruption from your side likely increases their costs as well. This is why EU companies usually make agreements on the purchasing processes with their suppliers. Efficiency and transparency are key concepts in SCM. In practice this translates to the storage, analysis and monitoring of the information load of all relevant factors. Relevant and timely information can lead to better product knowledge, better inventory, speeding of transactions, a decrease in the number of delays, a faster response in case of faulty products, higher quality, decreased negative environmental impacts, therewith increasing revenues. Moreover, it enables an EU buyer to monitor whether the products or services he puts on the EU market are in compliance with EU legislation.
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The themes quality, costs, time and continuity of supply, and information and communication strongly relate to concepts that are of high relevance in Europe: accountability, traceability and risk management. These concepts are important to guarantee the quality and safety of the products and services EU companies provide to their customers, while reducing costs, delivering on time and with continuity, often making use of information and communication technologies. 1) Accountability A well-organised information exchange, administration and financing system is important for each organisation to be accountable. To assure themselves of the continuity of your supply, EU companies may want to have insight in the financial stability of your organisation. 2) Traceability Traceability refers to the ability of a company to identify on one hand his suppliers and the raw and other materials they supply, and on the other hand his buyers and the products supplied to those buyers. For more information on traceability in the food sector, refer to the related document. 3) Risk management For EU buyers risk management is an important factor in SCM. EU buyers want to avoid damages to their reputation and sales that might occur through the use of hazardous substances (e.g. pesticides or chemical substances) by their suppliers, or production errors in manufactured goods, leading to unsafe situations. Such faulty products might lead to withdrawal of (a batch of) the product from the market or to negative media coverage, leading to decreasing sales. To prevent this from happening, many EU companies have a riskmanagement system in place, which allows them to identify, assess and prioritise potential risks at every stage of production or development, as well as to put procedures in place that prevent, correct or eliminate the risks. To bring down risks to a minimum, many EU companies demand that their suppliers do the same at their production facilities. In order to check compliance by their suppliers, European companies have different tools ranging from self-assessments (e.g. on-site checks and testing upon arrival of the products) and inspection visits, to third-party audits and certification. For suppliers who want to export to the EU market, it is therefore important to have effective quality or risk-management procedures in place. Assuring product safety Product safety is a very important issue in the European policy and therefore authorities react rapidly in case faulty products are put in the EU market. The importer of that product should be able to determine what batch of products put on the market needs to be taken back. In order to minimise the financial and image risks associated with such situations, EU buyers will demand their suppliers the implementation of traceability systems to identify rapidly which products are faulty and take effective measures to resolve the problem. This will only be possible when records are kept regarding the origin of a product and its ingredients or components, and which allows a company to submit all necessary data related to the products, services and production processes upon demand. The more precise a company knows what caused the problem, where it came from, and which batch of final products is likely to be affected, the smaller the amount of products he will have to withdraw from the market. In practice, this means that you can be requested to submit all the necessary data relating to your products and their components, their origin and the production process. EU companies may also ask you to have a good record-keeping system in place and/or demand you to link up to computer-based systems to allow fast information exchange. You may even be expected to demand the same thing from your suppliers.

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Responsible supply chain management (RSCM) In addition to the quality and safety of the products, EU customers are increasingly concerned about the environmental, social and economic impacts of the products and services they buy. In response, many EU companies have incorporated so-called sustainability values in their corporate policies, including policies for responsible supply chain management. One of the consequences of such a corporate policy can be that you may be requested to perform business activities in a manner compatible with these sustainability values. For example, you can be requested to assure that your production facilities meet certain standards with a view on the health and safety of your workers or the environmental impact of your production process on the local environment. Example: Philips Suppliers Sustainability Programme As part of its CSR policy, and also as a way to improve its supply chain management, Philips has an extensive programme to support and improve the performance on its suppliers. One example of this programme is the software developed to comply with Philips obligations regarding the EU legislation on Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). This software is meant for Philips suppliers who have to fill in all the information concerning the substances they use during the manufacture of products, but also in packaging and accessories. If this information is not available by the supplier, he must get the required information from his own suppliers. This case illustrates how EU companies demand and pass responsibilities to their suppliers, to be able to comply with its own legal responsibilities, but also to know and identify all parties in its supply chain. For more information on this programme, refer to the external links section.

Possibilities that facilitate the implementation of Supply Chain Management As mentioned before, when you sell to an EU buyer, you have to make sure that your products and service are in compliance with EU legislative quality and safety requirements. However, some EU buyers have established their own quality and safety standards that go beyond what is required by EU legislation. As a supplier, it is therefore important to verify with your EU buyer about his exact requirements. In order to comply with all EU buyers requirements, it is recommended to implement an SCM plan or strategy in your own business. To help you to develop a plan or strategy, read the following steps. Some specific tools to implement SCM are mentioned as well. Step 1: Look at the internal processes of your company and identify your own risks If you are able to identify and understand the risks that may cause disruptions to your trade with the EU within your own organisation, you can develop plans or strategies to monitor them. For suppliers in developing countries, potential issues can take place on the following three levels: Purchase: the use of hazardous/prohibited substances, long-term supply, short-term supply, labour standards and practices, fair pay of suppliers, waste, inventory levels, supplier dependence, etc. Internal operations: inefficient operations, equipment failure, poor productivity, increased costs of fuel and energy (delivery methods), labour standards and practices, pollution, contamination, waste management, etc. Product development: impact efficiency of products in use, costs of raw material increases, product traceability (bar codes and labels), packaging and materials, compliance with EU product legislation, EU companies demand, etc.

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To be able to respond to EU customers fluctuating demands, to avoid overstocking, and to reduce risks of supply disruptions as these may have impact on other functions EU companies usually make agreements on the purchasing processes with their suppliers. If your supply depends on the supply of other actors (e.g. ingredient or packaging suppliers), it is wise to include similar agreements in your negotiations with these suppliers. For example, EU companies may require you to maintain certain production-cycle-times and times of delivery. To ensure you are able to fulfil EU companies demands, while at the same time avoid overstocking yourself, you can include production-cycle-times in your negotiations with your own suppliers. Step 2: Identify your supply chain When you are part of a specialised or complex supply chain, it can be difficult to point out your position in the supply chain. It is necessary to determine who is responsible for an identified risk. In other words, to what extent you need to come into action. Step 3: Adopt measurement tools Only adopt measurement tools that will work for your organisation. These include written policies and communication materials, prequalification of suppliers (if necessary use social, environmental and economic criteria), purchasing guidelines and supplier partnerships. Here you can also choose to implement standardised management systems. Step 4: Schedule your manufacturing process Organise all activities necessary for production, testing, packaging and preparation for delivery. Make sure you keep good records of these processes as EU buyers may request for insight information. Some EU buyers may even request personal on-site checks. Step 5: Develop a logistics system In order to fulfil your EU buyers demands you should have a good record keeping system in place. With a logistics system you coordinate your supplier deliveries, stocks, inventory of final products and the receipt of orders from your EU buyers. Furthermore, you pick the carriers that are supposed to transport your products to agreed locations and take care of the actual shipping. Specific tools for the implementation of supply chain management For more information on risk management procedures in the food processing sector, refer to the CBI document on HACCP (Hazard Analysis Critical Control Point). Internationally recognised management systems, such as ISO 9000 for quality management, ISO 14001 for environmental management, SA8000 for social management and GlobalGAP for good agricultural practice are gaining importance in the EU. These management systems often include supply chain management requirements and assure your EU buyer that you have organised your processed in a structured way. Please note that implementation of these systems can require substantial investments. Therefore, before taking any concrete actions, assess if implementation would benefit your business. For more information on these management systems, refer to the related document. Available (online) tools to make it easier for practitioners to search and find relevant information to assist them in the process of embedding sustainability issues, such as human rights, labour, environment and anti-corruption, into supply chains are, for example, a cooperation between the UN Initiative Global Compact with CSR Europe. recently started a sustainable supply chain website, which enables organizations, companies and others to share information about their supply chain initiatives and resources. Another practical online initiative is the Portal for Responsible Supply Chain Management, which, for example, provides an overview of standards, and tools from companies' supply
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chain management programmes: supplier questionnaires, audit templates, training material and codes of conduct. For more information on the Global Compact/CSR Europe initiative or the Portal for Responsible Supply Chain Management, refer to the external links section. The identification of the origin of feed and food ingredients and food sources is of prime importance for the protection of consumers, particularly when products are found to be faulty. Traceability facilitates the withdrawal of foods and enables consumers to be provided with targeted and accurate information concerning implicated products. Regulation EC/178/2002 contains general provisions for traceability (applicable from 1 January 2005), which cover all food and feed, all food and feed business operators, without prejudice to existing legislation on specific sectors such as beef, fish, GMOs etc. Importers are similarly affected as they will be required to identify from whom the product was exported in the country of origin. Unless specific provisions for further traceability exist, the requirement for traceability is limited to ensuring that businesses are at least able to identify the immediate supplier of the product in question and the immediate subsequent recipient, with the exemption of retailers to final consumers (one step back-one step forward). For more information on Regulation EC/178/2002 refer to the external links section. For more information on sustainability values potentially affecting your business with EU companies, refer to the related document on Multilateral guidelines and initiatives for sustainability - OECD guidelines and Global Compact.

Last updated: November 2010

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