Products put at risk by relentless cost-cutting

Study finds that not one of 25 major companies tracked was aware enough of serious risks in the product supply chain.

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Exploding laptop batteries, melamine-tainted pet food, toothpaste laced with anti-freeze.

All three products were recently imported into the United States and all three illustrate how companies have grown more vulnerable to global glitches in product safety and even potential terrorist risks, according to a new report from Deloitte Consulting.

The Deloitte study, entitled "Supply chain's last straw: A vicious cycle of risk," studied 25 leading global companies from various industries with combined revenues of more than $1.5 trillion. It found that not one of them was fully prepared to handle or prevent these risks.

What's more, the report concluded that as companies cut costs to become more efficient - and more competitive globally - the more vulnerable they tend to become to lapses in the supply chain.

"The search for cheaper labor, cheaper raw materials, and cheaper transportation - the quest for efficiency - has forced the focus of companies to switch from revenue growth to cost reduction," Deloitte said in the study. "Individually, these forces have changed the world in which we live and conduct business. But when combined, these forces can create a perfect storm of risk not seen before in the history of commerce or humankind," it added.

Ken Landis, a principal with Deloitte Consulting who worked on the report, said Deloitte initiated the study a year ago after noticing these patterns.

"Historically, supply chain problems pertained to logistical issues or the weather or disruptions caused by union strikes," Landis said. But that has changed, he noted.

"Modern companies are already being impacted by both well-known and newly emerging threats that are more prevalent and destructive than ever before," the report said. "The very leanness and efficiencies that companies have sought in order to build competitive advantage have also created a new genre of systemic risk."

China, the second-largest trading partner of the United States, presents a number of supply chain challenges, the study said. "The road, air and rail transportation systems have trouble keeping up with global [supply] requirements," it said, noting that quality risks "can be significant."

Although Landis said many companies in industries from food to pharmaceuticals to electronics seem to lack common sense in this area, he offered a few suggestions.

"Companies should appoint a senior executive exclusively to manage supply chain risks," Landis said. He declined to name the companies studied in the report.

"Recognize that efficiency leads to vulnerability. As companies move to lower costs across the supply chain, at some point it'll become difficult to buy quality products. History has shown that when you squeeze the supplier, they will skimp," he said.

"Look up any key junctures in the supply chain and monitor it mercilessly," Landis said. "Your brand is at risk if you don't." Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.