Tuesday, August 10, 2010

ERM-BC-COOP: One more time
Vendor products are seller's risk


Lowe's Cos. has agreed to distribute $6.5 million in its gift cards and pay as much as $2.2 million in plaintiffs' attorney fees to settle a class-action suit claiming the home-improvement retailer sold defective drywall. http://tinyurl.com/2bdd4sj

"When will they ever learn?" The line from the Pete Seeger song keeps haunting me every time I read or hear of some organization assuming that the product the organization is selling is satisfactory or that the service a contracted vendor is providing is suitable.

Today it's Chinese dry wall.

Before that it was lead paint in Chinese toys imported by a major US toy maker.

Before that - what?

To be fair, China, while frequently the source of the problem is not the ONLY source. Every country has vendors that cut corners and ignore safety regulations.

Sometimes it simply is a matter of not exercising the "what if" possibilities during testing - I give you a failed O-ring on the space shuttle Challenger; according to the Rogers Commission Report, "The commission found that the Challenger accident was caused by a failure in the O-rings sealing the aft field joint on the right solid rocket booster, which allowed pressurized hot gases and eventually flame to "blow by" the O-ring and make contact with the adjacent external tank, causing structural failure. The failure of the O-rings was attributed to a design flaw, as their performance could be too easily compromised by factors including the low temperature on the day of launch. (http://en.wikipedia.org/wiki/Rogers_Commission_Report#cite_note-0

For Lowes and other retailers, as well as manufacturers such as Morton Thiokol of Challenger fame, the bottom line is the same: QUALITY CONTROL.

Ignore QC and risk a law suit.

As an enterprise risk management practitioner, I consider vendor products a risk.

The problem for manufacturers - versus retailers - is that while a vendor product might be "as advertised," it still might not be suitable as part of a system (e.g., Firestone tires on Ford Explorers). That should force the manufacturer to check all components as they arrive and again as part of the system tests.

It's fairly obvious that 100% testing is too expensive for almost all materials. I can't think of any organization that does 100% testing. For some products, testing is destructive; the test either destroys a product or so degrades it that it cannot be used.

However, sampling always is an option.

Sampling is taking a percentage of a product, be it individual components or a complete system, and testing all the units in the percentage. A 10% sample of 100 units would have 10 units randomly selected for testing.

The percentage of product sampled is based on a number of factors, including past experience.

Testing is expensive. It is expensive to perform and it often results in an unusable product. The cost of 10 nails or threaded fasteners (a/k/a screws) out of a lot of 1000 is relatively inexpensive; but the cost of sampling a 16-inch valve as an assembly is another matter.

All parts, be they vendor supplied or made "in-house" need QC both for quality of product and suitability for use within a system.

As an about-to-be grandfather, I want to look not only at parts, but design as well.

I have in mind infant crib failures and cribs with slightly-too-far-apart side-rail slats. I'm thinking of infant carriers with handles that detach unexpectedly.

If manufacturers fail to consider both design and part quality; if retailers fail to assume responsibility for assuring vendor product suitability, lawyers will continue to enjoy generous incomes.

I learned when I was a newspaper reporter and later managing editor that law suits are to be avoided. Even if the defendant prevails, the cost of the defense - both in money and time away from the job - can be sufficient to force a business into bankruptcy.

Bottom line: lack of QC is most assuredly a risk that must be considered and either avoided or mitigated. Claiming that someone thought the vendor product was satisfactory probably won't impress a judge or jury.

True, the risk may be "transferred" (to an insurance carrier), but that comes at a price. If the carrier is forced to defend once, the carrier's rate is very likely to increase (a risk in itself).

In the end, appropriate QC at all stages of a product's development is the best way to mitigate the risk of component failure or design failure. "Due diligence" failure usually guarantees a stiff penalty.

QC while not "cheap" certainly is better for both the corporate wallet and the corporate image than a law suit, even if the corporation prevails.

To this practitioner's mind, protecting people (including employees' jobs) and the bottom line is fully within the purview of enterprise risk management.


John Glenn, MBCI
Enterprise Risk Management practitioner
Hollywood - Fort Lauderdale Florida

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