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computing ethics information and communication technology for managing supply chain risks How to encourage ethical behavior among all links in a global supply chain.

Information security. In a multi- tier supply chain, it takes only one unethical supplier to create an IT se- curity breach. In 2011, the U.S. Senate Armed Services identified over 1,800 instances of suspected counterfeit electronics from China that were in- stalled in military systems made by Raytheon, L-3 Communications, and

O V e r t h e l a s t two decades, many firms implemented various supply chain initia- tives to: increase revenue, for example, more product

variety, more-frequent new product introductions, more sales channels/ markets in new markets; reduce cost, for example, supply base reduction, online sourcing, and offshore manu- facturing; and reduce assets, for ex- ample, outsourcing of manufacturing, information technology, logistics, and even product design. Supply chains to- day are more “efficient” but also much more complex than those in the past. As a consequence, they are more vul- nerable to disruptions and delays. In some cases, unethical behavior of one supplier along the supply chain can cause serious security risks and even deaths. Here are some examples:

Communication and coordination risk. Complex global supply chains of- ten create major communication and coordination problems. For example, Boeing outsourced the design and de- velopment of many critical sections of its 787 aircraft to tier-1 suppliers. How- ever, these tier-1 suppliers subcontract various modules to tier-2 suppliers, who in turn outsource certain components to tier-3 suppliers. With a multi-tier sup- ply chain that has at least 500 suppliers located in over 10 countries, the com- munication and coordination between Boeing and those nondirect suppliers

regarding various product development activities were essentially nonexistent. This is one of the reasons why Boeing’s 787 was launched 3.5 years late and the development cost was $6 billion over budget.5 Further, the lack of communi- cation and coordination is thought to have caused the battery problems that grounded the fleet for a period of time.

DOI:10.1145/2483852.2483862 Christopher S. Tang and Joshua Zimmerman

supply chain coordination and communication problems contributed to delays and cost overruns affecting Boeing’s 787 aircraft.

28 C o m m u n i C at i o n s o f t h E a C m | j u ly 2 0 1 3 | v o l . 5 6 | n o . 7

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scanned at each link of the supply chain all the way to the pharmacist. By using direct communication links among the pharmacy, the pharmaceu- tical manufacturer, and the regulatory body, the pharmacist can authenticate the drug, the pharmaceutical firm can know if its drug has been counterfeit- ed, and the regulator can take appro- priate actions (for example, product recalls) immediately. In Africa, HP and the African social enterprise net- work mPedigree teamed up in 2012 to develop a drug authentication ef- fort to combat counterfeit drugs in 2012. Under this effort, pharmaceuti- cal manufacturers add a “scratch-off label” containing a verification code before distribution. When a customer buys the medicine at the pharmacy, the customer scratches the label to re- ceive the code, and sends a Short Mes- sage Service (SMS) text message to the pharmaceutical manufacturer via mo- bile phone so the manufacturer can verify the drug’s authenticity.

Information technology for expos- ing unethical supplier behavior. Rec- ognizing information access as an important first step to creating public exposure, voluntary groups of activ- ists and NGOs are using the Internet to provide more timely and accurate information about food safety issues in China. In 2012, a group of Chinese volunteers developed websites (http:// www.zccw.info), and smartphone apps (http://tinyurl.com/72orssq) to report the latest Chinese food safety scandals (location, food categories, safety is- sues, vendor identity, supplier identity, and so forth). By providing fast and ac- curate information about food safety issues on a single website or an app, public exposure creates incentives for vendors to be more vigilant and suppli- ers to think twice before committing product adulteration. Pushing this line of thinking further, manufacturers may consider partnering with NGOs to expose the identity of unethical suppli- ers who produce adulterated products on the Internet and mobile phone apps to create the threat of public humilia- tion for suppliers who produce adulter- ated products.2

management tools for mitigating supply Chain Risks While ICT is an enabler for firms to

Boeing. Some counterfeit electronic parts can have malware preinstalled in the motherboards, making it ex- tremely difficult to trace and putting U.S. troops at risk.3 In the same vein, when firms (banks, hospitals, and insurance companies) procure their computers and servers with counter- feit electronics, they are exposed to the risk of leaking credit card data, personal data, and intellectual prop- erty information to cyber criminals.

Food safety. In Europe, the horse- meat scandal in 2013 heightened the concerns over food supply chain secu- rity. While the use of cheaper substi- tutes to produce food products is un- ethical, some suppliers would even use harmful or banned substances to pro- duce food products to increase profits. As U.S. agribusinesses and food manu- facturers import more food products from China, public concerns arose in 2012 after a series of reports about unsafe food products made in China, for example: melamine adulteration in pet food, hydrolyzed leather protein in milk, and chromium in pill capsules.2

Drug safety. Opaque supply chain operations in the pharmaceutical in- dustry and online pharmacies create opportunities for unethical suppliers to produce adulterated or counter- feit drugs. According to the National Association of Boards of Pharmacy, counterfeit drugs generated over $75 billion in revenue in 2010 and caused over 100,000 deaths worldwide.4 For example, Baxter’s contract manufac- turer Changzhou SPL-CZ classified itself as a chemical plant so that it was not under the scrutiny of Chinese State Food and Drug Administration. In 2007, SPL-CZ used chondroitin sul- fate (a cheap and unsafe substance) to produce heparin active pharmaceuti- cal ingredients (API) for Baxter and 14 other U.S. companies. This adul- terated API was then used to produce the blood-thinning drug Heparin that resulted in several deaths and major recalls in 2008.

iCt for mitigating supply Chain Risks As firms are confronting different types of supply chain risks, informa- tion and communication technology (ICT) can enable firms to access rel- evant and timely information so they

can improve communication and co- ordination as well as to screen, moni- tor, and enforce ethical behavior of all suppliers along the supply chain. Some examples include:

Information technology for improv- ing supply chain visibility and coordi- nation. Information technology can enable firms to improve supply chain visibility and coordination. For ex- ample, Agilent, a premier electronics measurement company, implement- ed an IT system developed by Kinaxis in 2011 that would allow Agilent to “bridge” different Enterprise Resource Planning (ERP) systems of all sup- pliers so that Agilent has end-to-end supply chain visibility for real-time communication and coordination. By operating as a “virtually integrated” supply chain, Agilent can respond to market changes in a cost-effective and time-efficient manner.

Information technology for im- proving track and trace capabilities. To manage, monitor, and secure con- tainer shipments, Savi and Qualcomm co-developed an integrated service to provide real-time track and trace ca- pability: Savi uses RFID tags, readers, software, and electronic seals placed on cargo containers, while Qualcomm uses satellites to track and trace the container movement and the seal sta- tus information conveyed by the RFID readers and the electronic seals. In Europe, the pharmaceutical industry started a new initiative in 2010 that is intended to fight the trade of coun- terfeit drugs. Under this initiative, pharmaceutical manufacturers add a serialization code (a unique machine readable “passport” number) to each pack of medicine before distribu- tion, where this passport number is

in a multi-tier supply chain, it takes only one unethical supplier to create an it security breach.

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j u ly 2 0 1 3 | v o l . 5 6 | n o . 7 | C o m m u n i C at i o n s o f t h E a C m 29

improve supply chain visibility, supply chain coordination, and supply chain security, many firms should consider the following management tools.

Know your suppliers and their sup- pliers. Many firms do not fully vet their supplier’s capabilities and their ethi- cal reputation. While ISO 26000 so- cial responsibility standards provide guidelines for establishing ethical standards, a firm needs to conduct au- dits to ensure these guidelines are be- ing followed by all partners along the supply chain. For example, to secure the government’s technology supply chain, the U.S. Department of Defense (DoD) conducts audits and requires certification of all suppliers along the supply chain—not just its direct ven- dors. Because it is inefficient for West- ern firms to conduct frequent audits at various suppliers located in emerg- ing markets, Western firms should form partnerships with various NGOs with local presence who can conduct those audits on a firm’s behalf or pro- vide information about the supplier’s reputation to ensure ethical standards are maintained.

Do not focus only on cost and speed when selecting suppliers. Because most firms tend to award contracts to suppliers with the lowest bid, many suppliers may commit unethical acts in order to ensure profitability after winning a contract with the lowest bid. To break this vicious cycle, a firm should develop a more balanced view and consider different attributes than simply cost and speed when selecting suppliers and the firm should commu- nicate this holistic measure with po- tential suppliers.

Provide incentives to discourage un- ethical behavior. To entice suppliers to maintain certain mutually agreeable ethical standards, firms should devel- op incentives to discourage unethical behavior. For example, the DoD would penalize their vendors for not buy- ing components from pre-approved suppliers or for delivering computer equipment with counterfeit compo- nents. Babich and Tang1 showed that firms can deter suppliers from prod- uct adulteration if they defer their pay- ment as follows: pay an upfront depos- it to initiate the production, withhold the contingent payment, and release this contingent payment only if no

adulteration is discovered by the cus- tomers or government agencies over a pre-specified duration. The logic behind this deferred payment mecha- nism is simple: it allows manufactur- ers to have more time to learn about suppliers’ product quality by withhold- ing contingent payments.

Conclusion While many Western firms have ethi- cal sourcing guidelines and their own internal ethical standards, they should not expect all partners along the global supply chain to share the same values and impose the same standards due to different regulations, different en- vironments, and different cultures. To encourage ethical behavior of all par- ties along the supply chain, ICT is an enabler and the aforementioned man- agement tools are the enhancers. West- ern firms should rethink the way they manage the whole supplier chain and not just focus on their direct links.

References 1. babich, V. and tang, c.s. Managing opportunistic

supplier product adulteration: Deferred payments, inspection, and combined mechanism. Manufacturing, Service and Operations Management 14, 2 (2012).

2. babich, V. and tang, c.s. using social and economic incentives to Discourage chinese suppliers from Product adulteration. Working paper. ucla anderson school, March 2013.

3. cassata, D. lawmakers say counterfeits flood Pentagon supply. associated Press. nov. 8, 2011.

4. gillette, f. inside Pfizer’s fight against counterfeit drugs. Business Week. (Jan. 17, 2013).

5. tang, c.s. and Zimmerman, J. Managing new product development and supply chain risks: the boeing 787 case. Supply Chain Forum: An International Journal 10, 2 (2009), 74–85.

Christopher S. Tang ([email protected]) is Distinguished Professor and edward carter chair in business administration, ucla anderson school, university of california at los angeles.

Joshua Zimmerman ([email protected]) is senior Manager, operations risk Management, amgen, thousand oaks, ca.

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information technology can enable firms to improve supply chain visibility and coordination.

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