OUTSOURCING SUPPLY CHAINS – COMPLIANCE RISK & NATIONAL SECURITY

July 10, 2020

Fundamentally, the terms “outsourcing” and “supply chain” are used interchangeably and refer to when an organization is dependent on a third party for providing products and services. However, there are many examples of internal sourcing (or “insourcing”), where supply chains consist of entities and processes under the direct internal control of an organization such as subsidiaries and other business units, and these should be considered along with external suppliers, especially when they are not co-located.

The coronavirus pandemic has exposed the downside with respect to outsourcing ‘critical’ products and services internationally by U.S. companies and government agencies.  These disclosures were bound to become public eventually – the pandemic has merely accelerated and intensified the security threats from such risky measures.  There have been many knowledgeable executives, consultants and analysts that have been voicing concerns over the years about the cyber security risks of global outsourcing and supply chain compliance risks.  But it took the pandemic disaster to raise concerns sufficiently for renewed calls to action.

Now, we are seeing a heightened media attention regarding organizations failure to consider the corporate supply chain compliance risks and national security threats due to outsourcing vital manufacturing to third parties both domestically and especially foreign-owned companies.

The initial obvious risk was that of depending on predominantly Asian countries for medical PPE (personal protection equipment), i.e., surgical masks, gowns, gloves, etc., for critical medical equipment such as ventilators, swabs, reagents and more, and for life-saving medications, particularly generic pharmaceuticals.  While such shortages are profoundly serious and have cost many lives, they at times fall short in comparison to threats on critical infrastructure and military systems.

An example is how America’s defense infrastructure runs on advanced electronics most of which are made abroad.  Ninety percent of the world’s printed circuit boards are manufactured in Asia, and more than half in China.  This is a consequence partly because of China’s determined effort to build up a domestic research and manufacturing base for their own advanced technologies.  Meanwhile, Chinese direct investment in American companies topped $64 billion between 1990 and 2015. While this lags behind Europe and Japan (Japan has invested around $400 billion), it does give Beijing another sizable stake in the U.S. economy and industries.

As if the prospect of American weapons being dependent on Chinese-made parts is bad enough, there are already worries that Chinese-made electronics may be infected with computer viruses that would let China spy on or disable U.S. military, commercial and consumer products.

As increasingly confrontations between the U.S., China and other countries have evolved, it appears that the Administration suddenly became aware of the U.S. dependency on foreign products that are integral to the operation of the electrical grid.  This resulted in the May 1, 2020 Executive Order (EO) 13920 on securing the American bulk power system.  The EO suggests bringing back to the U.S. the manufacturing of power-grid equipment that has been outsourced abroad.

While the EO is an important step in moving towards self-sufficiency with respect to critical power systems, it indicates a lack of understanding of the scale, difficulty, cost, time, and effort involved.  Many analysts believe that the problems of bringing manufacturing back supports the idea that this is a huge multi-hundreds-of-billions of dollars project that could span many years.

There are equally, troubling deficiencies in supply chains, not only in the vulnerability of supply chains to ‘disruptions’, but also reliance on products and services crucial to our national security.  The risks associated with outsourcing critical products and components to questionable offshore entities, particularly as they relate to national security interests will continue to increase exposure throughout organizational operations across the board.

Global outsourcing has evolved to impact many of these organizational risks:

  • Loss of control for delivery and continuation of operations
  • Lack of expertise
  • Viability of service provider
  • Quality of service
  • Reliability of product and support
  • Knowledge transfer
  • Responsiveness to support
  • Supplier Trust issues

A vital consideration from our collective organizational experiences with the pandemic is the recognition that national security and organizational operational control need to be considered when any major outsourcing decision is made.

Even if it takes much more initial investment resources and effort than would ignoring these issues, it can end up with far less compliance risk and be more cost-effective in the long term.  By allowing so much of our manufacturing capabilities to be in the hands of global offshore interests, who might become adversaries at any point in time, we have greatly increased potential security risks in the future.

Modevity Investigative Due Diligence Services provide actionable intelligence for risk avoidance in detailed reports that assist companies in assessing their supply chain.

https://modevity.com/supply-chain-risk-management/

Modevity supply chain audit services can assist you in protecting your company’s financial position, its operations, and its reputation going forward.  Our staff of veteran investigator analysts can provide timely and actionable intelligence on your entire supply chain.  Allowing you to make more informed decisions about overall operational quality and effectiveness of your supply chain.

 https://modevity.com/about/

Author: Tom J. Canova, Co-Founder, CMO, Modevity

Contact: tomc@modevity.com  610-251-0700

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July 10, 2020