Supply Risk Beyond Bankruptcy — When Suppliers Might End Up in Jail

Over on Spend Matters affiliate site MetalMiner, there's a fascinating but little published story that my better half is covering that could very well be one of the jucier direct materials supply risk scandals of the year. The short of it is that it appears that a supplier in the titanium supply chain substituted processes when they were not permitted to (at least according to allegations). But these substitutions weren't caught until after the finished parts went through production and assembly. The result is that 7900 unapproved parts may have made their way onto "active duty F-22s, F-15s and C-17s, Navy F-18s, and NASA's Kepler spacecraft". As a result of this alleged blunder, four executives accused at titanium parts provider Western Titanium "face up to 64 counts of fraud and conspiracy for falsifying supplier quality test certifications". But it's not just Western Titanium that the Defense Department is holding responsible -- it's the ultimate contractors, Boeing and potentially Lockheed Martin, as well.

But what actually happened to create what MetalMiner jokingly referred to as "Squished Titanium Parts"? In this case, it appears the "material went through a forging vs. a roll plate process. The shorter process resulted in weaker titanium than what is required for F-15 engine mounts, according to The Air Force." It's not entirely clear from the evidence presented whether "the customers, in this case Boeing and Lockheed Martin, among other government contractors, identified the quality issues or did it take the Department of Defense to first identify the problem?" But regardless, the lesson here is that when a supplier cuts corners, we can never expect to pass the buck on ultimate responsibility. While we might not end up in jail as a result of our supplier's actions, we can -- and often do -- pay just as a high a price with our customers and in the court of public opinion.

As a final aside, what's interesting in this particular situation is that the accused organization has attempted to vigorously defend against these allegations both in the legal courts and also in the court of public opinion. To wit, their lawyers and employee representatives of the company have both commented on MetalMiner in response to the allegations and original post. The comment list is fascinating not only because Western Titanium has punted on answering the questions MetalMiner posed, but also because of the fighting spirit of their responses. Last, it's worth noting the attorney representing the indicted is a high-powered criminal defense specialist who, judging by her responses, is clearly adept at putting together a forceful argument. Yet in my view, she's failed to answer any of the specific allegations that her clients are accused of.

Jason Busch

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