How Welspun’s Supply Chain Spun Out of Control

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One in every five towels sold in the U.S. is reportedly made by Indian company Welspun, which is now in the thick of a storm for allegedly selling fake Egyptian cotton sheets to Target Corp. and other retailers.

Target, which has not disclosed when it began investigating the Mumbai-headquartered company, or what caused it to scrutinize the sheets imported from the Indian manufacturer, said it was terminating all ties with Welspun, which also supplies major American retailers Bed, Bath and Beyond, Walmart, J.C. Penney, Macy’s, Costco, and Home Depot. Target pulled Welspun manufactured items from all its stores, and so did Walmart. Other retailers are also investigating Welspun’s cotton certification.

Target has also decided to refund all its customers that bought the sheets sold under the Fieldcrest brand. The retailer said that about 750,000 sheets and pillowcases sold as Egyptian cotton were made using a different type of cotton and were sold for as much as $75 a piece. Welspun’s other customers said they have started or would start their own investigations to see whether or not the textiles contain Egyptian cotton.

After an extensive investigation, we recently confirmed that Welspun substituted another type of non-Egyptian cotton when producing these sheets between August 2014 and July 2016,” Target said, adding “We have informed Welspun that, due to this conduct, we are in the process of terminating our relationship with them.”

Welspun, which is set to face two class-action lawsuits in U.S. federal  courts, was quick in its reaction and took responsibility for the incident, although it defended its products and blamed the lapses on inadequate supply chain processes. We have initiated immediate actions to investigate the root cause. We are appointing an external auditor to audit our supply and processes. This is an issue of highest priority for us and we will take all necessary steps to address it,” the company said in a filing to Bombay Stock Exchange.

Welspun hired Ernst & Young to help it oversee and review its supply chain processes and systems.

“We are already installing technology to monitor our supply chain, and vertically integrating to ensure complete traceability of cotton fibers. This will give Welspun an industry-leading capability for establishing provenance of our products,” Welspun told in a filing to the Bombay Stock Exchange.

The challenge for Welspun will be to figure out exactly where and how the lapses occurred and for how long they have been going on. Forbes.com quoted Indian analysts as saying they don’t know how deep the problem is. The famed long fiber high-grade Egyptian cotton is below 2 percent of the global cotton output and is also expensive. Most manufacturers that claim to use Egyptian cotton in their products either blend it with other cotton or use a similarly high-grade cotton grown elsewhere. Textiles made from Egyptian cotton are softer and durable and sell at a premium.

Although Welspun is not the only company to get into trouble with its buyers, it is the latest in a series of companies whose supply chain issues have caused business and reputational damages. As suppliers compete on costs, they could end up cutting corners to ensure better margins for themselves. In the process, quality could be impacted. There are multiple examples of how supply chain issues have caused companies to suffer penalties and fines, branding and reputational damages, service and product launch delays, and others.

To prevent these issues, companies should focus on identifying, assessing, managing, and mitigating supplier risk. Remember that risk is always present, but having the right processes and controls goes a long way in reducing exposure to supplier risks.

To ensure that suppliers meet the required business and regulatory requirements, companies must have a due diligence and supplier compliance plan firmly in place before onboarding a supplier. Along with this, it’s important to ensure that suppliers have all the certificates required to prove their manufacturing credentials.

Another best practice is to compile, combine, and centralize all supplier information required for compliance. Integrating data in one location makes it easier to access and track.

Companies would also do well to identify potential supplier risks such as legal risks, financial risks, or environmental risks. This will help stakeholders gauge the preparedness of the organization to mitigate those risks. It will also help the organization build better risk mitigation plans.

The key is to assess and monitor risks on a continuous basis and close the gaps, so as to be prepared for any eventuality. Risk management must be ingrained in the company culture and companies must align it with their business goals.

It takes years to build a market reputation and only days to destroy it. Hopefully, Welspun, a brand well known among many western retailers, will emerge from this crisis soon. Repairing their brand is likely to take some time; but with a robust supplier risk management program, the company will be well-positioned to regain the trust of their buyers.

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