30 Aug New China Syndrome: When outsourcing turns toxic
Toys. Baby clothes. Pet food. Automobile tires. Toothpaste. Seafood. Blood glucose monitoring test strips. What do all these products have in common? Each has recently been found to contain flawed materials or dangerous ingredients, posing health and safety risks to children, pets, and adults. All the products in question were produced in China and sourced to US-based companies.
In the 1980s and 1990s American companies (and those of many other nationalities) were obsessed with quality. In this first decade of the 21st century, many business executives now seem enthralled with the single-minded, never ending pursuit of cost reduction. A direct consequence of this cost-cutting compulsion has been the spread of outsourcing, which is now a global phenomenon and the universal management mantra of the bean-counter set.
Outsourcing can result in cost reduction and improved performance, but it can also lead to decreased product quality and diminished service. The difference between a positive or negative outcome from outsourcing depends largely on the soundness of the strategic rationale and quality of its management and execution.
A new China Syndrome?
The film “The China Syndrome” tells the story of a reporter and cameraman who discover safety cover-ups at a nuclear power plant. The title refers to the idea, mentioned sarcastically in the movie, that if an American nuclear plant melts down, it will melt through the Earth until it reaches China. One wonders if a different flow of toxic substances is now headed in the reverse direction.
Today, China has become a powerful global economic power plant. Its manufacturing driven economy – geared to high-volume, labor-intensive, low-cost products is booming. Companies have flocked there to set up manufacturing operations while sourcing of all manner of goods to Chinese producers has occurred on a massive scale.
Many consumers have enjoyed the benefits of China’s low-cost manufacturing process – how would Stephen Colbert manage if he couldn’t buy six pairs of tube socks for $1.99? But as we are now finding out, there are serious downsides to the Chinese manufacturing model. According to a study by consultants Mckinsey, a key contributor to the problems may be that producing products in China has been so cheap that sloppy and wasteful practices have become rife. They estimate that Chinese manufacturing labor costs are one-fifth of their levels in Europe and the United States.
The study authors contend that Chinese companies and even many multinationals have been running plants there less efficiently than in other parts of the world, but are still coming out way ahead financially. Additionally, building a reliable base of high-quality suppliers has been a constant challenge. In the opinion of the authors, many multinational executives in China settle for the performance they have rather than the performance they could get.
Revenues and profits look terrific, so they don’t take all the steps they could to reduce waste and inefficiency (not to mention massive pollution and unhealthy, dangerous, and abusive working environments) in their supply networks. But most of this has been overlooked because there are too many companies addicted to profits and consumers hooked on cheap goods to notice.
Mattel’s unhappy “Toy Story”
Perhaps the highest profile player affected by recent events in China is Mattel, the world’s largest toy company. It is currently in the midst of recalling millions of Barbies, Elmos, and other toys contaminated with lead paint or containing small magnets that are choking risks for small children. The company’s experience sheds light on the role of suppliers and buyers when outsourcing goes wrong.
The executive vice chairman of the Guangdong Provincial Toy Industry Association, asserted in an interview reported in London’s Daily Telegraph newspaper that Chinese manufacturers and American toy giant Mattel are both responsible for the recalls. “Blame cannot be pushed to either side,” he said. “The producers are responsible because they do not have tight controls over purchasing and production, but the buyer, Mattel, cannot evade responsibility.”
And indeed, the company has admitted as much. It turns out that Mattel’s quality problems run much deeper than a single supplier, facility, or product. And they are happening with some of the toy company’s most trusted suppliers. Mattel is far from an inexperienced outsourcer of manufacturing – it has sourced toy products in Asia since 1959 and has long-term relationships with Chinese suppliers, some ranging over decades. The company has entrusted its most reliable suppliers to do their own product testing.
The products recalled were produced by suppliers that it had done business with for 15 or more years. It appears that they had engaged in unauthorized subcontracting to other parties, who were the source of the toxic paints that went into the recalled toys.
Why outsourcing meltdowns happen
Three pathologies are largely responsible for the types of breakdowns that we are seeing with Mattel and other companies relying heavily on outsourcing:
Compulsive cheapness – Cheapskate companies often put severe price pressures on suppliers that force them to find ways to cut corners. Subcontracting to cheaper producers may occur, putting quality and safety standards at risk and further removing the buyer from the production process. This may be what happened in Mattel’s case. The executive vice chairman of the Guangdong Provincial Toy Industry Association suggested that price pressures forced the Chinese manufacturers actions. “If you give a high price for purchasing, the factories will use high quality raw materials to produce. But if the price is low, they can only use inferior raw materials.”
Knowledge and control gaps – Gaps in information and oversight can be caused by distance and erosion of know-how. The further removed from a process the buyer is, the greater the opportunity to lose control over it and the more risk that know-how about how a process should be performed is diminished or lost entirely.
Management failures – Outsourcing involves contracting with a third party to perform an activity or process. Many times, this means handing over management responsibility as well. Quality assurance and testing processes are necessary and valuable, but they are not a substitute for proper management attention and accountability. The vendor must deliver results, but it’s the buyer’s responsibility to ensure this happens. Relying on contracts alone, or even quality testing after the fact, may not be sufficient.
Avoiding Outsourcing Meltdowns – Tomes have been written on how to manage outsourcing successfully. But the most successful cases involve buyers that have a holistic view of their processes and operations and that proactively encourage, guide, and enable learning among all suppliers. Toyota is perhaps the most well-known success story. It maintains a strategic objective of continuous improvement of quality and cost. To achieve this, it treats suppliers as part of its family, trains them in its philosophy and way of doing business, and works with them to continuously improve what they do.
Whole Foods sets high standards for what it sells and validates that its suppliers meet them. It advocates for its customers’ health, environmental, and social values. The company elevates its suppliers’ standards and practices rather than force them to drag down quality to meet demands for rock-bottom prices.
To avoid the pathologies that lead to outsourcing meltdowns, companies should:
Be careful not to become obsessed with price – There is a big difference between being cost effective in your strategy and management practice and compulsively cheap. Cost-effective is really about value for money. It’s doing things in ways that keep costs down but which don’t reduce quality. Cheap is chasing price, all the way to the bottom. Often the lowest price is achieved by reducing quality.
Set and enforce high safety and quality standards – Make sure contracts, oversight, and control mechanisms support them. Avoid arms-lengths contracts with suppliers where risks of failure are high.
Invest in know-how – Keep up management acumen and quality-control capabilities related to outsourced processes by investing in training and knowledge development.
Be accountable – The reputation of your products and your brand and meeting the customer expectations is solely your company’s responsibility. Make sure you act that way. Outsourcing, even when it involves suppliers halfway around the world, doesn’t absolve a company from its accountability for these things. “Not knowing” is not an excuse.
Has your company experienced an outsourcing meltdown? What were the consequences and how did your employer respond? Please e- mail Tony DiRomualdo at firstname.lastname@example.org to share your experiences and perspectives.
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