Sourcing in China: Are the Buyers Getting Smarter? – Updated

Sunday, July 29, 2007 5:37

During my discussion with the WSJ reporter last week (see Assess Your Risk, Plan, and THEN Outsource to China), I was asked whether or not I thought buyers were getting smarter.

At that time my answer was an unequivocal “yes and no”.

There are defiantely companies like B&Q, GM, Nike, IKEA and GE that have put together very strong quality control systems in place. they were put into place by well seasoned professionals and were well funded. In short, their firms saw quality control as an investment in their supply chain rather than as an investment.

On the other hand, you have firms who are smaller, who are new to China, who are lacking seasoned talent, and are looking to at investment required as an expense. they are pushing onto suppliers the QC function, and for some of these products the cracks are beginning to show.

Shortly after this conversation, I read several very relevant articles on this very issue (Toy-Train Maker Discusses Lead Paint Problem (NY Times) , Toymaking in China, Mattel’s Way (NY Times), RC2 outlines safeguards following Thomas recall (Chicago Tribune) that explore the China based supply chains of RC2 and Mattel and give some interesting insights into just how critical investment is to the quality process.

As such, I thought I would draw out some of the important portions of the articles to show just how different Mattel vs. RC2 is, and how Mattel has put together a much stronger system than RC2.

It is easy to see that Mattel’s process (a result of many year of overseas production) is far more advance than that of RC2, a point that the NYT article makes in the first paragraphs:

Inside Mattel’s sprawling test lab here, scores of technicians are doing their worst: setting Chicken Dance Elmo dolls on fire, wrecking Hot Wheels cars and yanking at the limbs of Dora the Explorer. The lab workers are paid to break toys, pick apart their innards, and analyze the raw materials that go into them.

The goal is to protect young children from the serious harm that poor construction or dangerous components can bring. But it is also to protect Mattel, the world’s biggest toy maker, from what is increasingly viewed as the risk of doing business in China.

For readers, what is important to note is that Mattel did not get to where they are without being the subjects a crisis, a situation that RC2 is currently in the middle of:

In the 1990s, critics charged the company with running sweatshops in Asia. Now, independent analysts, and even watchdog groups, say Mattel may be the best role model for how to operate prudently in China.

for myself, and those following the recent scandal, while Mattel’s success is to be appauded, it is really RC2 that should be studied and understood. In doing so, I have pulled out some statements made in the articles that I thought were important (my notes are in italics)

RC2 does not own any of its factories. Instead — like many United States toy makers operating in China — the company works with a local network of contract manufacturers, supplemented by 175 RC2 employees stationed there.

Owning the supply China is the safest of all options as it allows for the most decision making power. Anytime one uses contract manufacturing, particularly in a bidding system, quality becomes secondary to price as buyers will shop around. this shopping around has downsides: manufacture ring relationships are based on pricing, not quality; manufacturers are less likely to listen to guidance from buyers; manufacturers will not invest in process or equipment for a single order that may or may not result in another order

Additionally, 175 employees sounds like a lot, however I would be curious to know how many of the 175 are quality control vs. design vs. retail vs. buyers.

Mr. Stoelting said that RC2 was now requiring lead testing of every batch of paint used on the Thomas toys. And the company has increased the number of times it checks incoming supplies and outgoing toys for problems.

These are excellent steps, and ones that should have been in place. however, I am curious as to who the supplier of paints are. When we are purchasing glues, paints, and other materials we will ask our supplier to assist us with identification, but in the end we will communicate directly with the suppliers. Letting your manufacturer source and buy materials they feel suitable is adding risk.

The company is also hiring an independent auditor to conduct checks, though RC2 executives have not decided whether to release the auditor’s reports to the public, Mr. Stoelting said

Bringing in independent auditors is a strong move to boost the confidence of consumers, however there is some question as to the effectiveness of externals (something that recently was discussed at length at our recent movie night). for these inspections to be truely effective, it is important that they not only come announced, but that they come at different period of the production cycle. Not limited to producers, external auditors should also be used to check material providers (paint, aluminum, wood, etc)

A couple of things that RC2 could learn from Mattel include:

1) Hire in an expert following a crisis to get the job done. Obviously it a problem has arisen of this level, it is time to bring in fresh eyes:

The company hired S. Prakash Sethi, a professor at Baruch College, part of the City University of New York, who had an international reputation as a critic of worker mistreatment. Mr. Sethi would make unannounced visits to Mattel’s factories and vendors’ plants. He insisted that he would only monitor Mattel if the toy maker let him post his reports publicly and uncensored.

2) Invest in their own factories, and spare no expense.

Professor Johnson of Dartmouth visited the Guanyao factory while it was under construction. “I was impressed that they were spending a lot more time and money building dorms,” he said, comparing the factory with those of other companies. “Mattel’s China partner working to build that factory could not understand why they’d be wasting this money on all these things.”

Mattel says that it can control the quality of its toys better because it owns factories like this one. Before the company approves any of its new toys — some 5,000 each year — it produces small batches.

In the end, it comes down to risk and investment. Firms that understand the risks fully, and plan for them, will invest at a higher rate than those who do not. Unfortunately, it sometimes takes a headline for a company to get this point, but with as many headlines as there are now… firms do not need to wait any longer.

UPDATE – The Chicago Tribune is now reporting that this recall will cost RC2 8 million USD.  With a yearly budget of between 350,000 – 400,000 (1 expat with full family, 2-3 support staff, office rent, and other admin), this recall would have paid for between 20-25 years of quality control… and that does not even account for the impact this recall will have on future sales or the impact to stock price.

To learn more, you can read these previous posts

If you want something done right… You Gotta Do It Yourself

Avoid the Middleman! INVEST in Your QC!!

Assess Your Risk, Plan, and THEN Outsource to China

How to Build a Strong Outsourcing Platform in China

Finding the Right Suppliers – Part 1

Finding the Right Suppliers – Part 2

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5 Responses to “Sourcing in China: Are the Buyers Getting Smarter? – Updated”

  1. Christine says:

    July 29th, 2007 at 11:47 am

    Great topic and discussion. Questions on sourcing make up a majority of the emails I get from listeners of my weekly radio talk show on China business here in the U.S. — Please feel free to let me know if you’d interested in an on-air interview on this issue as you make some great points that are relevant to our listener base who make up the smaller business/entrepreneur segment of buyers and still at the start of their learning curve. Look forward to having you on a future segment.
    Best regards,
    Christine

  2. Sourcing in China: Are the Buyers Getting Smarter? | Top China Suppliers says:

    July 29th, 2007 at 12:46 pm

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    December 6th, 2007 at 11:16 pm

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  5. Jim says:

    December 9th, 2007 at 6:15 pm

    Great article. It’s no joke if you source from China and get burned.

    One web site that has helped me handle China sourcing problems better is from GlobalSources.com: http://www.SmartChinaSourcing. Has really practical articles on how to negotiate prices, control quality, make payments, handle shipping and legal problems, etc.

    Good thing about Global Sources is that they also check out suppliers on their site beforehand. It really helped prepare me for some of the issues I encountered, especially since I never sourced overseas before.

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