News of a 25 year old committing suicide at Apple’s primary China supplier (Foxconn) has once again brought to the front burner the difficulties of managing outsourced operations, and the risk to the brand that these arrangements bring when improperly managed.

It is a situation that sadly I believe could have been avoided, and that unlike the 1997 Nike scandal where it took NGOs and the media to highlight the problems (for the first time), labor problems – particularly with its supplier – are neither new nor unknown.

Go back 36 months, when news (and pictures) hit the wires that Apple’s Suzhou supplier (Foxconn) was improperly housing employees, forcing overtime, and paying poor wages. A huge story for both the domestic and international press, Apple responded very quickly by sending their “crack” team to investigate the allegations. Allegations that ultimately Foxconn and Apple would own up to, almost.

However, more recently, signs that Apple’s China supply chain were really in poor shape came through another report that one of their suppliers, Wintek, was wrapped up in a number of disputes and strikes over labor conditions.   Conditions that violated Apple’s own Code of Conduct.

The most recent warning sign came in the form of Apple’s own internal document the release of the Supplier Responsibility 2009 Progress Report (download here) where the following highlights went public

45 of the 83 factories that built iPhones and iPods in 2008 weren’t paying valid overtime rates for those workers that qualified, while 23 of these weren’t even paying some of their workers China’s minimum wage.

A deeper look at Apple’s findings found that about 25 of the 83 also discriminated to some degree against people based on ethnicity, biological issues like disabilities, or political leanings. 22 didn’t meet environmental standards, while almost exactly a fifth also had problems with on-site living conditions and safety.

It is quite simply a report that should have set off an all hands on deck response in Cupertino, and were the press not obsessed with the health of the Dear Leader, perhaps the release of this document would have been a leading story.  Instead, it largely passed under the radar, and over the last few days we have come to see how poorly Apple assessed the risks and severity of the problems.

I by no means want to imply that had Apple taken steps beforehand that this situation would have been avoided, however I think it is important to point out that through its own issues in 1997, Nike began putting 1 full time inspector on site of factories.  inspectors who were independent of the supplier, an moved on a regular basis.  Suppliers who were the eyes and ears of the corporate, and could alert HQ of issues and manage the programs meant to minimize code of conduct infractions.  Infractions that Nike still admits openly it struggles with.

Apple’s consistent issues are a problem that goes far wider and deeper than a single guard, and like Mattel’s paint line, is in need a change. A systematic change.  A change that will be difficult, as they have completely outsourced all operations, I have a few suggestion of where I would start:

1) Contact Nike
Why contact Nike?  simple.  Nike and Apple are essentially one in the same, they are design and marketing firms who rely on others to bring their designs to the market.  At the same time, they take no equity stake in these firms, and like everyone else who outsources, are focused on the bottom line.

So, by contacting Nike to learn lessons, Apple will essentially be reaching out to a peer who has been through the same things.

2) Get Boots on the Ground
Simply allowing their suppliers to “manage” things is at this point negligent at best, and perhaps criminal.  Their own code of Conduct is simply being breached on a regular basis by an unacceptable number of their suppliers, and they need to take the reigns of this wild horse.

So, get inspectors from Cupertino on the ground.  NOW.

3) Invite in third parties.
Clearly Apple needs assistance in the process, and firms like Business for Social Responsibility would bring a significant amount of experience, independence, and credibility to the issue. Quite simply, at this point, whey would anyone trust another Apple report, and more than that, what is the risk that now external agencies, NGO, and media are given the access now (think Indonesia).

4) Do the Right Thing
Foxconn is not the one on the firing line, Apple is.. and it must make sure to either hold Foxconn’s head to the fire, or take the bullet themselves because in the end, it is Apple that lawyers will sue, that reporters will write up, and consumers will boycott.

5) Make materials improvements, or make materials adjustments
Going forward, breaches must end.  Period. Otherwise, Apple will need to look at being a manufacturer again.  That,while manufacturing is seen as expense by investors, the point will be made that the risk of brand damage will need to be made.

That it is a much better use of money to bring it inhouse vs. burning down the house.

6) Open Up
Apple’s previous life as the introverted firm with cool stuff is over, and like Nike, it will have to open itself up.

Managing global operations is not an easy task, and while this post is focused on Apple, the point that this could have happened to anyone needs to be made. 2 years ago, when we were in the middle of the “Made in China” crisis, I made the same point, and at the core the issues behind both are the same.

It comes down to investment. Investing in a process. Investing in people.

That treating China like a McDonald’s drive-thru is not sustainable over the long term, and regardless of whether or not breakdowns occur in China, the fact that breakdowns do occur is not a “China” problem.

The summer and fall of 2007 should have been a wake up call for anyone and everyone whose supply chain involved China.  The risks of doing business outside of one’s four walls smacked importing firms across the face as their products failed.  Lead paint barbie, tainted dog food, and others.

It was a time when “Made in China” became something tainted in itself, even though many of the failures had little to do with China itself, and one would have thought that through that time people would have learned a lesson.

Well.  It appears not.

The title of the recent Seattle PI article should say it all Honey Laundering: Tainted product still slips easily into U.S., and if it doesn’t than these paragraphs should capture your attention:

The newspaper’s five-month investigation into honey laundering — the intentional mislabeling of the country of origin — found that tons of Chinese honey coming into the U.S. is tainted with banned antibiotics.

But when the contamination is discovered by the industry through internal testing, insiders say, federal health or customs officials are almost never notified, and the honey ends up being dumped back on the market.

In particular, the article highlights Sue Bee Honey, which are finding (on average) a container of bad honey a month,  and rather than report ths shipment to the FDA or destroy the content, they are returning the product to their suppliers IN CHINA to handle it:

Bill Allibone, Sue Bee’s president, said the company has no intention of telling government regulators about the bad honey it finds.

It’s not really Sue Bee’s honey, he said, “because technically, it’s still (the importer’s) property until we pay for it.

“We have not notified the FDA in the past because we don’t have title to that property,” Allibone said.

“We deal with a core group of suppliers that have long, established ties in the import business, and we’re assuming that when we reject a load of honey, they’ll return it to the people they purchased it from.”

Allibone said he has no idea whether the tainted honey is resold to other U.S. packers. Asked whether the company had an obligation to take action to protect the public health, the president repeated: “It’s just not our honey.”

Isn’t that fantastic.

Their suppliers who have a “long history” of importing the honesy are selling them a bad container a month, but they are somehow entrusting them to do the right thing.

Perhaps I am over reacting here, but this is just a cop out on the part of  Sue Bee Honey, however this article also highlights a massive hole in the system.

Why are these groups not forced to report failures?

I began wondering this question actually when reading that the recent producer of Salmonella laced peanut butter had found salmonella through internal tests, but that there was no rule specifying that they must notify anyone of this, and they were able to ship the tainted products anyway.

So, once again we find ourselves faced with a systemic issue whereby Chinese suppliers are shipping failed products, corporations are looking out for their self interests, and the agencies are unprepared.

Just when I thought that progress was being made.

The scenario is always the same.

An executive team is in China assessing the opportunities for China based manufacturing.  they want to meet potential partners, understand the environment, see what the conditions on the ground are, etc.

They have heard from others, and seen in the media (blogs inlcuded), that China can save them money… and for them All Roads Lead to China

But, there are times when as a consultant in China you have to say NO.  That the worst possible move they could make would be to outsource their product to China (or anywhere for that matter) as either the volumes are not there, or the price points are not feasible, or they simply have one of those products that has no hands on it at all and the risk that would be injected into the system vs. the gains are to great.

The Businessweek story Dangerous Fakes presents a very timely article on how outsourcing critical parts to military equipment can have long term consequences that were not thought of.

Personally, I am floored at times by how far people will go to save a buck.

Computer chips for the latest fighters and routers used in military networks are exactly the items that countries should not be outsourcing to anyone, let alone bringing in distributors who:

Hakimuddin says she knows little about the parts she has bought and sold. She started her business by signing up on the Internet for a government supplier code. After the Defense Dept. approved her application, with no inspection, she began scanning online military procurement requests. She plugged part codes into Google  and found Web sites offering low prices.

Then she ordered parts and had them shipped directly to military depots. “I wouldn’t know what [the parts] were before I’d order them,” she says, standing near her front door. “I didn’t even know what the parts were for.”

Amazing.  After the last 8 years of listening to my own president speak about how security is the country’s number 1 issue, it all comes down to this one person who by her own admission doesn’t know the first thing about the product she is buying or the suppliers she is finding.

What was the process here?  Didn’t anyone think that these components may be of a higher level of protocol to find domestic manufacturers or at the very least find a factory direct source?

Case closed: these items should have never been outsourced.

Perhaps an extreme case, what I hope this example highlights is that (1) companies/ countries should not outsource items that are critical to their ongoing concern, (2) that if they do, they should make sure the right people are in place to manage the process, (3) that there needs to be a process

Going along on a topic I have covered quite a bit in the past, responsible sourcing, Ethical Corporation has written a painfully detailed article on Adidas’s recent supply chain woes and how they are handling them.

You may remember my post on their labor issues earlier this year, and as you will remember I have said that companies need to clean up or clean out, but through this article a twist is added… the factories in question are (according to Adidas) previously Reebok manufacturers, and that integrating their supply chains has been a difficult process to manage.

I suggest you read the article in full and then consider how the Adidas supply chain and the Reebok supply chain differ… and what was the source of the difference, and how did the difference impact their ability to work with/ manager their suppliers

Sound familiar to anyone?

Focusing on the difficulties of transparency within the supply chain, Melissa Brown of Association for Responsible and Sustainable Investment in Asia (ASRiA) sat down for an interview covering a lot of the angles surrounding the integrity of supply chains in China.

I highly suggest taking your lunch break to watch the 15 minute clip, and then think about some areas you feel may be at risk within your supply chain. I have listed the 7 questions she was asked along with a few bullets on what she said… and added a few thoughts of my own in italics

Questions asked during this clip are:

1) How easy is it to get details about Asian companies?
- Need to have a sense about what is know and how to compare
- Need to use different tools – policies are not set the same way, available resources can be limited

Getting information about Chinese firms is not terribly difficulty, it is about time and the amount of money one is willing to spend. One can approach firms from different angles, as a buyer, as a supplier, through a friend, through Alibaba.. you can even stake a factory out for a week. But it all comes down to how much time you want to spend, and the budget you are willing to allocate

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A couple of weeks ago, I threw out the argument that the potential success of Vietnam was severely limited over the next 5 years because their logistics infrastructure was not in place to support large amounts of FDI…

Well, as it turns out the World Bank agrees with me, or at least their recent Logistics Performance Index supports that line of thinking in general. Released November 5, the news release says the report:

a study based on a world survey of international freight forwarders and express carriers, indicates that facilitating the capacity to connect firms, suppliers and consumers, is crucial in a world where predictability and reliability are becoming even more important than costs.

The researchers/ authors did a great job at looking at “logistics” as more than the physical movement of goods on a ship by including telecom, services , gov’t department, and a number of other steps/ pieces that need to exist for the entire process… and then they linked that back to the income levels of a country

In this highly competitive world, the quality of logistics can have a major bearing on a firm’s decisions about which country to locate in, which suppliers to buy from, and which consumer markets to enter.

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for the last few months, there have been few China related topics discussed more than the 2007 lead tainted toys, and more generally, product safety. Fingers have been pointed, stones thrown, consumer rights in high gear, and Lou Dobbs has gained traction.

But thorough all this, many are wondering what the real impact will be. Will “Made in China” suffer, what will the impacts at the checkout counter be, and what does it all mean for those brands/ people in China who are manufacturing for export.

Well.. according to a NYT poll recently, it looks like cooler heads are prevailing (on the whole), and that the recent recalls have not damaged the “Made in China” brand – despite the efforts of some.

In fact, according to their study (full results can be downloaded here) that while a significant portion of the resppndants did think products made in China were more unsafe than those made in other areas

55 percent, said the recent wave of recalls just created a perception that Chinese imports are more harmful than imports from other countries.

and this “perception” of harm, while detouring some respondents (14%) from purchasing goods “Made in China”, has not detoured the majority (65% haven’t stopped).

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Just stumbled on a interesting collection of pictures on maZm (via China Digital Times) of men and women working in a toy painting factory. In total, there are 25 shots (I have a couple here).

As I said before, the average consumer is too disconnected from this process, and I hope readers will pass this around. There are no stone face killers in these pictures, just some shots of your average Mr. and Ms. Zhou (pronounced Joe) hard at work.

Why Lou Dobbs Scares Me More Than Chinese Toothpaste was a post I wrote early on in the days of “Made In China”. My position was that while there were certainly problems in the supply chain, Lou Dobbs (and other like him) were actually far worse because of their predatory reporting. Far from being balanced, Lou Dobbs always feels the need to remind viewers that China is a communist country, and does little himself to bring on balanced panels or perspective.

Well… it appears that someone else (more powerful than I) has also grown tired of Lou and his “communist China” angle.

According to a press release dated October 17, Gary Shapiro (CEO of the Consumer Electornics Association) has:

issued a direct challenge to Dobbs to present his viewers with a balanced view of international trade. “I am prepared to debate Lou Dobbs live on his CNN show,” Shapiro said. “His anti-trade comments on his cable show and his refusal to grant equal time to opposing viewpoints are inconsistent with CNN’s great legacy as a pioneering news network. We are hopeful that CNN will wish to retain its credibility and allow equal time for pro-free trade viewpoints.

also included in the release were some stats from a Zogby study (I am looking for study) that I found very interesting:

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With retail chains forming around China (Lianhua, Walmart, etc), there has been a lot of news recently on China’s sad state of affairs when it comes to cold storage. A lack of trucks, containers, warehouses, and just a generally difficult process for approvals for those who are wiling to invest.

So, when Eimkip opened their brand new warehouse in Qingdao (through put of 500,000TEUs), it goes without saying that people were excited… Baldur Gudnason (CEO of Eimskip) had this to say in front of the 350 other Icelanders

This is a very exciting project, which supports the current operations of Eimskip China. We have established 4 offices in the country in recent years and currently around 100 people work for Eimskip in China. The cold store project started with the visit of Mr. Olafur Ragnar Grimsson to Qingdao in 2005 and is now concluding successfully.

Located between Shanghai and Beijing, Qingdao is know best perhaps for its beer Tsing Tao (same pronunciation…just a different spelling), however Qingdao has a very long history as one of China’s original trading ports. Heavily influenced by the west, Qingdao has always had a strong port (see map), has seen a lot of western business and with this new warehouse, they are sure to garner more interest from those in the food industry (not just fish processing as mentioned in this Shanghai Daily article).

In addition to this opening, and the planned expansion, Eimskip’s website also announced that they had taken a stake in the Linyi container depot (110,000m2) . According to their announcement:

Eimskip has a call option to buy additional 20% share in Luyi Depot. Former owners will hold 40% share and will further develop the operation of Luyi Depot with Eimskip.

This investment obviously is a positive sign for things to come, but I cannot help but wonder where they will get the trucks needed to support the facility.

For anyone interested in learning more about cold chain in China, I would suggest you download this Accenture report or this AT Kearney Report. Both give a good overview of the industry, the need, and the hurdles. The September edition of CHaINA also has a great article on cold chain as well.

For more on Qingdao, see Dan Harris’s comments on a trip he took there. I personally have yet to make it there, but from everything I have heard, it is a place I need to go.