Assess Your Risk, Plan, and THEN Outsource to China

Monday, July 23, 2007 20:50

Recently I have been spending a lot of time on the responsibility companies have when they outsource to ensure the integrity of their supply chain by investing in a solid quality control process, and recently this resulted in an editorial writer from the Wall Street Journal sent me an email as for my comments on the following:

Most, if not all, coverage I’ve seen has focused on the role regulators in Beijing and Washington need to play to clean things up. But I suspect that’s missing the big role for the private sector.

After all, don’t a lot of western companies sourcing in China have a major financial incentive to enforce quality standards independent of regulators? They have to defend their brand reputations in the eyes of consumers back home, don’t they?

First, I totally agree with his initial assertion that it is there needs to be more focus away from just the actions of those in Washington and Beijing. In fact, given the primary decision makers on outsourcing are from the private sector, the primary bearer of responsibility is on the private sector (i.e. those who chose to outsource) to ensure the quality of the goods they are bringing in from China, components or finished. By “ensuring the quality” of the goods I do not simply mean that they look pretty good, or that price-to-quality differences are the same, but that these products are being produced as they were in the U.S. and being inspected as they would be in the U.S.

With regard to the second question, the correlation between quality and brand is without a doubt positive all levels,and what is so interesting to witness is how many firms will add large amounts of risk (knowingly and unknowingly) to their brands when outsourcing. Luxury, midlevel, and low end brands all try to balance brand image, quality, and pricing at some levels, and there are thousands of brand managers spending billions of dollars every year to create brand identities that will lead to customer loyalty as the desired market segment. From the management/ operational standpoint though the decision to outsource to China is a seemingly pretty easy one:

China is low cost, we can save money, and someone needs to fly to China.

Yesterday!

There is no risk assessment or gut check.. WE NEED NEED TO GO TO CHINA TO STAY COMPETITIVE becomes the company mantra and the supplier identification process begins

With this time being the most critical, the logical steps that firms take should include: evaluating supplier capabilities, capacity, price, quality, pricing terms, value add services, etc., and all of these should be considered as part of any final decision. Additionally to this, firms SHOULD be making visits to any finalists and negotiating on site, asking for production samples, running smaller test order, and taking other measures to ensure that the supplier is living up to their promises. Following the successful identification of a supplier, and negotiations, production runs get underway and inspections take place to ensure the product meets specifications and that failure rates are at acceptable levels. If there is a problem, the buyer will have someone who can work through the issues and make the necessary adjustments..

These are the steps that they have taken in the United States in house when setting up their own supplier network there, and it should be expected that the same process would be followed (with more caution) when doing this in China right? After all, with all those news stories about bad products coming from china in the newspapers and shared over coffee at trade shows, one would think that companies would be more cautious right?

Wrong.

All too often, and the recent headlines are proof of this, low and mid-level manufacturers do not take one or many of the steps… For them, their market advantage is on price, and they look for short cuts… they look to save money… they look to cut out middle men of any sort… and do not recognize that by cutting corners on resources, materials, and processes they are essentially adding what can amount to a catastrophic amount of risk into the system.

The choice to move to China is a commercial decision that is made at various levels of management, and it is the role of these managers to ensure that the right supplier is chosen, that the supply chain produces a product no different than it would in their own factory, and that there are the systems and people in place to ensure that should anything go wrong, corrections can be made. Making spot checks, investigating supply lines, monitoring production samples, packing containers in house, performing multiple tests, etc are all views as expenses rather than investments, and as such many will choose to allow their supplier to “get the job done”. Short term, the company saves money, but what these decision makers have failed to understand is that long term they risk everything.

If nothing else, the recent cases show that one bad container can endanger not only one’s brand, but the very consumers who they have built trust with.

This really is a topic that will permeate the global supply chain as it has moved from a commercial issue to a political one. My goal in posting this is not to out any one company, but to highlight that more focus needs to be placed on how companies assess the risks and then take the appropriate steps. The companies that have ended up in the news saved money short term, but what is important to understand is that they not only outsourced their products, they outsourced their brand management, to their Chinese suppliers.

This is a post that will continue..

Comments are welcome

Both comments and pings are currently closed.

3 Responses to “Assess Your Risk, Plan, and THEN Outsource to China”

  1. OUtsourcing to China? Think Before You Leap » Third Party Logistics News - 3plwire says:

    July 23rd, 2007 at 9:18 pm

    […] the complete article here and be sure to drop him a line and let him know what you […]

  2. Assess Your Risk, Plan, and THEN Outsource to China | Top China Suppliers says:

    July 25th, 2007 at 2:59 am

    […] (more…) Bookmark to: […]

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

    July 29th, 2007 at 12:42 pm

    […] 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 […]