Sourcing from China: You get what you pay for

Apr 01, 2008 9:30 PM  By

The steady stream of product recalls from manufacturers in China late last year caused panic at many U.S. companies. Quality and sourcing managers, along with corporate counsel, were asked to define and defend their procedures to protect companies from quality lapses, such as the use of lead paint on children’s toys.

The crux of the issue is rather mundane and boils down to just two simple problems: A lack of resources for managing and monitoring our supply of consumer and industrial goods; and a focus on ever lower prices, particularly in commoditized markets. In short, too few people are monitoring too many suppliers in a now-lengthy and often complex supply chain.

First, the bad news: Many merchants have a limited understanding of the actual content of the products that they sell. Product engineers may have generated technical specifications that drive the vendor selection and production processes, but not always. Buyers often come to Asia with a product that they want to copy or modify, without a drawing or detailed specifications of the product.

Moreover, even when buyers are armed with detailed specifications, the need to reach certain price points drives buyers and sellers to compromise on quality. In many markets, such as toys, the need to meet price points is dire. The incentives and market dynamics drive unwanted behavior. And quality can suffer.

The good news: Overall, the majority of goods produced in China meet global requirements, and the procedures and costs for monitoring product quality are well known and effective — if implemented and sustained. Those companies that want and need to ensure content and quality specifications will need to hire — or rehire — qualified support teams that can document, implement, and monitor rigorous quality control procedures. These additional steps will increase costs, but this additional cost to achieve the desired level of quality is measurable.

The main result of the recent product recalls appears to be a heightened awareness and willingness to probe deeper into the supply chain and define the content of products produced in China. More deal teams will now conduct due diligence that documents sub-contractor processes, defines commodity sources, and outlines potential risks in the supply chain. This level of detail will now be required to satisfy investors, corporate counsel, and other stakeholders.

The bottom line: If we will pay for quality products and if we have adequate management oversight, we will likely find safe, high-quality products in China. If we push too hard for impossible pricing, under unreasonable time frames, and we stop monitoring what the suppliers do, we will receive low-quality goods.

Manufacturers in China can produce quality product. The question is, are we willing to pay a reasonable price for reasonable quality?
Francis Bassolino
managing director, China operations, Alaris Consulting