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China’s Quality Squeeze


Last updated 7/13/2010

Analysts are just beginning to assess the strategic impact of the recent wave of incidences of quality failures tied to Chinese exports. Largely due to sustained consumer demand for inexpensive Chinese goods, some are predicting that product recalls won't slow business expansion in China. Instead, companies will likely inject more stringent quality-control measures into their dealings with Chinese suppliers and their management of supply-chain processes.

Seventy percent of product recalls in 2007 involved Chinese-produced goods—including hazardous toys, tires, toothpaste, food and medical supplies and equipment—costing companies tens of billions worldwide (Edmund 2008). Expansion of Chinese imports to the U.S. has helped create this scenario. From 2001 to 2005 alone, the volume of imports from China grew 30% annually, so that today Chinese goods comprise 40% of all U.S. consumer imports ("The Last," 2007; Qi 2006).

China's supply-chain quality lapses do not appear to be a critical factor in growth strategies, however. According to some quality professionals, the store of cheap Chinese labor and raw materials will continue fueling expansion of foreign investment in the nation's manufacturing sector, keeping exports from China robust. A significant two-thirds of 446 U.S. executives surveyed by Deloitte (2007) said they expect their organizations to establish or expand operations in China over the next several years. And, based on their proprietary survey of 46 manufacturers in China, analysts from the smart cube (an international business research firm) forecast that most firms will continue outsourcing their operations to China, even in the face of rising global fears over product safety and supply-chain gaffes. Nearly 80% said they were confident their supply chains were meeting quality standards; 78% said massive recalls of Chinese-made toys did not prompt them to review their supply chains (Abdullah 2007).

Such confidence may rest partly on the understanding that "on average, two-thirds of [recent] recalls were the result of design defects, and you can't blame [China's supply chains] for that," suggests Gene Rider, VP of global retail services for Intertek Plc. In addition, loyal customers of Chinese suppliers, particularly those importing electronics components, say their sources have consistently met the high quality demands of Western markets. Selectron Corp., a provider of electronic manufacturing services, for instance, expanded its China sourcing from 30% to as much as 50% in just five years, with continued growth on the docket. And Louisville-based lighting manufacturer Genlyte Group touts the 0.02 defect rate for its Chinese-made components, a higher quality achievement than some of its U.S. suppliers have delivered (Banham 2007).

But a Quality Executive Board (QEB) survey of 60 companies suggests that such confidence is not widespread. In its examination of best practices and risk factors for sourcing goods from China, QEB found satisfaction with suppliers limited to a relatively small segment of companies, those that have developed long-range supply-chain strategies that employ diligent pre-contract vetting and costly onsite visits (reportedly undertaken by only 17% of respondents) ("The Quality," 2007).

Having recently acquired a keener sense of supply-chain risks, businesses realize they face daunting costs associated with quality control. Twenty percent of respondents to the QEB survey said supply-chain quality-control costs canceled out savings garnered from low-cost labor. As a result, many are seeking more affordable quality solutions through closer collaboration with their suppliers. A 2007 Global Sources survey found more than 60% of suppliers increasing their quality-control budgets and 63% of suppliers establishing quality standards and strategies with buyers well before production begins ("Over Sixty Percent," 2007).

Still, with product-liability risks mounting, analysts say it makes good business sense to set the bar very high for supply-chain standards and to invest liberally in a mix of risk-aversion strategies. Large companies such as Quickie Manufacturing are heeding this advice. Deploying statistical process control, a tool that collects and analyzes complex supplier data in real time, the firm has been able to maintain high-quality standards for its product components while preventing major breakdowns at manufacturing sites ("How to," 2007). Experts also recommend that companies utilize monitors to directly oversee plant operations and carry out surprise spot checks at various points along the supply chain.

Effective risk management for supply chains remains at an early stage and, according to a recent Accenture survey, continues to elude as many as 89% of companies operating in China (Banham 2008). The recent emergence of independent testing agencies and supply-chain monitoring and mapping services is boosting quality efforts. But as long as troublesome supply chains continue to pose financial threats and Chinese regulatory networks remain weak, some experts advise companies to require their Chinese suppliers to commit to contracts that assign product liability—and recall costs—to the party directly responsible for quality failures (Fremlin 2008).

References:

Abdullah, O. (2007, December 20). Survey: Global manufacturers staying put in China. the smart cube.
Banham, R. (2007, September). Chinese checking. CFO, 60–64.
Banham, R. (2008, March). Fixes for broken China. Treasury & Risk.
Deloitte. (2007, January 1). Innovation in emerging markets: 2007 annual study.
Edmund, M. (2008, January). Message to firms using overseas manufacturers: "Get over there." Quality Progress 41 (1).
Fremlin, G. P. (2008, January/February). Careful contracts reduce risks. China Business Review, 35 (1), 34+.
How to avert your next supply chain failure. (2007, March 1). Quality.
The last word: Helping China's quality. (2007, August). Quality
The Quality Executive Board identifies best practices and major risk factors for managing the quality of goods sourced from China. (2007, September 25). Business Wire.
Over sixty percent of mainland China exporters spending more on quality control—Global Sources Survey. (2007, September 24). PR Newswire.
Qi, W. (2006, September 29). China's surging foreign trade: Joy tempered with sorrow.