Quality in Foreign Downstream Manufacturing

The question of quality is a growing global debate. Government discussions are increasing over inspections and product safety. Meanwhile the business world grapples with internal QC and supplier auditing. The question is a worldwide supply chain issue. How do companies ensure their customers receive safe products?

In today's context, many focus on quality related to Chinese manufacturing. Without understanding the context of China and its impact on global supply chains, emphasis directed at the core challenges is lacking. To put it simply, present day China is similar to chapter two of James B. Twitchell's Twenty Ads that Shook the World. Twitchell discusses a time in the U.S .around 1900 where over-the-counter medications faced a hurdle with the proliferation of inferior and unsafe remedies. The industry changed as "ethical drug manufacturers" such as Eli Lilly began to differentiate themselves on the attributes of trust and quality. The key was an integrated supply chain from raw material to end product, which monitored quality throughout the process.

Modern day China provides a similar story. For one global multi-million dollar airfield lighting company, component products arrived from China at a UK sub-assembly as noticeably not meeting quality requirements. Profit margins were strong for the manufacturer as were the buyer volumes. The question then, is why was product quality overlooked? The salary of QC employees after all is split equally by the manufacturer and customer. The reason, such as medicinal remedies in the 1900's, were insufficient inventory for material inputs and a buyer who demanded the product immediately. As the manufacturer looked to fulfill the order on-time, substandard materials replaced necessary ones and delivery was expedited.

Buyers World versus Sellers World

The Western world is a buyers market. U.S. and European customers have been receiving low cost products from Asia with a high investment return. For China, and most of Asia, the opposite is true. Here we see a sellers market. The cost of manufacturing is low and the asking price from foreign customers is high. Hence, there is a sizeable gap, which has been advantageous for the last 20 years or so. But what does the gap tell us?

First, the gap will close as is happening today. The influence of this factor on global supply chains and quality cannot be overlooked. We see this with export agencies in the middle being squeezed out, increased pressure on suppliers to lower costs, and customers willing to take risks on quality and increased lead times to meet market demand. The perfect storm has occurred.

Quality is a Question of the Downstream Supply Chain

Ultimately quality comes down to two factors, resource inputs and the model itself. Resources include human capital, material inputs and fixed asset investment. Human capital in this context is central. Labor knowledge, direct and indirect contributors impact the supply chains material, information and financial flows. This is a critical area in which to focus.

The supply chain model governing human capital must also be analyzed. For example, inventory procedures show time and again how the model leads to the outcome. The pharmaceutical and F&B industries face this constantly when products reach expiration still in inventory. Without considering the design, costs and the risk of error increase.

When human capital policies and the model are not clearly emphasized, product quality monitoring is limited. This is what we see in China. Very few procedures are presented in writing beyond the contract terms. Overseas executives make visits, but are not active in decisions that impact the downstream supply chain. Questions concerning material inputs, transportation, material handling, inventory management, material reordering, sub-contracting networks, QC and continuous improvement are mainly left to the supplier. It is no wonder costs continue to rise and quality has remained an issue. There is very little end-to-end supply chain knowledge.

Lessons from the Auto Industry

Some suggest, such as the Chairman of the Toys Advisory Committee of Hong Kong's Trade Development Council, foreign buyers increasingly demand lower costs adding to product quality issues as manufacturers substitute lower grade input materials to remain competitively priced. What we must recognize, is Chinese manufacturing is facing a crossroad based on reduced profit margins.

With the rapid appreciation of the Chinese RMB against Western currencies and little change in the downstream supply chain, margins are quickly nearing zero. This affects not only finished product cost, but also material inputs. The automotive industry faced a similar scenario, which we can learn from.

Not so long ago, companies such as Ford or GM were increasing pressure on their suppliers to lower component costs. As a result, margins declined. The problem again was a question of the model. Automotive companies had been focusing on only one metric, direct material cost. As a result, component manufacturers were going bankrupt and an industry wide consolidation took place. The classic model had to be changed. The Chairman's comments suggest much of what we see developing in China.

To remain competitive, many look to Toyota, which gained market share by developing an alternative supply chain model enabling the company to maintain a higher than average profit margin in the industry. By better understanding the Toyota model of flexible assembly systems, kanban and JIT models, the industry as a whole was able to reinvent itself to remain competitive.

In order to address quality around the world, industries and companies must reinvent themselves. Passively monitored supply chains create increase costs and product quality risks. Active improvement of the existing supply chain commonly minimizes risk, reduces cost, and improves quality overall. Herein lies the China dilemma. As language is seen as a barrier, the knowledge gap is large, and modern supply chain procedures are slow to transition, where must a company focus its attention to ensure the customer receives high quality and safe products? Collaboration in resource inputs and the supply chain model offers the key.

Bradley A. Feuling is the CEO of Kong and Allan, LLC, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and corporate expansion. http://www.kongandallan.com

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