Chinese checkers

Posted on 20 Feb 2008 by The Manufacturer

If the Mattel crisis has a single lesson to teach, it is that ensuring the quality of products outsourced to the Far East is of critical business importance. It can be done, says Malcolm Wheatley, and is very worth the expense and effort

G eorge Dexter has a stark warning for any manufacturer wanting to import parts or products from China or other low cost economies in the Far East. “You get what you inspect,” he says. “Not what you expect.” The chief executive of Tunbridge Wells-based in-car entertainment consumer electronics manufacturer and distributor, Armour Group, Dexter has enough years of Asian buying behind him to have encountered most of the difficulties that the region can throw at a manufacturer – including (literally) entering a bankrupt Chinese factory in the dead of night to retrieve a consignment of components that belonged to Armour and not the bankrupt business.

And as Mattel’s high-profile disastrous autumn product recalls highlighted, a widespread practice of informal subcontracting means that any assumptions regarding how and where manufacture will take place are dangerous. “There are so many intermediaries that you have to deal with,” he warns. “Even if you get to tour a factory, you need to be sure that it’s the factory that will actually be used to
manufacture your goods.”

For Armour, having its own people on the ground in China – including two Chinese quality engineers who have worked for Armour in the UK – provides critical assurance that the supply chain, and the goods that ultimately emerge from it, are fit-for-purpose. “Having people on the ground has made a huge difference,” says Dexter. “Trying to communicate by email, with attached photographs, is no substitute for on-site visits.”

There’s no doubt that Mattel’s misfortunes – widely covered by the world’s business and consumer press – have prompted companies to have second thoughts about some of the sourcing decisions that they have made in recent years. Even as Mattel was recalling its lead-contaminated products, America’s The Gap was dealing with the fallout from embarrassing video footage of child labour in an Indian subcontractor.
Within hours of TV footage showing child labour being broadcast, company president Marka Hansen was issuing statements declaring that its prohibition of child labour in its contracts ‘was non-negotiable’. “While violations of our strict prohibition on child labour in factories that produce product for the company are extremely rare, we have called an urgent meeting with our suppliers in the region to reinforce our policies,” said Hansen, adding that Gap had “one of the industry’s most comprehensive programmes in place to fight for workers’ rights overseas.”

What might work for giants like Gap, though, with its 2,000-strong global supplier base, won’t necessarily work for smaller companies. So Britain’s small- and mid-sized manufacturers face an awkward question as they try to remain competitive by sourcing from China and the Far East. And it’s this: can quality within the supply chain be assured through monitoring and assessment of policies, procedures and
processes – as it is in the west – or must that assurance be based on traditional product – based quality assurance? With all the costs – both monetary and organisational – that such testing incurs? Some lessons are clear. “It’s no use being a gentleman and thinking you’ll be alright because you’ve got a contract,” warns Peter Bullock, partner with responsibility for the Hong Kong-based outsourcing, technology and commercial practice at international law firm Pinsent Masons. “Creating a tightly worded contract is no use if you can’t find anybody to enforce it. It’s not the availability of laws that’s the problem – it’s the availability of legal procedures and judges willing to enforce them on local parties. Success in China is much more about self-help than about clever legal drafting.”

And that self-help starts with finding a reliable supplier. “Without doubt, there are good suppliers out there – but also bad ones,” asserts David Taylor, sales and marketing director at contract
electronics manufacturer ACW Technology, which has factories in Tonypandy, Southampton and Zhuhai, China. “Find the good ones, build a relationship with them – but monitor the quality of what you get from them.” And ideally, before the goods in question have left the factory gate – for finding substandard parts in an opened container in Britain is expensive. Which is why, he adds, ACW – like Armour – has established a small purchasing office, attached to its Zhuhai plant, staffed by two buyers, aided (as required) by three of the plant’s quality engineers.

“If we’re in any doubt at all, we always go to inspect the quality of what’s about to be shipped to us, which is the reason that we try to select suppliers no more than an hour’s drive away,” he says. “For us, that local presence is the key to making China work for us – and without that local presence, life would be much more difficult.” Indeed, factors such as proximity are probably as important as price. For, seeking the lowest cost isn’t the best strategy, explains Iain Ansell, head of product development at technology consulting firm Sagentia, which – as well as advising on sourcing from the Far East – has a joint venture with electronics manufacturer Automatic Manufacturing of Hong Kong, owning four assembly plants in mainland China and Hong Kong. In general, he advises, it’s usually better to identify a company already producing something as close as possible to the product or component you have in mind – and then leverage their experience, and (hopefully) their reliable and trustworthy supply chain as well.
“Almost inevitably, you’ll have to invest time and effort into developing a supplier to meet the standards you require,” he says. “So pure-and-simple lowest cost isn’t the best strategy: instead, it’s the lowest cost at which you don’t have to develop the supplier.”

But in terms of meeting a British manufacturer’s quality requirements, what exactly are those requirements? For if the Mattel case highlights anything, it is that manufacturers need to be far more specific about what they are looking for in an overseas supplier, argues Masood Hassan, a senior principal with supply chain consulting firm PRTM. “There’s a blind spot, and it’s to do with controlling the inherent quality of manufacture,” he explains. “In the Mattel case, the supplier performed precisely the end-of-assembly checks that Mattel had specified – but didn’t probe any further, and so didn’t find the lead-contaminated paint. When a western firm approaches, say, a moulding company, there’s an automatic
assumption that it will have its moulding processes under control, and it doesn’t specify that. But as assumptions go, it’s a blind spot.”

The good news is that it’s a blind spot that has been recognised. The British Promotional Merchandise Association, whose members import toys and other merchandise from China, are recommending quite distinct changes in practice, says Margot Parker, the Association’s European board director and spokesperson on overseas sourcing issues. In particular, she says, research has shown that the product specifications that Chinese manufacturers are working to often aren’t specific enough – especially when it comes to acceptable materials, and conformance with European Union standards. For while Chinese manufacturers (and manufacturers in other low-cost Far Eastern economies) are certainly capable of working to appropriate standards, they certainly can’t if they can’t read them, understand them, or are by default working to local (or even American) standards instead. “Importers must have a firm specification of what they want, and how it is to be manufactured – and then have it translated into the language of the country of origin,” she says. “It’s an additional cost, certainly, but a smaller one than the reputational risk or rectification or recall cost that might otherwise result. The focus must move away from price to quality control: it costs money, but is essential.”And it’s a point echoed by David Caddle, a principal manufacturing advisor with the Manufacturing Advisory Service South East. “Companies have become fixated on the piece part of the cost of what they’re buying from abroad, and aren’t thinking enough about the total acquisition cost, including the cost of quality,” he says. “Appraisal cost, assessment cost, monitoring costs, final product inspection costs – they’re all part of the package.”

At Tewkesbury-based Exception Group, for example – one of the UK’s largest electronics outsourcing businesses, and with 15 years’ experience of managing Asian supplier relationships – quality assessments come high on the list of hoops through which potential Asian manufacturers must pass to become an approved supplier, says managing director Howard Goff.First, a sourcing team based in Penang does a ‘rough cut’ search, based on price, to find suppliers who are considered to be in the right cost ballpark. These suppliers are then sent a self-assessment form to complete, he explains. Then, based on the impression formed by that, selected suppliers undergo a commercial audit – in other words, an assessment of their finances, ownership, commercial viability, language ability and customer base.
Only those potential suppliers who pass that then go on to the next stage: a full QS9000 quality audit, probing their plant, processes, supply chain and manufacturing capabilities. Those that pass this stage go on to be given a trial order to complete, not of a real product, but a dummy sample costing £1,000 or so, with the cost split between Exception and the supplier. This order, when complete, is then ‘destructively tested’, says Goff, with Exception engineers probing the product itself, the packaging, the communications, the delivery performance and everything connected to it.“Only then do we open serious negotiations, followed by – if successful – a slow ramp-up,” he concludes. Does it cost money? Yes. Is it worth it? Undoubtedly.”