Another day, another story about Chinese quality problems. This time it was Mattel’s Fisher-Price division having to recall over 1.5 million toys due to too much lead in the paint. That of course led to another barrage of news stories bashing many aspects of the outsourcing phenomenom, which is why I delayed ranting about the issue. Just last week I wrote about "quality fade," and I’ve found that too much attention to a single subject can lead to ambivalence.
We’ve often mentioned how the costs of outsourcing often don’t show up on the balance sheet, so the supposed benefits in terms of direct labor cost vastly overwhelms supply chain length and convolution, communication delays, inventory on the high seas, training costs, turnover costs, rapidly increasing pay inflation… you get the picture.
So how about a different take? The impact of outsourcing on a company’s reputation.
Mattel’s Fisher-Price used to create positive memories of toys at Christmas and family time spent playing games. Now it’s associated, at least temporarily, with lead paint and Chinese quality (and John Q. Public has a more negative perception of Chinese quality that is really the case). What’s that worth to Mattel? Reputation is sometimes quantified in terms of "goodwill" on the balance sheet… a nebulous calculation that is real only in that it has to be written off by some other nebulous amount if the CFO has a gut feel that reputation has been tarnished. I’m sure CFO’s and CPA’s would argue that it is truly quantitative and exact, but in reality they just sniff the wind of customer perception and guess.
So reputation has a balance sheet cost in terms of goodwill, but also a direct P&L cost in terms of lost sales. How many parents are rushing out to buy Fisher-Price toys this week? I’m not a parent, and I consider myself more pragmatic than most, but I doubt toys would be high on my shopping list. In effect outsourcing itself has created a "demand quake" that is going to screw up Mattel’s outsourced factories even more, perhaps throwing them into a minor fit of panic that could even drive more problems.
Anyone else want to put their reputation into the hands of an outsourced operation? Why not just go to Vegas if you want to gamble? But before I end I’d like to take a look at a couple other interesting points in one of the articles.
As far as U.S. companies shifting sourcing to other low-cost manufacturing hubs in Asia, Johnson said it’s not a realistic option right now. "The infrastructure in countries like Vietnam and Cambodia is still underdeveloped, although the potential is there," [BMO Capital Markets analyst Gerrick] Johnson said. "Vietnam right now can support manufacturing of some soft goods like clothing but not hard goods like electronics or toys."
While companies could decide to shift some of the production out of China into Malaysia, Indonesia or Vietnam, it doesn’t guarantee that they won’t face the same issues in these countries whose infrastructure is less developed than in China.
Now haven’t we warned you about the perils of globe trotting? Instead of chasing low labor costs all around the world, constantly disposing of one trained workforce after another in search of a few pennies an hour in savings, how about working to improve the fundamentals of your operation?
It might just save your reputation, whatever that is worth.
Contrarian says
Isn’t any business a risk? Any business has potentially rogue employees who can screw things up. It sounded like Mattel had many controls in place, but a supplier screwed them with a switch to lead-based paint. If you want a risk free business, go ahead and close the doors, eh?
JDM says
I like how you say that too much attention leads to ambivilance. It sounds like that Yogi Berra quotation: “Nobody goes there anymore, it’s too crowded!!” Haha…
The quality fade article is definitely interesting, that’s why its got the attention it received. You guys were against it and now it’s in your face. They hit the nail on teh head with that one.
Mark Graban says
Great comment about this on the Marketplace website:
“So, Mattel has to pay $30 million to recall the lead-tainted toys. Is that still less than what they would have to invest to produce their merchandise here in the States, employing our citizens with family-wage jobs?”
http://marketplace.publicradio.org/community/confessional/
Joe Gariplerden says
It is easy to blame the supplier greed in cutting corner.It is a fact that such behaviour exists in China as much as in any other country.When we look to reality
that they are a lot of factories deliver goods meeting the expectations of the buyers.So I take all these accusations with a grain of salt.
Many people work as third party contractors or in purchasing offices for the companies that can afford having a sourcing office and QC System.
Can we talk about quality fade of products without talking about fading of quality in quality control system?
The first job of any quality control system is to have due diligence.
If we search the description of due diligence:
Due diligence in Supplier Quality (also known as due care) is the effort made by a QC professional to validate conformance of product provided by the seller to the purchaser. Failure to make this effort may be considered negligence.
The aim of a quality control system is to prevent Quality Fade regardless of the root cause.
If any product reach the destination with quality flaw, the responsability of the system to prevent it comes to those who day after day are involved to detect any discrepancy, prior to shipment.
When the control system fails to deliver products in conformity, we can than talk about Investigative due diligence, involving a general obligation to identify true, root cause for non-compliance to meet a standard or contract requirement.
If we are talking about Quality Fade this word can only coexist with Quality Control Fade.
The lesson can be learnt from this events that Quality Control System should function without lowering the dilligence, that accidents happens even when there is no bad intention.
If I am paid to control the quality in every stage of production it is my duty to make sure that Quality fade can not pass the door of the producer.
It is a matter of choice between prevention and cure.
Simon Craig says
Good point Joe – more than 1 system must have failed here. That being said, a mistake like this is not uncommon and a browse through the weekend paper will likely find a few product recalls hidden in it’s pages.
I’m not a politically minded person and my job puts me at risk of increasing imports, but the ‘histerical’ climate that is being politically driven has to be affecting how the media are treating these sorts of issues. Not many other recalls get front page (almost) treatment…