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.