Concerns around quality and risk exposure in China sourcing raised during the summer of 2007 have re-emerged, or if they haven't they should have, in light of revelations of tainted milk from a number of Chinese companies. Although its impact has so far been largely limited to inside China, this is as good a time as any to revisit China sourcing and partner relationship management strategies. We'd encourage companies to avoid the trap of saying "we don't have anything to do with milk," and "this is limited to inside China," wiping their foreheads, and continuing as usual. Chances are most companies continue to be fine, but a few lenses on this to mull over, and questions to ask yourself:
1. Do I fully understand the pressures my Chinese partners are facing? Rising commodity costs and slower sales are not just squeezing you; your suppliers are likely feeling this too. This is the classic root cause of quality fade in China: partners seeking to maintain or increase margins in the face of new cost pressures. Don't discount this.
2. Does this matter to me if my presence is limited to joint ventures? You bet it does. The closest the current milk crisis has come so far to directly impacting an international company has been the joint venture relationship between Fonterra (a New Zealand company) and Sanlu, the Chinese dairy firm that was first to be identified with tainted milk. Control is just as much an issue in a JV as it is in a traditional sourcing relationship.
3. How well do I know what's going on with my suppliers' suppliers? Another Western company impacted by this is Starbucks and its China operations. One of its dairy suppliers, Mengniu is blaming its suppliers for its problems. Surveys of our members have found risk management to be virtually absent beyond the first tier of suppliers. This is something worth addressing.
4. When's the last time I reviewed my supplier monitoring practices? If it's been a year, that might be a little bit too long. At the very least, you might want to conduct a quick refresher and tightening of procedures and awareness internally.
Partnership management and quality assurance have been constant topics of concern and discussion among our members, and we've learned a few things from them over the past year that are worth remembering in light of these recent events:
1. Do the things you know to be effective. Surveys of our members (Link for Quality Executive Board members only) have found that many fail to use the supplier quality management methods they know to be effective. Instead they focus on what's familiar. For example, almost 94% report using periodic supplier audits, but only 52% find it to be highly effective. On the other end, almost all of our members emphasize putting staff on site at a supplier as a highly effective strategy, but only 17% actually do it.
2. Use real-time evaluation when entering partnerships. Our conversations with experienced executives working in China have taught us that the more successful companies enter into partnerships slowly. But they don't do this the way you'd expect, by extending due diligence. Instead, they shorten their up-front due diligence process, and instead extend their integration ramps with partners, using this period to identify and resolve quality issues before they become customer-identified problems. This may mean some wasted production, but it reduces the risk of wasted partnerships from production failures down the line.
3. Provide tools and support to first tier suppliers to manage risks among their partners. Our members describe emerging practices (Link for Procurement Strategy Council members only) to engage their first-tier suppliers in the risk assessment process by making cooperation a prerequisite for partnership, and sharing risk mitigation practices with key first-tier suppliers to extend assessment rigor to lower tiers.
4. Ensure your own staff understand product safety protocols. One of our members described a frightening situation when they realized, shortly after news broke last year about lead in children's toys, that many of their own staff could not describe their quality assurance protocols for a number of key products. They developed simple check sheets to make sure this information was widely available, and focused heavily on ensuring their staff could pass the "pop quiz" test at any time for any key products where they had responsibility.
Some useful additional resources:
- [Sept. 25 Update]: Wall Street Journal's China Journal has a good run-down of indications that this is spreading outside China, here.
- China Law Blog has covered issues around quality extensively, and is always a good resource. Their most recent post, along with links to past advice, is here.
- Silk Road International has also been all over this topic for some time. Their latest, and links to great earlier advice, is here. While it targets smaller enterprises in China, the advice holds for all companies and is well worth a read.
- For perspective on the public relations aspect of quality issues, Imagethief has a useful offering here.
