Product recalls make manufacturers skittish about outsourcing from China

Outsourcing production to China and other low-cost emerging markets is no longer seen as the silver bullet for manufacturers.

A new global survey of industry executives found that two-thirds of respondents are growingly increasingly concerned about product safety, environmental standards and product quality in the wake of a spate of product recalls. Just over 40% of executives from developed countries and 59% of executives from emerging markets expect higher quality and safety standards will flow through to higher operating costs.

The survey indicates the trend towards outsourcing production continues to gather pace, with about three-quarters of the developed market executives surveyed saying they had increased their use of emerging market suppliers over the last three years, with almost half saying they had increased it significantly. Around two thirds of respondents shifted production to China, while 36% moved production to Mexico and Central America. Australian companies that have shifted manufacturing offshore in recent years include GUD Holdings, Hills Industries and Futuris.

Deloitte’s lead manufacturing partner for Australia, Tom Imbesi, says manufacturers will need to improve their risk management practices. While most Australian manufacturers are very good at doing due diligence at the start of a supply agreement, they are not so good at on-going monitoring of suppliers. “Beyond initial due diligence is where the game really begins in terms of risk management,” Imbesi says.

His other risk management tips include:

• Reference checks of suppliers.
• More frequent visits to suppliers’ facilities.
• Willingness to address problems during these visits.
• An expectation that testing levels will increase significantly.
• Contracts that require the approval of subcontractors.

Imbesi argues that manufacturers who get supplier risk management right could gain an advantage over competitors that get caught up in a product recall situation. He cites the example of toy-maker Mattel, which was forced to recall 21 million toys worldwide after the toys were found to contain lead paint. “The enormous damage that caused to their brand globally is a very real example for all of us,” Imbesi says.

Read more on quality control and doing business in China