Small players: they are the weakest link (h/t Supplychainer).

This was the finding of an independent report commissioned by the EU, Evaluating Business and Safety Measures in the Toy Supply Chain, which concluded that China has taken steps to address safety concerns after the recalls of last year, yet small players all round - both among Chinese manufacturers and European importers - tend to be the soft spots in the supply chain. According to the report's independent expert authors, final product testing alone is insufficient to guarantee product safety (which instead has to be embedded in the entire supply chain), and Chinese enforcement authorities should continue to strengthen supervision of the Chinese toy industry, especially focusing on weaker manufacturers. One example of these would presumably be Guangzhou Dongxin Electronics Co., Ltd., which turned out to be the only substandard toy maker in a recent review of the Guangzhou market undertaken by the Guangzhou Municipal Quality Inspection Bureau before International Children's Day. (For children's apparel, however, the review found 30% of clothing to be substandard).

Yet because of these weak links in the supply chain and the substandard products that have menaced consumers, as an indication of how the debate on outsourcing has shifted, serious quality and safety concerns in outsourced products have led consumers and regulators to question whether products using global suppliers are of sufficient quality for end-users. And these intense discussions, as Ben Heineman writes at Forbes.com, have moved outsourcing to the top of the globalization agenda and focused attention on the need for more regulation. And while the role of sourcing countries, such as China, in setting and enforcing standards have likewise been emphasized, for Heineman this should not obscure the fundamental point with regulation, namely

Businesses are responsible for their products and must have sourcing disciplines which ensure their products are free of safety and quality defects...This basic responsibility exists whether the business is sourcing a finished product or components...or whether it sources from one supplier or must rely on second- and third-tier suppliers...

With today's elaborate global supply chains, moreover, the deverticalization of the manufacturing process through off-shoring and outsourcing does not change that ultimate responsibility of companies to take things in their own hands through all stages of the sourcing process,

from solicitation of bids to qualification of suppliers to monitoring, auditing and testing by the ultimate seller of the product before it enters the market. Due diligence...is required to navigate the many shoals of shoddy businesses in the developing world - and to pierce the first-tier supplier, drilling back to the practices of second- and third-tier suppliers.

In global supply chains, therefore, as Bob Ferrari points out at Supply Chain Matters, the only thing that companies cannot outsource is risk.

In the latest of their TrendWatcher series, the Institute for Corporate Productivity last week produced a piece entitled China's Quality Squeeze, which incorporates a range of statistics, notably:

• 70% of product recalls in 2007 involved Chinese goods, a scenario which has been greatly helped by the
  
• 30% annual increase of Chinese imports to the U.S. from 2001 to 2005, so that today
• 40% of all U.S. consumer imports come from China.
  

This despite the range of well-publicized China supply-chain quality lapses and gaffes of 2007, which have, however, not significantly dampened foreign firms' confidence in continuing to source from China. Instead, the strategic impact of the recent wave of quality concerns in China is inducing companies to inject more stringent quality control measures in their dealings with Chinese suppliers. Even so, the TrendWatcher piece continues, in its examination of best practices and risk factors for sourcing goods from China, a Quality Executive Board (QEB) survey found satisfaction with Chinese imports confined to a relatively small segment of companies that have developed long-range supply chain strategies that employ diligent pre-contract vetting and costly onsite visits.

In outlining how sub-quality products can reach the international marketplace, contract manufacturer Mike Bellamy at Smart China Sourcing recently pointed to how bad things can happen when a certain set of factors overlap. The fast growth of China's production base in recent years has given rise to a rapidly changing environment with a wide range of manufacturers of various quality standards. And as today's communication technology facilitates increasing numbers of first-time foreign buyers to suffer from a lack of experience in sourcing from China, an uninformed choice may lie at the root of product quality problems. (See also Sebastian Bretau at China Success Stories on how product inspection, auditing and testing can be used to spot potential issues before shipping, rather than upon delivery).

In a familiar refrain recurringly echoed by Silk Road International's David Dayton, Bellamy writes

The single most critical action you can take to ensure a successful sourcing program is to visit your selected factory.

In fact, in Dayton's experience, the money saved from not coming to China multiple times will be lost in missed delivery dates or quality problems. Yet simply making it to China is not enough, because without painstaking diligence on your part, you're not going to get what you asked for. In Dayton's list of rules for international purchase managers, this diligence includes, among other things:

• personally speaking Chinese (I suspect, the first problem)
• personally and physically having samples tested and confirming they match production, and
  
• never getting angry in the midst of problems (the challenge is to get your supplier to like you).

And if you do make it to your Chinese factory, Dayton advises, beware if their answer to all your questions is 'no problem, of course we can do that,' because then you are simply not going to get what you asked for.

THE issue of 2007 must have been Quality Fade. A huge proportion of last year's China-related media coverage and all the consequent spats and convulsions flowed from some lead-painted toy, toxic pet food or other faulty products that had the label Made in China on them.

And the random reduction in quality of some Chinese products, which the whole world uses...(except probably soon for Martin Richenhangen, whose leading tractor-making company has been consistently prevented by Beijing from attaining a majority stake in a Chinese state-controlled company. From FT.com, Richenhangen slammed Chinese manufacturing for, among other things, its obsessive copying of other companies and for not working hard enough) ...fosters a sense of foreboding about the quality of future supplies, which could at any time fall prey to short-term planning by Chinese factories.

What makes the phenomenon of Quality Fade so interesting is the seeming deliberate malfeasance inherent in the process, and how this illuminates the interplay of economic conditions in China. The term was coined last year in the wake of a host of product quality issues by Paul Midler (audio interview at China Talk Radio here) who described it as the deliberate and secret habit of widening profit margins through a reduction in the quality of materials...(W)ith each successive production run, a but more of the necessary inputs are missing. Seeking cost savings, suppliers push the limits until they are caught, or until disaster strikes. As manufacturers in China are subject to a government able to act without restraint or controversy, factories operate with a sense of urgency, hence they have become excellent at the 'short game' to compete at the lowest prices in order to ensure profitability over the short term.

Midler's views elicited a host of responses. While acknowledging quality fade as a problem in China (telling his customers that the fade usually sets in with the fourth shipment), Dan Harris at the China Law Blog saw a less gloomy outlook as the product situation in China is slowly improving and will continue to do so as China's economy evolves. Quality fade is driven by economics, he argued, and occurs in order for Chinese manufacturers simply to survive for a few more months in the face of currency re-evaluation, competition, tax reform and the end of VAT rebates. In addition, much of what is described as Quality Fade Harris sees as inevitable odd mistakes resulting from the increase in products produced in China, and instances of bad products are by no means confined only to China, despite that the media have created a frenzy about faulty products sourced from China.

At Smart China Sourcing, David Dayton recently outlined two types of Quality Fade, the willfully dishonest variety described by Midler, and a more common 'natural' quality fade over time, the result of an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments, and so forth. Yet ultimate responsibility for ensuring product quality, Dayton argued, lies with the buyer to remain diligent in maintaining quality control. Importers are often hypnotized by the opportunity and hospitality offered by China, and under the China sourcing spell, we too often check our good sense at the door.

Quality Fade starts with the supplier, Dayton posits, but ultimately has to stop with the buyer, who holds the final responsibility. A straightforward solution to either type of Quality Fade is to hire third-party inspectors, who should catch many of the problems. Another solution is to build your own production facility and hire and train your own staff, although this could take years and a lot of money. Yet the bottom line is, according to Dayton, at some point you must have a degree of trust with your supplier... Trust but verify is excellent advice, but verification will never be 100 percent. Some element of your QC is necessarily left to trust in the relationship.

When it comes to product quality in China, it is "still too easy to break the law." Reuters on Wednesday reported Chinese Vice Premier Wu Yi adding a cautionary tone to recent claims of success in a four-month government campaign against 'shoddy goods':

"...in a country with as many people as ours and an industry whose technical and management skills are uneven, you cannot expect to nurture good production and consumer habits in the space of a few months... (A)lthough this campaign has solved some outstanding problems, the results achieved have only been initial ones.

The Vice Premier outlined a long list of issues still confronting the country, including (quoting the Reuters report) "the plethora of small factories in remote areas which often fall beneath the radar and lack of awareness of quality problems among the Chinese public."

Silk Road International Blog recently profiled a factory in Jiangsu province with 20 years of international experience manufacturing two products "over and over" for a couple of large clients. Each employee does the same thing every day and there is little if any appreciation of quality control. And they are growing so quickly that,

while intentions are good, they are falling short in quality because of the inability of the 'family business' model to keep up with the new international level business they are attracting. They are going after bigger fish... appear(ing) bigger and more capable than they really are... The international standards/testing requirements are not even on their radar.

Unregulated factories in remote areas form part of the rural-urban disparity affecting the building of a harmonious society in China. Yet ultimately the responsibility of sourcing quality products from China lies as much with suppliers as with importers. China Sourcing News on Thursday reported the American Society for Quality conceding that much of the responsibility for quality problems resulting in Chinese product recalls lies with 'inadequate oversight' by U.S. importers:

...importing companies need to take more responsibility for their inadequate assessment of risks in dealing with foreign suppliers, insufficient supplier development activity and a lack of discipline applying quality basics with suppliers

who, in the case of China, include a plethora of largely unregulated factories who have little problem in breaking the rules.

As Beijing celebrated the start of its 'Olympic Year' with a large outdoor music performance on Monday night, we might well look at some of the trends that could impact China sourcing in 2008.

Homeworldbusiness speaks of "shifts in the China sourcing paradigm" as a 'macro' issue of 2007, and one which is expected to escalate in 2008. As a gloomy forecast of the outlook for the U.S. housewares industry in 2008, changes in the Chinese economy in the coming year like 

Inflated prices on Chinese-made housewares induced by rising raw material and fuel costs are a reality that the biggest retailers can no longer deny. Get ready for mounting increases in 2008 stoked by a weaker dollar to the Yuan RMB, reduced export tax rebates to Chinese factories, stiff pollution penalties and tightened product safety standards as the Chinese government adopts and enforces regulatory controls.

The benefits of stricter product safety standards, however, should be more evident in 2008, even though housewares retailers and suppliers will have to "rigorously self-police" to ensure the quality and safety of all their products. And as an additional challenge to Chinese sourcing in 2008, the Olympics may lead to labour shortages as workers are temporarily relocated to Beijing, resulting in restricted production during the usually critical June/July manufacturing period.

For Supply&Demand-Chain Executive the advent of the Olympics could in 2008 coincide with media attention focusing on China as the world's next potential 'bubble,' leading many manufacturers to shift sourcing strategies away from Asia. The falling dollar, limited free trade agreements, high energy costs and rising production costs will all contribute to companies reevaluating extended supply chains in Asia, and in addition

shareholders and board members could question their company's reliance on China and the Asia region should any further negative headlines arise regarding quality issues or if China receives bad press on the handling of protestors and dissidents prior the the Olympics. 

Prospects for 2008 have a few few commentators fearing signs of 'bubble(s).' The Washington Post on Sunday outlined China's current dot-com boom where start-ups have proliferated in the past decade in 'new Silicon Valley' districts thanks to an aggressive government campaign to attract private investment. Since the beginning of a frenzy of investment in 2005, many domestic Chinese companies that have gone public have traded at exceedingly high valuations, and some fund managers are worried that China is creating a tech bubble similar to the one that burst in the United States at the start of the decade.

Yet the party seems far from over in China, and Moneymorning.com views China as being on the edge of an economic transformation known as 'global decoupling' in which the growing prosperity and influence of China is contributing to the U.S. slowly being excised from its role as global economic trendsetter, all indications that 2008 will see a continuation of trends prevalent in 2007.  

As Barack Obama retreated from his far-fetched call for a ban of all Chinese toys (see posting from China Law Blog welcoming Obama 'back to reality'), Xinhua reported on Sunday all Chinese food enterprises will be required to have a quality safety label on their products to gain market access starting from January 1 2008. The regulation is said to fulfill China's market access labeling system which was first put into practice in 2002 but had not yet been applied to all food products. According to findings from a report about China's food quality and safety released in August, the article continued, by June some 107,000 food production licenses had been issued to enterprises, accounting for 90% of the market. During the nationwide campaign from late August until December this year to crack down on unqualified food products, 192,400 unlicensed food shops were closed down. 

In light of the "stigma in many peoples' minds about the quality of goods produced in China," sourcing website SourceJuice Friday posted an analysis of the rating system many manufacturers use for their products. Simply put, the product rating system is comprised of 'A' rating indicators, the more of them, the higher the quality and cost. Every country typically has a particular acceptable 'A' rating in place for a product. The time (the posting concluded)

of China producing cheap knock-off goods, toys or furniture has long since passed. This is an era where high quality goods are available if you look in the right places.

Yet problems with product quality in China can also be more systemic in nature. In the Investor Environmental Health Network's (IEHN) December video webcast "Product Toxicity and China: Insights for Investors and Companies," Melissa Brown of the Association for Sustainable and Responsible Investment in Asia (ASRiA) outlined some of the real issues affecting the quality of products in the China supply chain. China's development has progressed rapidly, Brown states, yet

all the infrastructural support and key raw material support that Chinese companies may need are not there every day of the week. There's tremendous pressure on suppliers at all tiers of the supply chain. 

And moreover,

The knowledge level of companies themselves about their risk profile on toxic chemical issues in Asia is low. The information in simply not there...

To develop regulatory and enforcement tools for product quality and safety issues takes years or even decades, and in a sober assessment of the situation in China, Brown contends that China is 'only just starting' down this road. While the Chinese government is beginning to act strongly on this issue, the necessary tools are only just beginning to emerge in Asia, however, and typically only come into public view when there's been a disaster or scandal.

So Brown's advice: keep following the scandals.    

If there is one product that has received way too much attention in 2007, it must be those millions of toys 'made in China,' a tainted few of which caused such an uproar this year. Those 'few,' whether blamed on the faults of foreign importers or on Chinese manufacturers, had a significant impact on global perceptions of the quality of Chinese products. Yet in the aftermath of the Mattel saga Chinese toys, food products and others have all been subjected to stricter quality controls, and have moreover been caught up in 2007 in the general drive for improved quality occurring in China (see CSB's 2007 China Sourcing Review).

As reported in a previous posting, China's toy-making heartland in Guangdong province stated already by late November that global demand for its toys had rebounded from the recall dramas of earlier. In the end nothing much has changed, because with Chinese toys still cheap and their quality improving, demand for them will not abate. 

But not so for Barack Obama.

A Reuters report yesterday quoted the presidential hopeful as saying he would ban all China-made toy imports following the safety scandals of this year, though admitting that such a move would cut off about 80 percent of toys in the United States. Calling for tougher inspections, Obama cited the example of Japanese food safety inspectors who go to China and meticulously test all food products sent from there.

Obama would probably be heartened by reports from China yesterday claiming the four-month national food safety campaign managed to hit its targets early, with a state newspaper reporting that officials seized 'thousands of tainted products and (put) many unregulated shops and eateries out of business... Inspectors shut 192,400 unlicensed food producers and pulled 29,800 products from the shelves.' 100% of stores in larger towns and cities, it was proclaimed, now had a quality label system in place and could trace back where their supplies came from.

And on the day after Thanksgiving, Xinhua reported yesterday, U.S. customers 'rushed in their hordes' to stores such as Toys 'R' Us to purchase Christmas gifts for their children. The article mentions Samantha Gusteins, a mother of one, who was carrying two big bags of toys and about to leave a store, saying "The toys are many and affordable."

No doubt she and many other shoppers would have Obama think twice about going to such extremes...      

Ahead of impending cabinet-level talks between China and the United States likely to be dominated by fears of substandard Chinese-made products, the U.S. Secretary of Health and Human Services Mike Leavitt today in a conciliatory tone said the issue at hand was one of improving the monitoring of imports,

Our message to China, as well as to every other import/export partner we have, is if you desire to produce goods for the American consumer, you need to meet American standards of quality. We want you to know what they are, and we'll work with you to meet them.

The current emphasis on effective and sustained monitoring, resulting from the product quality and safety issues involving Chinese products in 2007, echo findings from KPMG's March 2007 Sourcing Survey (available here). Acclaiming sourcing, when managed well, as having evolved today to a key strategic business tool, the survey found 'significant opportunities' still exist for organizations to capitalize on the strategic value of sourcing;

this potential is often unlocked by more consistent measurements of contract provisions and other metrics about the relationship with service providers... This measurement process, while challenging, can be instrumental in protecting the bottom line (and) also helps consolidate the alignment of expectations among both customers and service providers, enhancing overall corporate governance and ensuring money is well spent.

In Asia Sentinel today John Berthelson looked at how the events of 2007 have impacted on sourcing companies in China. Numerous quality concerns have contributed to the development of a flourishing quality-testing industry, and with such vast amounts of products flowing out of China, Chinese producers have come under ever-increasing scrutiny. Yet the companies in the first line of fire here are the sourcing companies who constantly and vigilantly need to ensure factory owners are delivering on what they promised. Hence sourcing companies are constantly engaged in monitoring and testing, not only when products are made but also when they are transported. Speaking of logistics, in today's macro-growth China forecast the organiser of the Asian International Transport and Logistics Exhibition stated in Beijing that the value of China's logistics industry rose 12.1% over last year and is expected to grow 20% annually, reaching 1.2 trillion RMB in 2010.

With all the high-profile product recalls and quality scares associated with Chinese products this year, events in the news can give some sense of the response elicited from Chinese government and business circles. Xinhua today reports customs authorities in Guangdong Province, a major base for toy-making industries in China, saying demand for exported toys has rebounded from the recall dramas of earlier this year. Partly spurred by the start of the Christmas retail season, Guangdong toy exports in October still registered no less than a 27.6% year-on-year increase. Yet in reaction to the outcry over toy safety the province launched a month-long safety inspection in September, and the provincial Quarantine and Inspection Bureau subsequently withdrew production licenses from 423 toy makers.  

In terms of food safety, a Chinese government spokesman has recently outlined the measures recently taken in legislation, administration and media supervision. In the aftermath of international food quality scandals Chinese officials have called for international consultation on food security, and today saw news of the issuing of a joint declaration in Beijing by 600 World Health Organization (WHO) and international delegates from 45 countries to boost information exchange on food contamination and disease outbreaks. 

It seems likely in fact Chinese manufacturing is taking the quality concerns of 2007 in its stride. The editor of Cargonews Asia this week expressed his amazement at signs that manufacturers in China have actually increased their profitability despite a number of challenges such as inflationary pressures and increased costs of raw materials:

The rising costs forced mainland manufacturers to seek out the inefficiencies in their systems that were previously of little consequence... Labour costs have always been low enough that some factories employed hundreds of thousands of workers with no regard for the payroll. Those days are over. Better transport and storage of raw materials, improved technical efficiency in the production process, better warehousing and road access have all enabled factories to cut down on waste and ramp up productivity.   

This year has seen Chinese products regularly hitting the headlines for the wrong reasons, raising serious concerns about quality control and the qualitative value of Chinese exports. In the latest round of recalls, of toys unsurprisingly , Xinhua News agency reported last week that the Chinese government’s quality control administration was suspending exports of toys covered with a toxic chemical or so-called date-rape drug as nine children in the U.S. were taken ill after ingesting toy beads coated with a toxic chemical. Attempting to buttress China’s tarnised exporting reputation, the government has increased inspections and punishments and launched a public campaign to boost quality control in China. Now Chinese toy makers, The Economic Observer reported recently, are going on the offensive to restore trust in the ‘Made in China’ brand. In a law suit expected to be filed by toy industry players from Guandong under an umbrella body, China’s toy manufactuers are taking on American toy giant Mattel after the company announced a recall of 21 million China-made toys during August. Yet although fifteen percent of the recalled toys were found to contain excessive qualities of lead, Mattel admitted subsequently that the majority of products were flawed as a result of the way Mattel designed them. Yet for the Guandong toy companies picking a fight with Mattel, part of the province’s overbearing share (70%) of the total Chinese toy production, the consequences of Mattel’s recalls are far-reaching: following the incident with Mattel, Guandong toy exports contracted by 5.776 million dollars in September compared to the previous month.