Editor’s note: The following is an updated version of an article published on the Shoreview Management Advisors website in June 2020. The relevancy of these issues continues to increase. As executives consider the best way to strengthen their strategic sourcing strategy, we highly recommend they consider Mexico due to the inherent relationship capital between the two countries, ease of doing business, and insured high product quality they can rely on.
PRODUCT QUALITY FROM CHINA IS CHARACTERIZED BY “BUYER BEWARE”
China became the factory of the world because of its tremendous advantage in low-cost labor. This was complemented in previous decades by many US industrial companies providing raw materials at a lower cost to China than to the US so as not to upset pricing in the US. Adding to this, heavy subsidies by the Chinese government made it difficult for many manufacturing companies in the US and Mexico to survive. To maintain profitability, there was a wave of resourcing of products to China and closures of inefficient factories throughout North America.
The move to inexpensive product always has unintended consequences. In many cases, product quality has suffered. This article is not about the inherent design quality, which is a choice of the marketing or product design company. That is understood and a known tradeoff of features, materials, and aesthetic quality relative to price. This is about the failure of many firms in China to adhere to standards.
From time to time, the media has published articles concerning spectacular failures of quality in China. There was the 2008 baby formula issue with melamine being used as a filler, affecting 300,000 victims and hospitalizing 54,000 babies, the 2019 recall of generic blood pressure pills that originated in China, and reports of faulty masks imported by Spain in April. For those of us who have imported from China, we know that there is a certain “buyer beware” attitude present at many factories.
Foreign brands are routinely preferred by Chinese consumers over Chinese brands. According to a 2018 Forbes article, consumers there increasingly demand safe, trusted brands.
CHRONIC CAUSES OF QUALITY ISSUES
Despite the quality control that factories exercise, major importers insist on independent, certified third-party laboratory tests and inspections to ensure quality. All the major retailers require this of products shipped to them directly from China. That should make us feel more secure, but many manufacturers do not submit random samples, and there have been numerous instances of inspectors passing sub-standard product in exchange for monetary consideration. According to a 2015 study by Charney Research, 36% of Chinese manufacturing companies pay bribes.
Quality issues sometimes occur because of the creativity of the Chinese in attempting to solve a cost problem. When faced with a cost issue and a customer who is unwilling to accept a price increase, all companies look for ways to reduce costs. Unfortunately, many Chinese firms will substitute materials of lower quality or of questionable quality without informing the customer and hope that the change is not discovered by the customer. In one instance, we were able to witness how one Chinese manufacturer failed to renew their product UL certification and did not provide timely notice to the client. This was later discovered through a Supplier Quality audit, and a very expensive field recall campaign had to be deployed in order to replace non-certified product from the shelves. Since they do not always understand the downstream impact of these unauthorized substitutions on product performance, they believe the change is perfectly acceptable. This is understandable as they view themselves as manufacturing experts and may lack the marketing and scientific research that has gone into developing the right formulation that provides the defined performance for US customers. My company has been adversely affected several times by product recalls because of this overconfident attitude. Even though there are specific agreements in place to notify and test with the US partner, they feel that the US partner will actually celebrate their solution to the cost problem.
Many factories in China have become vertically integrated. This happens for several reasons. First, to capture more of the value of the supply chain and thus increase profits. Second, a lack of trust in the component suppliers that results from the attitude that the factory that is insourcing these components is stronger in technical and manufacturing capabilities. The first of these reasons is valid. The second has a large risk associated with starting up an operation in which the management team has little expertise. Since all startups have a learning curve, more quality issues can occur during this initial period, and if the company truly does not have the skills and expertise, this can result in lower quality for years. The issue for the US customer is not that this is occurring, it is that this is often done without the customer being involved in the approval and certification process of this change.
QUALITY IN MEXICO
The Mexican manufacturing culture is closely aligned with the US. The integration of the US and Mexico since the implementation of NAFTA has been hugely successful particularly in the automotive, aerospace, appliance, consumer electronics (e.g. TVs), and medical device sectors. Since all five of these sectors are highly regulated in the US, deviations from design are not tolerated in either the US or Mexico. Additionally, the engineering and technical universities in Mexico have strong degree programs with great emphasis on manufacturing disciplines including quality systems. As such, performance to specification is ingrained throughout the Mexican manufacturing culture.
The reaction of Mexican factories to receiving substandard components or materials is typically to stop operations and consult with the customer (i.e. Zero Defects culture). There is no “buyer beware” attitude. There are quality issues, for certain, but prompt and full disclosure is normal. There is also the added convenience of being able to travel to Mexico and back in two days to personally observe the issues and to problem solve in the immediate term.
For those companies which require third-party certifications, these are readily available throughout Mexico and include the same independent laboratories employed in China; ISO is heavily employed throughout Mexico.
In short, customers can rely on Mexican manufacturers to produce high-quality products consistent with their expectations. In China, remember Ronald Reagan, “Trust but Verify.”
SHOREVIEW MANAGEMENT ADVISORS AND THE MEXICO STRATEGIC SOURCING ALLIANCE
Having built multi-billion-dollar supply chains in China and having built and operated manufacturing plants in Mexico for major US marketing and distribution companies, Shoreview Management Advisors and our strategic partners bring unique capabilities in Asian sourcing and logistics including ocean freight, customs, overland transportation, and 3PL distribution. We are uniquely positioned to bridge this cultural divide and close the gap in capabilities and execution.
- We have assembled a strategic alliance of companies that provides an engineering-based approach to strategic sourcing and has 20 plus years of transferring products competitively to Mexico.
- Through Quality Function Deployment (QFD), we develop a thorough understanding of the material specifications and required performance of the product with our clients. If required, we will assist the factory with qualifications and introduce the client companies to the independent, third-party testing laboratories in Mexico.
- We perform category-based, multi-tiered supplier market research in Mexico to add to our list of highly qualified manufacturers (a.k.a. “Approved Vendor Lists” or “AVLs”). If necessary, we will reverse engineer the detailed product design from samples and create detailed bills of materials (BOMs).
- Our Cost Engineers work with Mexican manufacturing companies in multiple ways to reduce their client costs and achieve competitive pricing. As part of this, the Alliance can provide a full analysis of the Total Delivered Cost, as well as an analysis on the reduction in working capital as a result of being closer to the factory. If necessary, we globally source components from Asia and import them into Mexico as part of the total supply chain.
- We can handle customs and duties, as well as delivery of product to the customer warehouse in the United States. In short, we provide a complete turn-key sourcing alternative to China that nearly always results in a lower delivered cost to your distribution centers.
Shoreview Management Advisors is a trusted advisor to a variety of businesses in the consumer products and industrial products industries.