Do you know whoâ€™s making your merchandise?
Cheap labor and an advanced logistics infrastructure have been the catalyst of China's decades-in-the-making global manufacturing domination. But this year's high-profile consumer recall stories (toys, toothpaste, fish, tires, pet food) have been scary for consumers and retailers, and in fact deadly for Chinese manufacturers. American brands are reconsidering the sourcing savings Chinese manufacturers offer in light of the perceived risk they pose. Steps to mitigate that risk — testing, insurance, and litigation, for instance — are expensive. But the risk is real, and beyond lax Chinese manufacturing standards, it's exacerbated by American brands' ignorance of their sourcing partners. In the days following Mattel's third major recall, fallout ensued. China committed to eliminating lead-based paint in toys shipped to the United States, Mattell CEO Robert Eckert testified before Congress on toy safety issues, and in brilliant but expensive PR moves, Disney, Wal-Mart, Toys "R" Us, and other brands have committed to independent testing of the products they sell.
Upon hearing the first news of Mattel's lead-tainted toys, I instantly recalled a conversation I had with the CEO of a large global sourcing solutions provider. Speaking candidly about several of his tier-one retail customers, he said most have no grasp whatsoever of who's supplying their goods beyond the brand — or at best, brokerage — level. That's a norm that will most certainly be reevaluated in light of this year's recalls.
Brand Damage Is Most Costly
Some experts are saying that the hard costs of a recall are not the problem, but that bolstering testing efforts to ensure product safety and mitigate the risk of recall necessity is problematic because it's expensive to do. But, if recall hard costs aren't the problem, why go to the expense of testing to ensure product safety? Why not roll the dice and deal with recalls as they come? Because brand managers know this: More damaging than the hard cost associated with recalls and product safety testing is the brand damage done when pet foods kill pets or when children's toys pose the threat of lead poisoning.
There's been much talk about American retailers and CPG (consumer packaged goods) brands looking for new countries from which to source goods in the wake of the bad press coming out of China. But in fact, the idea of sourcing from China isn't so much the problem. The problem lies at the manufacturing level, and American retailers and brands can't expect to avoid problems like those that surfaced this year unless they have better knowledge of who they're sourcing from, regardless of the country in which those sources reside. Meanwhile, those responsible for maintaining the health of a brand must be more cognizant of the risk associated with their sourcing partners. You really don't have a choice but to work with whom you have (supply chains are not easy to move) and as many talking heads have quipped, you're not going to move toy production back the North Pole overnight.
The risk associated with Chinese manufacturers went up this summer. But is it any higher than that associated with manufacturers in Mexico, South Africa, or Eastern Europe? There's only one way to know. Get to know your supply chain in more granular detail.