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MACKAY'S MORAL

Outsourcing's Lethal Risks

09/03/07

Turning a blind eye to product quality can be dangerous to your health. In June, the former head of China’s state food and drug agency became the ultimate object lesson: Zheng Xiaoyu, who ran the Chinese equivalent of the FDA for seven years, was actually executed for taking bribes and “dereliction of duty.” Chinese prosecutors maintained that under his watch, a host of people in Panama died from cough medicine laced with Chinese-origin toxins and more than a dozen babies in China perished from milk powder with no nutritional value. His demise is yet another bombshell of global outsourcing.

Tremendous Growth

The risk to Americans doesn’t just come from goods imported here as Chinese products. Fifty-six percent of Chinese outsourcing is done for Japanese and Korean firms, and many of these products end up as components or finished goods sold in the States.

What happens in China matters very much to managers worldwide. Writing in the New York Times, David Leonhardt zeroed in on lead paint found in the popular “Thomas the Tank Engine” toy trains. A British company named HIT Entertainment owns the brand, and it licenses a company in Shenzhen, China, to make the Thomas toy. The article describes how Thomas is trying to distance itself from the slip-up, saying it’s the Chinese manufacturer’s problem. Thomas is conducting a recall, but the article wonders if this is enough.

The enormity of outsourcing in places like Shenzhen can’t be overlooked. In twenty years, that city’s population has grown from 80,000 to 8 million. That makes it roughly the size of New York City!

In June, Fox News reported sixty percent of the product recalls announced by the Consumer Product Safety Commission this year come from one country: China.

Setting Standards

There is scarcely a company of size in the United States — manufacturing or service — that doesn’t outsource offshore. The costs can be lower, but the risks can be lethal.

• Have you identified the key product safety risks when you outsource? Experts point out that even central authorities in countries like China may be fully committed to quality. However, regulators have their hands full with the blistering economic growth taking place out in the hinterlands.

• Do safety and production standards meet U.S. norms? The Associated Press recently reported a New Jersey company might need to recall nearly a half-million radial truck tires it imported from China. Reason: The bindings inside the tires might not hold. And the blowouts may not stop on the roadway. The company’s counsel said it couldn’t afford a full recall. Bankruptcy could be the next explosion.

• Do you have a reputable testing laboratory in the United States that regularly monitors your product? Often the original specs are met. Then the offshore producer starts sneaking in low-quality, sometimes dangerous ingredients.

• Dicey products are half the story. Unsavory practices are Part Two. These can include sweatshop conditions and child labor. They can involve political strife, as with blood diamonds. If a deal sounds too good to be true, it probably is. Many a reputable company and celebrity endorser have been whacked on the backside because they didn’t perform due diligence.

• Just because some biggie in your industry trusts a resource, it’s no automatic stamp of approval. According to the Times article, the Thomas train manufacturer in China, also “makes toys for giants like Disney, Nickelodeon and Sesame Street.”

When you buy into a deal, you buy into all sides of it. A supplier becomes part of your image food chain. It’s easy to be swallowed up by your own false economies.

Mackay’s Moral: You can send out the laundry, but you better check the scrubbing . . . before you get hung out to dry.

Harvey Mackay is president of MackayMitchell Envelope and a nationally syndicated columnist.