The Single Biggest Challenge in Global Outsourcing Projects

Consider, for a moment, that your company has just developed a consumer product to be sold in a very competitive global market. Your job is to manage the outsourcing process.

Unfortunately, you have discovered that the off-shore sources your company has been using are losing their advantage.  Inflation in China, currently about 10 percent annually, has been increasing and along with it outsourcing costs. Here is your dilemma. Should you stay with China and use familiar sources, should you find new sources in China, or should you begin to look toward South Vietnam or Malaysia where your costs could be significantly lower?

How would you think about this problem?

Many project managers would begin by placing the emphasis on price. Why?  It’s very simple. The competitive marketplace is such that if products or services are priced too high they won’t sell.  So the pressure at the beginning of a product’s life cycle is to find a supplier capable of producing it at a cost that will insure market success.

Quality, at this stage is not often the primary issue.  Perhaps the thought is that quality issues can be dealt with later, perhaps it is assumed that a supplier will learn over time, or perhaps price is what matters now and quality will be addressed later.

Here are three examples of what can happen if quality management is neglected.

 In 2007 Mattel recalled over 10 million Chinese-made toys when it was discovered that the paint used to decorate its toys contained lead. The recall included such popular brands as Barbie dolls, Hot Wheels, and products that featured the Cookie Monster and Dora the Explorer.  Even Mattel’s quality control systems, which involve independent audits of supplier manufacturing facilities, failed to uncover the use of lead paint.  One vendor had worked with Mattel for 15 years! Mattel maintains that they were not negligent. They do require that the factories with which it contracts use paints from certified suppliers, but clearly something went wrong in the process!

Again in 2007 dozens of pet food companies recalled their products after veterinary organizations began reporting hundreds of cases of renal failure; more than 100 pets died from contaminated ingredients in the pet food supply.  In total more than 5,300 pet food products were recalled.

In 2008 the U.S. Food and Drug Administration concluded that heparin, a blood thinning drug linked to at least 19 deaths and hundreds of allergic reactions, had been contaminated during the manufacturing process in China.   At first, officials in China denied their role in the problem, but after clear evidence was presented to them, they cooperated with FDA officials.

What becomes apparent from these three very brief examples is that the rush to minimize costs in the short run may lead to quality problems in the long run.

Where did these companies go wrong and how can we learn from their mistakes?

Perhaps it might help to consider the forces at work. In general, the more emphasis that is placed on cost at the beginning of the outsourcing process, the complexity and cost of maintaining quality standards increases.  This might be true for any one of several reasons.  The first is that outsourced activities are often located at considerable distance from the control of the purchaser. Fifty years ago factories were vertically integrated and it was easier to institute quality standards. Using statistical quality control methods, random samples were taken, the samples tested, and the results plotted on a quality control chart. When the sample results began to suggest that problems were brewing you had only to walk across the factory floor to initiate changes that would bring the component or product back under control. Today, not only are you unable to walk across to the factory floor, but there is far less direct control over production or services processes.

Second, there is the confusion and ambiguity of how language is used.  At an outsourcing center in India one employee closed each customer call with “I love you.” He was quite surprised to find that his supervisor was appalled by this practice, and insisted that he was simply creating a “closer” relationship with the customer.

Third, there may be ethical or cultural issues that confuse the interpretation of quality standards. Lead paint may not raise the same concerns in China as it may raise in North America or Europe.  Consider the pet food scandal. The care and feeding of pets may be quite different between developed and developing nations. For the Chinese manufacturers of pet food it is quite possible that the violation of quality standards and the consequences that followed would not be raised to the ethical level it was in North America.

What becomes clear from the evidence suggested by these three cases is that outsourcing projects must not only consider the immediate consequence of price but also the longer consequences of product quality. Furthermore, quality issues have the potential to do far more harm than price.

Lessons Learned. The full cost of outsourcing is the sum of the direct costs associated with purchasing the product plus the indirect costs of quality management. The three cases illustrated here underscore the fact that quality management may be the single biggest challenge in global outsourcing.

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