Buyer Beware Is a Bad China Manufacturing Outsourcing Strategy


Ron Keith, Executive Chairman, Riverwood Solutions

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I wasn’t able to watch 60 Minutes last week to see the story everyone is talking about – toxic, carcinogenic laminate floors imported from China.  I’m not really sure what I was doing when the devastating piece about US retailer Lumber Liquidators aired.  But as it was Sunday evening, chances are I missed the show because I was on a Skype call with China discussing various sourcing activities that my firm provides for companies around the world.

Over the past 10 days I’ve been asked dozens of times about the situation and the story.  “Is it true?”, “do these things happen all the time?”, “do you think the company knew about it?” etc. etc. - to which I answer “probably”, “yes”, and “probably not”.   I have no specific information here about Lumber Liquidators’ products, their sourcing processes, or the general moral character of the company’s senior management.  But my gut, sensitized by many years of professionally sourcing products in China, tells me that these guys just missed it…………..and perhaps wanted to.

China has clearly gotten more expensive over the last decade since they embarked upon a policy of letting the Yuan’s exchange rate float, at least a little, back in the summer of 2005.  But by and large China is still, and will remain for the foreseeable future, the world’s factory for everything from phones to floors to footballs (not the American kind – those other ones).  For companies competing with high cost, American made products, the “China Price” initially seems alluringly seductive, and I’m sure this was the case for Lumber Liquidators.  Being able to offer the “same” product to their customers for 30% less while making very healthy profits surely was an attractive business proposition.  The problem with their model however appears to hinge on the adjective “same” and which product characteristics actually exhibit this sameness with the higher priced products.  When a company is making serious bank and gobbling up tremendous market share on the back of a laying goose, they are generally disinclined to undertake a deep metallurgical analysis of the golden eggs.

And so it likely was for the execs at Lumber Liquidators.  Exceedingly content with the trajectory of their business, they undoubtedly dropped the ball on managing their Chinese suppliers.  As the old and now out-dated adage goes, “the time to fix the big problems is before Mike Wallace shows up at your door” (no offence to Anderson Cooper – but you are far less scary than Mike).  But that ship has clearly sailed and now it’s time for the company to embark on tons of costly damage control and remediation – both of which tend to be orders of magnitude more expensive than a few pounds of prevention and monitoring.  China is filled with factories, by some count as many as 22,000,000 of them.  As is the case almost everywhere, there are good factories and there are bad ones.  These factories may be managed by moral paragons or by the morally bankrupt.  But the key to making a successful business sourcing products from China lies in knowing the difference.  This requires a myriad procedures, controls, validations, verifications, and surveillance processes to insure that your customers are not the ones left to figure out which type of Chinese factory you are sourcing your products from.

Over the many years of sourcing products and services in China, my team and I have learned a great many lessons about how to make this work with low risk and high efficiency.  The procedures and controls, and the checks and balances are many and mostly uninteresting to elaborate here.  So let me just hit the conceptual highlights with a few generalized pearls (hopefully genuine pearls that are free of excess formaldehyde) of hard-earned wisdom:

1.In China you do not get what you negotiate, you get what you manage.

Contracts are all well and good, and of course they are needed.  But the real teeth in most sourcing contracts in China are in the form of remedies – not prevention.  If you want a reliable outcome sourcing in China you need to actively manage the supplier.  No contract has ever reversed time and put an already escaped cat bag into the bag before it ever escaped

2.Ambiguity is like Arsenic – it seems harmless enough until you’re forced to eat it. 

Yes, there are suppliers that will intentionally take short cuts - you need to avoid them.  But a far more frequent source of product problems is ambiguity in the specifications and expectation.  Any factory manager worth his or her salt is constantly looking for ways to reduce costs, and the low hanging fruit here tends to be changes to the materials and processes used in the manufacturing.  Often times it is not sufficient to have just a product spec that defines the key attributes of the finished goods.  Buyers must also consider processing changes that may impact the product in unexpected ways, even if these changes do not technically make the final product “out of spec”.

3.In god we trust, everyone else is required to bring data.

This is a very long topic, which is best addressed fully in a QA manual.  But the most important concept here is that customers and products are not binary, so your product validation should not be either.  Don’t allow simple yes/no, pass/fail observations on product attributes for your primary quality assurance and acceptance criteria.  If your flooring needs to be flat for example, make sure the factory, and an independent third party, is measuring, and reporting the actual flatness measure and not just reporting whether the product passes its flatness specs.

4.The product is a reflection of communications; if communications are not made safe, the product won’t be either.

I can’t tell you the number of times I’ve seen a customer visit China and beat the crap out of a supplier over a truly insignificant issue with no understanding of the cultural differences in power distance between our culture and that of China.  So many companies inadvertently train their suppliers to not communicate problems, to not revisit financial terms, to generally not make waves.  This is a dangerous approach and one that has caused more than its share of Mike Wallace visits.  If the price of titanium dioxide unexpectedly goes through the roof, you need your supplier to feel safe discussing this with you lest you find your next shipment in need of recall because it was finished with lead-based paints instead.

5.Guanxi is gold…Very rare and highly valuable.

Most companies reap what they sow with their key suppliers, so pay close attentions to your seeds in China.  The Chinese business culture is far more relationship based, and far more dependent upon shared history, shared struggles, and shared successes than is the Western business culture.  Personal trust is incredibly important, and the earning of trust, and the bestowing of trust drives business.  Be fair and consistent with your suppliers.  Break some bread and drink some wine together.  Always live up to your word and your commitments and make sure that they understand that you personally expect them to do the same.  People do not form bonds with companies, and they do not get pissed off at companies.  People react and respond to people.  Consequently, and of paramount importance here, Chinese people do not worry about disappointing a company – they worry about disappointing people at a company.

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