What can be learned from the recent sudden increase of Chinese-made children’s toys coated with paint containing lead, which of course, is a RoHS banned substance?

The North American toy industry was an early adopter of outsourcing. Toys in the 60’s and 70’s were often made in Japan. Then, new sources were developed in Taiwan. In the last decade, China has become the dominant country of origin for toys. So for 40 years the toy industry has been practicing Asian outsourcing. Far longer than the five-10 year period the switch and relay manufacturers have outsourced.

This article will examine some of the possible breakdowns that could have led to the toy problem and that outsourcing manufacturers should be watchful of.

Control of Designs and Intellectual Property

In an outsourcing relationship establish who controls the design and specification of the product is essential. Many manufacturers start by outsourcing the production of products that they have designed and once manufactured. For these, they should keep control of the designs and specification of the product, as well as, the process controls and documentation for production.

As an outsourcing relationship matures or for manufacturers that are truly marketers, the outsourcing company may become the design and build source or original design manufacturer (ODM). This is where problems can arise. The question must be asked does the ODM have design expertise and more importantly the market knowledge to produce a product that is acceptable to the manufactures market place. In the case of switches and relays, does an ODM in Asia know the European or North American market requirements well enough to design and specify the product? The answer to this must be known before handing over design control.

The design of a product and sometimes the process used to make it are what differentiate it and make it valuable to a customer. This is the intellectual property a manufacturer gains in designing, producing, and marketing its products. Once a manufacturer starts outsourcing from an ODM they become a marketing company, not a manufacturer. Once this happens the ex-manufacturer must be very careful that work done for them based on the market knowledge they have is not used to supply or start-up a new competitor, particularly in countries where intellectual property rights and laws are not well established or enforced. Losing our minds to outsourcing may lead to losing our competitive advantage.

Cost Savings of Outsourcing

The ultimate reason to outsource anything, products or services, is to lower costs thereby improving a company’s competitive position. The headline here always seems to be labor savings. The folks in developing countries will work for less than those in industrialized nations because they have less. No car or house payment, no insurance, no college tuition to pay for, they don’t travel on vacation, no credit cards with high interest rates, or cable television. But they will have these someday and the countries labor cost will rise. Material costs can also be lower in certain countries due the competitiveness of the market or government subsidies. If the additional shipping and increased inventory carrying expenses do not offset these cost savings, off to the promised land of low cost sources go many a manufacturer or perhaps they are a marketer.

What is the cost of quality? Deming tells us that the cost of good quality is free. Design and make products right the first time and every time thereafter then products will never need to be scrapped or recalled. The key to free quality is process control. ISO certification is one way to tell if an outsourced manufacturer has the needed process controls to produce a quality product or service. Certification is like getting a drivers license, to have one doesn’t necessarily correlate to good habits or performance.

The cost of poor quality can be far more dramatic. The most obvious is the cost to scrap actual finished goods and work in process inventory. “Ah, the agreement with the outsourced manufacturer requires them to absorb this cost so my company is protected.” Perhaps from this direct cost but not the indirect cost of “ill will” created by not supplying a customer or the damage caused to a brand or franchise once word gets out on a major quality incident.

Who is Responsible?

Back to the lead paint in children’s toys, when news of this incident hit the media and political spin was to blame the Chinese manufacturers. “Just one more thing these manufacturers are doing to this great country.” Well, who is doing what to whom?

The entity that brings the product to market, the name that appears on the box is responsible for the product inside.

In the toy case, the complete product and package was supplied to the manufacturer or marketer. Say a manufacturer receives a bad component part that it assemblies into a finished product that then goes bad in the market. In the latter case, the manufacturer of the completed product bares the brunt and then passes the impact onto the supplier. In either case, the company marketing the product is responsible for its content and function.

Lessons Learned

Control, control, control.

Control of the design and specifications of the products your company buys and makes. Control of the processes used to produce the products your company buys and makes. Control of the products your company puts out in the market place.

Cost reduction through outsourcing may be necessary to be competitive. The cost of bad quality due to complacency and lack of controls can be devastating. Who would have thought that a well know hazardous substance like lead would be used to make a child’s toy. Could lead or some other substance windup in an outsourced relay or switch marked as RoHS compliant?