Wednesday, August 15, 2007

China and "quality fade"

This is an interesting article in light of the problems Mattel is having.

'Quality Fade': China's Great Business Challenge

One of the problems facing China is that manufacturers continue to engage in a practice I call "quality fade." This is the deliberate and secret habit of widening profit margins through a reduction in the quality of materials. Importers usually never notice what's happening; downward changes are subtle but progressive. The initial production sample is fine, but with each successive production run, a bit more of the necessary inputs are missing.

What is maddening to importers is that quality fade often occurs in the last place an importer thinks to check. One American company had been importing a line of health and beauty care products for over a year when the cardboard boxes that held its product suddenly started collapsing under their own weight. There was no logical explanation for the collapse except quality fade, and the supplier in this case blamed sub-suppliers for replacing an acceptable cardboard box with ones that were inferior.

The Case of the Missing Aluminum

Some quality issues are not all that serious, but others are downright frightening. One of the most disturbing examples I have encountered while working in China involved the manufacture and importation of aluminum systems used to construct high-rise commercial buildings. These are the systems that support tons of concrete as it is being poured, and their general stability is critical. The American company that designed and patented the system engineered all key components. It knew exactly how much each part was supposed to weigh, and yet the level of engineering sophistication did not stop the supplier from making a unilateral decision to reduce the specifications. When the "production error" was caught, one aluminum part was found to be weighing less than 90% of its intended weight

Notice how stock analysts and business journalists rarely bring this issue up when they are praising some CEO's outsourcing initiative and its projected cost savings.

Wonder if saving those pennies was worth it for Mattel?

Speaking of Mattel. Why didn't the board fire the CEO last night? A rolling recall is bad enough because it keeps the bad news in the headlines. Better to emulate J&J during the Tylenol scare. Be over-cautious and get ahead of the problem.

What makes it unforgivable is that Mattel knew how the pet food mess worked out. They had every reason to believe that the problem would be bigger than their first estimates. And yet, they acted slowly.

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