Case study on the dangers of hidden outsourcing by Chinese suppliers.
This is a real case but some details have been changed to protect identities of buyer and factory.
Earlier this year I was brought in on a project to support a buyer who received from their supplier in China toys with sharp metal pieces inside, including scissors and needles. Luckily nobody was hurt, but the situation could have been very bad for all involved.
Until that point, this supplier had been a decent vendor for past few years. The following blog post is based on our discovery session into what went wrong. I hope that readers may be able to learn from the situation and avoid similar horror stories with their suppliers.
Scissors in a plush toy is far beyond a critical defect. This kind of issue can hurt people and put companies out of business. So I was very eager to get to the bottom of things by visiting the factory.
From past visits to the factory by the buyer, they knew the factory had a metal detector at the end of the production line and that the factory had a written operations manual. I had the following hunches as to what went wrong.
Possibility 1: Metal detector was not used.
Possibility 2: Metal detector was used by not calibrated correctly.
Possibility 3: Metal detector was used but foul play took place after the product went through the metal detector. For example, a disgruntled employee purposely putting the sharp objects into the toy.
At the factory to start the discovery session, I was pleasantly surprised to find the factory owner involved and visibly concerned about this problem. Usually, denial is the normal reaction among local vendors. It turns out the factory owner also suspected foul play and wanted to get involved in the meeting personally in hopes of finding clues as to which person in her organization was to blame.
Our agenda for the meeting was a bit different than hers- even if there was foul play, how could such pieces still make it out the door of the factory, considering that 100% of the products go thru the metal detector before going into the master boxes?
But at least the factory owner and the buyer were aligned in the determination to get to the bottom of things.
Here are some key pieces of evidence:
1. The thread in the needle found in toy was not the normal color used in her factory.
2. The strap on the scissors found in the toy was not the normal strap used in her factory.
3. Both the needle and the scissors were tucked into the middle of the toy, it would not be possible for a disgruntled employee to get into the warehouse, open up a master pack, open up a toy, insert the objects into the middle, and then sew it back up without being noticed. There are cameras and locked storage areas to prevent this.
I was pleased to see the factory had records for the machines calibration and records of which lots went through the machine. There were even records of our order going thru the metal detectors.
Realizing that all future orders were on the line, the factory owner finally came clean having reviewed the evidence in detail as we conducted the discovery session during the day. The following root cases all had a role to play.
1. Due to the rising costs of labor and rents in coastal China, the boss is setting up a new factory in a different city 12 hour’s drive inland. She is spending at least half of her time at the new location to help get the new operation set up. She is flying back and forth these days. Her original location ran well when she was there to monitor every aspect, but she lacks a good factory manager to look after the shop while she was gone. Her mid-level support time is almost non-existent as she was owner, GM, shift supervisor and QC director when at her factory.
2. While she was away, she received a call from her team that during final QC check of this product in question, which took place AFTER the products went through the metal detector, her QC department discovered that the tails were not sewn on correctly and needed to be re-sewn. But they were over booked on orders and didn’t have the staff on hand to make the adjustments and meet the ship date and get paid. So the owner authorized that the rework would be done next door. That outsourced factory uses the same color thread, same needles and even the scissors found inside the toys.
3. It was uncomfortably hot the day the rework needed to be made and the outsourced factory did not have proper ventilation. Plus staff were paid on a per-piece basis and had little regard for quality. When the reworked parts were delivered to the original factory, they were rejected for poor quality. The outsourced workers on the outsourced line were not happy to have to “re-work the re-works” in the heat and with no additional per-piece compensation. Some workers on that line vented their frustration by placing sharp objects in the toy.
4. Even if outsourced, the original factory has an obligation to take responsibility for the workmanship of the product they are selling to the customer. There is no excuse for even outsourced product to have sharp objects in it. The ultimate root cause of this disaster was that the factory that outsourced their production didn’t have procedures in place for how to handle goods re-worked outside by 3rd parties. This was outside the normal operations covered in their written production manual. So the young low level managers, with no written SOP to tell them what to do, simply packaged the goods up rather than sending them thru the metal detector as would have happened with products made in-house, and the owner was away so she wasn’t on-site to catch the error.
Here are the takeaways from this experience.
Contract has clear penalties in place should this happen again.
Buyer has hired a 3rd party to visit the factory and watch over critical steps during production. Especially to confirm that all product, re-worked or not, outsourced or not, goes thru the metal detector.
3rd party also validates the calibration of the machine.
For the foreseeable future, the supplier is responsible for paying back the buyer for the costs of this 3rd party.
Production is to take place only inside the original factory, until agreed in advance by buyer. Buyer will have authority to monitor any outsourced production and reject facilities not suitable.
If the buyer continues to do business with this supplier or not is the subject of another blog post and highly dependent on how serious the owner takes her responsibilities.
What other actions would you suggest the buyer take?
Wishing you successful China sourcing!
About the blogger
Written by Mike Bellamy – author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)