Made in China

The recent Mattel toy recall dramatically exposes the high stakes of retail and poses questions to executives at all levels of supply chain management.

First, there is the issue of children’s toys colored with lead-based paint, which has been banned—and has been the source of heavy litigation—in the United States for the past 30 years. Then, the news reports that Cheung Shu-hung, co-owner of toy manufacturer Lee Der Industrial, hanged himself in his Shenzhen-based warehouse. Lee Der had been held responsible for exporting many of the tainted toys, and just days prior to Shu-hung’s suicide, the company had been temporarily banned from exporting products.

The toy problems flared after a string of Chinese-product recalls in the home channel.

Earlier this month, 140,000 wood blinds manufactured in China and sold at Lowe’s stores were recalled for repair because of a strangulation hazard. In May, Lowe’s had another China-made product cited by the Consumer Products Safety Commission—36,500 “Perfect Flame” four-burner gas grills were recalled because of a missing hose that posed a risk of fire and burn injuries. No injuries were reported in either case.

Earlier this year, Pier 1 recalled 180,000 items from a decorative glassware collection that were made in China and posed a laceration hazard because they cracked or broke too easily. Similarly, Home Depot this year recalled 9,500 children’s accent lamps because of a reported laceration hazard—the lamps, manufactured in China, also broke too easily. Black & Decker recalled 420,000 branded coffee makers in 2006, 200,000 Lowe’s GardenPlus Industrial Garden Carts were recalled in 2004 and a whopping 2.2 million oscillating fans were recalled by Home Depot, also in 2004. All were made in China.

Of course, there have been plenty of recalls from products made in the United States, Mexico, South Korea, Eastern Europe and other locales. But given that 40 percent of all consumer goods in the United States are manufactured in China, problems there will be magnified, and more scrutiny will be placed there when quality controls fail.

“You’ve seen an evolution in the way retailers treat offshore sources, in terms of integrating them into their business models,” said Jeff Pluto, managing director of Stout Risius Ross Asia (SRR), a retail and manufacturing operational advisory firm. “Those relationships have become very integrated.”

With such a long supply chain in manufacturing products in China, companies are learning the value of setting up fail-safes at every step.

“The problem isn’t always with the manufacturer specifically, but maybe one of the sub-suppliers had changed where they were getting raw material from,” Pluto explained. “A lot of issues are occurring now through the supply chain. Having that transparency at every level is key to avoiding problems.”

Pluto said retailers and manufacturers must examine all intangible costs associated with developing and managing an effective supply chain when making products in China. “That really is what I think more and more U.S. businesses are doing—examining what’s the associated risk and cost. They have to ask whether they’ll say, ‘Alright, I’m going to have some people on the ground there who are going to manage the entire supply chain, and their goal is to mitigate these risks.’”

Mitigating “risk,” in the case of product recalls, can be a gray area. There are, of course, financial risks, but also risks to the brand name and the most important risk of actually harming consumers. One way of ascertaining whether a plant or manufacturer is at greater risk for producing a defective product, Pluto said, is to view the subject’s workload.

“A very good barometer for companies that are buying offshore…is to know whether within that supplier there has been a significant increase in volume. That’s one of the greatest risks in poor quality, because they either don’t have enough capacity to do it and they outsource, or they shift it from one manufacturing facility to another,” he said.

Home Depot has a team of 180 associates in China for the purpose of identifying suppliers that meet federal and individual state product regulations, as well as the company’s own quality standards, according to a statement issued to HCN by the retailer.

“All China factories and direct import products go through numerous toll gates during new product development and product evaluation,” the statement said. “We have also added these controls to domestically sourced, branded product.”

Home Depot implements numerous controls, including audits and factory quality testing, pre-purchase testing, in-process product reviews, pre-shipment inspections, post purchase testing and others.

Such measures are invaluable if they mean avoiding a public relations calamity, such as the one that now faces Mattel. The trade-off is difficult, however, in light of one factor exemplified in the above-mentioned recalled items—all of them share, other than being manufactured in China, the distinction of being lower priced compared to other similar products in the marketplace.

“That is a bottom line, the demand in this country that we create for products that are as cheap as possible,” said Vin Coluccio, a lead risk management expert with TRC Cos. Coluccio lectures on foreign sources of lead exposure at the Lead Poisoning Prevention Training Center at the Centers for Disease Control and Prevention in Atlanta.

Coluccio said lead paint has slipped into the supply chain at several points, from cheap, typically Chinese-made jewelry found in vending machines to folk pottery, made in Mexico and glazed with lead.

“[Lead paint] is durable. It provides a brilliant color,” he said. “It’s smooth. It’s easy to use. And it’s the cheapest alternative product they can use” to satisfy the demands of American consumers.

Coluccio said some major big-box retailers have done an exemplary job of setting up a transparent supply chain for their house-brand goods manufactured in China. Smart companies employ in-house quality personnel who examine all aspects of the supply chain, he said.

“They don’t trust anybody to verify that the product they’re importing is safe,” he explained. “They have the resources to have their own representatives in these developing countries and actually monitor the facilities where these products are being made. They go as far back to the manufacturer of the paint used in the product.”

Whether consumers will, because of the negative press Mattel and other companies have received, curb their enthusiasm for inexpensive Chinese-made products remains to be seen. While most manufacturers understand the need to create a contract by which costs of a recall would be passed back to an at-fault supplier, Pluto noted that necessary quality controls will always lead to higher charges.

“It certainly tacks on costs. But manufacturers must be able to build costs into their business models when developing these other suppliers,” Pluto said.

In the immediate future, it’s clear that avoiding recalls will be an even more sensitive issue than in the past, particularly when it comes to China-made goods. Quality controls likely will become a matter of ever-increasing high stakes in terms of overseas investment and brand recognition.

That’s not to mention the personal consequences that exist for the people involved in a recall. Prior to his death, Cheung Shu-hung maintained the lead paint used on Mattel toys came from Lee Der’s paint supplier, the owner of which was one of Shu-hung’s best friends, according to local news reports. Chinese officials and Mattel executives continue to investigate the source of the lead paint contamination.