By now you’re probably familiar with the concept of quality fade, defined by Paul Midler as, “the deliberate and secret habit of widening profit margins through a reduction in the quality of materials,” in his excellent treatment of the subject, “Quality Fade: China’s Greatest Business Challenge” (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1776). It’s credited as the common cause behind recent cases of melamine in pet food, lead paint on toys, self-destructing tires and poisonous personal healthcare products imported from China.
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As founder and president of outsourcing and supply chain management services firm China Advantage and a 15-year veteran of dealings with thousands of Chinese factories, Midler should know what he’s talking about. He describes in unflattering terms how Chinese politics and economics lead to management attitudes that drive quality fade.
Anti-outsourcing individuals and groups have leapt on the concept as further reason to abhor Chinese imports and the companies that deal in them. But, does quality fade happen only in China? How much different are the political and economic drivers, and results, in the rest of the world? I often thought of situations I’d seen or heard of right here in the United States as I excerpted Midler’s comments:
“The initial production sample is fine, but with each successive production run, a bit more of the necessary inputs are missing.”
In a case where the cardboard boxes used for packaging a product suddenly started collapsing during shipment, “the supplier blamed sub-suppliers for replacing an acceptable cardboard box with ones that were inferior.”
A purchasing company designed, patented and engineered the key components of a high-rise building construction system designed to support many tons of concrete. “It knew exactly how much each part was supposed to weigh, and yet the level of engineering sophistication didn’t stop the supplier from making a unilateral decision to reduce the specifications.” When one delivered part measured less than 90% of its specified weight, the supplier claimed a "production error."
Before shipping product, the supplier is to take a sample and send it to a third-party testing laboratory to make sure the product is safe. To get around quality problems, the supplier pre-tests 10 samples. “Nine of these samples failed, but one passed. The supplier took the one test result marked ‘passed’ and sent it off to the customer.”
A load of plywood was rejected, so the supplier mixed a portion of it with good product in later shipments.
Purchasing companies see many quality problems as minor compared to the difficulties involved in rectifying them. They are more likely to overlook a product flaw than a late delivery, as they see the chance of a product failure as remote, but the penalty for late delivery as an almost certain loss of business. If they insist that substandard goods be replaced at the supplier’s expense, the supplier threatens to terminate the relationship or raise prices. Their threats to change suppliers are empty, because finding and cultivating a new supplier will take too long.
When the supplier offers its most sincere apologies and promises that it won't happen again, purchasers simply close their eyes and hope for the best.
Buyers don’t want to let competitors know the source of any supply chain advantages.
They keep the names of suppliers secret, so suppliers “pay little, if any, reputational cost for production shenanigans. The invisible hand doesn't work well when the manufacturers themselves are unseen.”
Often, factory expansions are privately financed. “Making the matter worse are extremely short payback periods on private investment. Many factories hope to pay off investments in as few as three years…the more a supplier invests, the quicker it raises prices.”
There’s a sense of urgency, a feeling that one must work fast before the window of opportunity closes. “For factories, that means taking shortcuts on quality. Many factory owners can't see beyond the next purchase order.”
When government can operate without restraint or controversy, it limits predictability “and leaves the business sector keenly aware that it is subject to the evanescent whims of officials who may or may not know which policy is best.”
“Manufacturers that engage in quality fade unfortunately subscribe to the view that business is about increasing one's share of the pie rather than growing the pie over time. They often focus on extracting profit through short-term maneuvers that inevitably militate against long-term development.”
I don’t think the symptoms and causes of quality fade are exclusive to China. Do you?