Monday, August 20, 2007

Outsourcing isn't child's play

If you are one of those entrepreneurs yearning to join the global outsourcing bandwagon, think hard before you take the plunge. For, life isn’t a bed of roses there. If you fail to live up to quality standards and other pre-requisites set by the large companies and retailers, you could end up with huge losses.

Last week, a Chinese toy maker committed suicide after the US toy company Mattel decided to recall nearly a million plastic pre-school toys that the Chinese company had produced for its Fisher Price label, after it detected excessive amounts of lead in the paint used.

Mattel said excessive quantity of lead would be harmful to children’s health. The supplier could not cope up with the thought of running up huge losses. Add to that the embarrassment of having, in a way, caused irreparable damage to the credibility of Chinese companies engaged in contract jobs for large US and European firms.

“While factories are given the opportunity to improve their working conditions, certain violations are not tolerated and will result in an immediate banning of factory production for Wal-Mart.” In 2005, 141 factories were permanently banned from doing business with Wal-Mart, primarily because of underage labour violations. In addition, Wal-Mart disapproved another 23 factories as a result of multiple instances of non-compliance with the standards of suppliers.

It is indeed interesting to note how a big retailer like Wal-Mart, which buys merchandise from suppliers located in more than 60 countries, manages to keep a tab of how these suppliers comply with standards.

“We created one of the most active supplier monitoring programmes in the retail industry. In 2005, we audited more factories than any other company in the world, performing more than 13,600 initial and follow-up audits of 7,200 supplier factories. We work with our global suppliers to improve workplace conditions,” says Mr Jain.

All this exercise is not only about finding problems. Big retailers also try to partner with the suppliers to resolve their problems. “When we find a problem, we fix it. Instead of halting our work with a supplier, our ethical standards team works with them, so they can improve their performance,” Mr Jain adds. Perhaps, termination or rejection of a supply order is only the last refuge. Back home, in India, the question haunting the suppliers is clear: Are we in a position to leverage the opportunities that organised retail will throw up?

As far as Indian exporters are concerned, there’s nothing new in adhering to strict western quality norms. “Indian manufacturers cannot be compared to their Chinese counterparts. China may beat us in terms of volume, but in value terms, we are clearly the leaders.

Perhaps, this is why, in the apparel sector only the regular jobs go to China while the high-end ones come to Indian manufacturers,” says Orient Craft chairman Sudhir Dhingra. Orient Craft is one of the biggest textile exporters in the country and is a leading supplier to some of the best-known international apparel brands, including Gap, JC Penny, Levi’s and Ralph Lauren.

Some industry experts do feel that manufacturers will have to self-impose a new quality regime to meet the new opportunities. “Speed and efficiency are the new battle cries. In the initial phase, some-not-so efficient players may survive.

But gradually as organised retailing gets matured, they will be wiped out,” says JHS managing director Nikhil Nanda. Delhi-based JHS, a manufacturer and supplier of dental care products to some leading FMCG and retail companies including Oral-B, Prudent, Aldi Stores, Dollar Stores (USA), Boots, Leader Price, Savon Drugs, Wallgreens and Wal-Mart.

However, coming to smaller suppliers, it’s not always as rosy as it may appear. At least, for suppliers operating on small margins. “There is a problem with the payment cycles. Also, unlike that in the west, there isn’t an organised market for rejected products or manufacturing wastes,” says Craftos director PK Saxena. Craftos is a Manesar-based manufacturing unit that supplies to some well-known home furnishings retailers.

Some others also feel that supplying to retailers in India will not be the same as that to foreign brands and chains. “Not that there will be any relaxation as far as quality parameters are concerned. One clear benefit that manufacturers will have here is in terms of the cycle time,” says a Delhi-based retail consultant.

This event is the latest in a slew of scandals involving Chinese-made products that includes seafood, toothpastes, toys, tyres, pet food, medicines and food products and ingredients, among others. Global retailers and brand owners have decided to delist many third-party manufacturers in China citing quality issues, many of which can jeopardise the health of customers.

Indian contract manufacturers, too, are on the watchlist, like those which make medicines. If it is, indeed, found that a company sold fake drugs to Americans, it would not bode well for the health of the Indian pharmaceutical industry. Says Chandigarh-based Ind-Swift Labs’ joint MD VK Mehta:

“The possibility of rejection is very bleak in the pharma sector as vendors are governed by rules of the US food & drugs authority (FDA). However, if a rejection does happen in any sector, the loss is mutual and the buyer too has to bear the brunt.” This becomes further evident if one notes that just one recall by Mattel will result in its second-quarter pretax operating income decline by $30 million or 47% year-on-year.

For the big foreign retailers, who outsource product manufacturing to low-cost countries like India and Chine, the writing on the wall is clear: the fittest survive. If you cannot adhere to quality norms, there is no room for you. Says Wal-Mart India president Raj Jain:

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