News and Views

- August 20, 2007 -


Supply Chain Tip of the Week: Improving Quality and Reducing Risk in Offshoring


After Mattel Incidents, Arrow Electronics Executive Offers Recommendations to Reduce Supply Risks; SCDigest Review and Comment



SCDigest Editorial Staff

The News: In the face of the hyper publicized incidents involving the recall of millions of toys by Mattel for safety issues, William E. Mitchell, chairman, president and chief executive officer of Arrow Electronics, offered 10 guidelines last week on how to reduce product quality and related risks in an offshore supply chain.

SC Digest Says:
To do this right will involve greater costs, reducing the relative price advantage of offshore strategies to a degree, and certainly requiring companies to build a substantial infrastructure to develop and maintain these monitoring programs.

What do you say? Send us your comments here

The Impact: The guidelines were nominally targeted at electronics suppliers, but offer a good starting point for many companies looking at how to reduce risk and potential quality problems. As we’ve noted recently, however, to do this right will involve greater costs, reducing the relative price advantage of offshore strategies to a degree, and certainly requiring companies to build a substantial infrastructure to develop and maintain these monitoring programs. (See Mattel Incident Shows Companies Can’t Go On the Cheap when Sourcing from China, Must Take Proactive Control of Entire Supply Chain)

The Story: Arrow’s Mitchell offered these 10 guidelines in a company press release, which we publish here in bold, followed by our comments:

1. Source from reputable, well-established companies with tight internal controls: Makes sense, but it is easier said than done. The company Mattel used for the toys' production was actually very well-established, but ran into trouble with lead paint on the toys through one of its own suppliers. This recommendation will require a significant investment in time to perform due diligence on operational, financial, environmental, and other controls at offshore suppliers.

2. Conduct comprehensive background checks, including checking trade references and past business history, of supply chain partners before conducting business with them: Standard procurement practice here, but much more challenging and time consuming offshore.

3. Implement site inspections of supply chain partners and find out what systems have been put in place to track quality: Similar to number. 1. It’s the right thing to do, but will add a lot of time and cost.

4. Conduct ongoing performance reviews of supply chain partners and engage in ongoing communications with them to benchmark against preset goals and define improvement plans: This is a “best practice” for dealing with any suppliers, whether domestic or global. Many companies don’t do a good job of this currently with domestic vendors.

5. Only source from companies that are willing to provide a guarantee for products in writing: May not always be worth a lot, but certainly some form of guarantee should be baked into the contract or separate document.

6. Be cautious of buying from companies that do not have franchised relationships with distribution partners to avoid a greater potential risk of counterfeit product: Simply says the more a supplier is established and has long term relationships, the less likely it is they are involved in counterfeiting. We would add, though, that it doesn’t mean they won’t knock off your design.

7. Beware of unusually low pricing: This certainly may indicate potential quality issues, counterfeiting, or some other supply chain hazard. We would also suggest that companies do their own cost modeling, using offshore wages and other factors, in order to have a good idea of what pricing seems unrealistic even from China.

8. Look for International Organization for Standardization (ISO) or other equivalent, globally recognized certifications in a supply chain partner's operations: The easiest recommendation on the list, and certainly some sign of an offshore supplier’s investment in quality.

9. Establish relationships with third-party organizations:  For example, Mitchell says Arrow often works with testing centers for the Restriction of Hazardous Substances (RoHS) in China to have products tested for compliance to meet customer requirements. For many companies though, they won’t even know where to begin here.

10. Translate quality into measurable and clearly defined targets with supply chain partners and ensure these metrics are communicated regularly with employees: The bottom line for us: as always, it will take leadership from the top to make it clear lowest price/highest margins/least overhead must be balanced against quality and risk.

What is your take on these 10 recommendations, and SCDigest’s comments? Will companies really make the investment needed to follow these principles? Let us know your thoughts at the Feedback button below.

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