Product safety: Manufacturers feel the heat over emerging market sourcing

A new executive survey from Deloitte Touche Tohmatsu reveals exactly why safety, product quality, and environmental standards are getting a lot more attention from manufacturing senior management and investors.

05/28/2008


Heightened publicity over product recalls has made product safety—as well as product quality and environmental standards—in emerging markets a hot-button issue. According to a new Innovation in Emerging Markets annual study by the Deloitte Touche Tohmatsu Global Manufacturing Industry Group, boards of directors, senior management, and investors of global manufacturers across industry sectors are sitting up and taking notice.

Roughly two-thirds or more of both developed market and emerging market executives surveyed by Deloitte said that over the last 12 months these issues had become more important when global companies choose emerging market suppliers. As a result, manufacturers are taking additional steps to address the risks.

The Deloitte study, which captures the views of more than 650 global executives, explores how manufacturers from developed and developing countries view and handle their exposure to risk stemming from sourcing in emerging markets—and how the most successful companies are working to manage this risk and turning it to a competitive advantage.

Product sourcing from emerging markets has increased. Roughly three-quarters of the developed market executives surveyed said they had increased their use of emerging market suppliers over the last three years, with almost half saying they had increased it significantly. In terms of where they look for suppliers of components and parts, 66 percent cited China, while 36 percent named Mexico and Central America. Central/Eastern Europe, India, and Southeast Asia were each cited by one-quarter or less.

“Manufacturers are feeling the heat—especially with all the negative publicity related to issues of sourcing from emerging markets,” says Hans Roehm, global managing partner of the Deloitte manufacturing group. “But the more successful companies are not avoiding the risks inherent in sourcing from emerging markets. Instead, they are intently focused on understanding and managing these risks in order to continue to reap the benefits that emerging market sourcing provides.”

More than one-third of the developed market executives surveyed by Deloitte believe their companies had been very successful in sourcing from emerging markets. These companies appeared to be more attuned to the risks involved. Their boards of directors and senior management are more involved in product safety and quality issues, and their companies work closely with their suppliers to inspect supplier facilities more often.

“Deloitte’s research found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency,” says Craig Giffi, Deloitte vice chairman and U.S. Consumer & Industrial Products industry leader. “In addition to upgrading standards and testing, many viewed the need to provide customers with more sourcing information to allay fears about safety, quality, and environmental standards.”

Forty-one percent of developed market executives surveyed believed cost increases were very likely, as companies respond to the demand for more stringent standards. Emerging market executives were even more likely to anticipate higher operating costs, with 59 percent believing these were very likely.

“Manufacturers have the opportunity to turn this situation to their advantage,” explains Roehm. “In fact, some executives surveyed view the entire risk scenario in emerging markets as an opportunity to stand out from the competition by providing guarantees of meeting strict standards—which may allow them to command higher prices.”

The benefits can go far beyond price to include increased market share and the building of brand equity for the developed market manufacturer. Emerging market suppliers also stand to benefit. Adhering to higher standards may also make it easier to attract and keep global customers, especially when those standards are contrasted with problems afflicting competitors in the local market as well as in competing emerging markets.

"Competing on cost alone can be short-sighted when the potential for brand-crippling damage is so real,” warns Roehm. “Companies that raise standards are likely to find that their competitors will follow suit. To maintain their advantage, they will need to execute quickly and be prepared to continue to upgrade to more rigorous standards.”

“Finding the right suppliers that are both willing and able to comply with rigorous standards and nurturing these relationships are important to success,” emphasizes Giffi. “When choosing emerging market suppliers, successful manufacturers are going beyond the basics of quality, cost, and reliability to place much more emphasis on the overall reputation of the supplier.”

The study indicates that successful manufacturers have been engaged—or will likely engage—more rigorously in other risk management activities, including:

• More frequent visits to suppliers’ facilities;
• Willingness to address managerial skills and working conditions during visits;
• An expectation that testing levels will increase significantly; and
• Contract requirements that call for more visits to facilities and for the approval of subcontractors.

“Setting standards is one thing, but ensuring compliance to those standards over time is another,” adds Giffi. “Monitoring emerging market suppliers is a real challenge, especially in light of “extended enterprises” that rely on far-flung, complex webs of suppliers and strategic partners.” The study reveals that although executives recognize the importance of effective monitoring of their supply chain, they also acknowledge there is significant room for improvement.

Product safety, product quality, and environmental issues have hit the radar of the public, government, and manufacturers’ competitors. Like so many aspects of the manufacturing industry, these issues will not hold still—they present a dynamic and evolving challenge. Those companies that can move quickly and intelligently to propagate higher standards throughout their supply chains are likely to see fewer negative impacts from these issues—and even use them to derive new benefits.

View the study now .





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