VANTAGE POINT: From Reactive to Proactive

Ask a CPG CEO his/her opinion on overseas manufacturing and he/she would probably tell you that it is a fact of life, but would also caution that companies must take a proactive approach to ensuring quality processes are in place to avoid recalls which can put a company's brand and business in jeopardy.  In a two-month period, a leading U.S.-based toy manufacturer recalled more than ten million toys due to lead paint contamination.  Although, it appears these issues did not originate with the company's primary Chinese supplier, it calls to light the importance of conducting due diligence at multiple levels of the supply chain to ensure regulatory compliance.

All too often, companies take a passive approach - or worse, a reactive approach - to mitigating quality and compliance risks. In a passive or reactive environment, manufacturers often have systems in place for managing a recall once a food borne illness or hazardous material is traced back to their product, or a random lot sample test uncovers a quality concern. When a quality issue arises, these companies must trace the problem to its root, identify where the affected product has shipped and manage the return of large quantities of inventory. Additionally, companies must augment production to replace the affected inventory and continue to meet market demand. This can be an expensive endeavor, and can damage a manufacturer's relationship with retailers and consumers. 

Today's manufacturers must take proactive steps in preventing product recalls. From R&D and sourcing, to production and delivery, manufacturers must collaborate with multiple organizations to ensure products meet industry and government regulations. To accomplish this, manufacturers should adopt a proactive approach to quality assurance and include the following steps that encompass the entire value chain and spreads responsibility among trading partners. 

1) Develop specific criteria for new markets
When a company decides to source materials from or transfer production to a new market, companies must keep quality and compliance top of mind.  Manufacturers not only need to specify the materials they are looking to receive from the supplier, but also the quality/business practices of the vendor.

Even if a product is perfectly safe in terms of quality, consumers are starting to take notice of companies who are or are not socially responsible. This adds an additional layer of risk, which is sometimes overlooked.

Case in point: A number of high-profile brands have come under scrutiny from media and consumers alike over issues with child labor. In addition, environmental concerns play a large role in corporate social responsibility. A good example is the recent boycott of a popular, environmentally conscious ice cream manufacturer because an egg producer who supplied the company did not use free-range techniques. Although no company purposefully sets out to damage the environment or employ children in harsh conditions, U.S. manufacturers must work closely with their overseas production and supply partners to ensure they are aware of all business practices used in the production/distribution of their goods.

During the material evaluation RFP processes, manufacturers should ask questions about the company's production and quality procedures. The questions could be as simple as "do you commonly use peanut oil as a processing aid?" or more detailed in regards to their specific manufacturing techniques, such as "how do you validate your controls to stop cross-contamination?" and "what agency validated the procedures and when was validation completed?" Then manufacturers can choose the partner who offers quality processes most aligned with their own.

2) Identify and flag potential risks
Most international countries do not have the stringent compliance regulations with which U.S. manufacturers must comply, and therefore, will not have the policies and procedures in place throughout their supply chain to minimize the risk of a compliance or quality issue. This poses a serious problem for U.S. companies who wish to source from these markets.

Case in point: Aside from the economic impact of a recall, companies face the daunting task of winning back consumer trust and loyalty. A September 2007 Reuters/Zogby poll found that 78 percent of Americans worry about the safety of Chinese imports. Twenty-five percent of respondents claimed they had quit purchasing food manufactured in China. If a company can survive the initial economic downturn in sales, will they be able to pick up the pieces and carry on, or will consumers worry that future products may have the same problems?

Manufacturers must carefully select international vendors, focusing on strategic partners who are willing to evolve their quality processes to align with the manufacturers' standards. Once a company has selected the vendor, it needs to identify potential areas for improvement and flag these for specific attention, which may require the manufacturer to augment current quality control processes to perform due diligence on these business activities.

3) Consistently and continuously audit vendors
When a manufacturer begins working with a company in a new market, they need to evaluate the partner's capabilities continuously. Traditionally, companies chose to periodically test lots. With recent events, some companies are implementing more stringent quality control, initially testing all lots until they are confident no quality issues will arise. While this improves quality, it often leads to latency in identifying process issues, a rise in inventory management problems and increased costs. To reduce compliance and supply risks, companies choose to send personnel or experts to work with the vendor on a periodic basis to improve their existing quality processes.
 
Case in point: In recent months, manufacturers for everything from hamburgers and toothpaste to pet food and baby bibs have initiated recalls when lot testing uncovered bacterial contamination or hazardous materials. A company's current quality control process may include testing every hundredth lot, which is acceptable for vendors they are currently working with who have similar quality procedures. For new vendors however, a manufacturer will have to implement more rigorous testing as this is the only way to ensure regulatory compliance. A lack of planning in the sourcing of materials or the production environment can result in catastrophic quality issues, which effect consumer and investor confidence and ultimately, the bottom line.

Even after a manufacturer is confident the vendor's quality program is consistent with its own, there still needs to be periodic auditing of the partner to ensure their quality standards remain consistent. Once a vendor's quality processes come into alignment, a manufacturer can begin reducing auxiliary compliance testing. Collaborating with suppliers to improve quality and compliance can result in lower costs, improved quality and reduced supply risks.

4) Incorporate quality data into the PLM system
Manufacturers can continuously incorporate the quality data into their company's PLM system to ensure all business areas are aware of potential issues and identify opportunities for improvement. When manufacturers begin developing future products, this information will be readily available, enabling them to choose the materials or production source that best fits with their operations and quality standards.

Case in point: One consumer goods company identified the potential risk of a global recall within 15 minutes of formulating the product for production. Another company was able to eliminate more than 48 percent of materials analyzed as high regulatory risk and low value add. When suppliers have higher risk ratings, a company's R&D and sourcing departments can select lower risk alternatives to meet consumer demand while ensuring regulatory compliance.

The ability to integrate, plan, and implement quality processes is critical to manufacturers. Without this, product quality is impacted, time to scale extended, market opportunities and revenue lost, and brand equity reduced. By incorporating quality data into the PLM system, a manufacturer can move from a departmental focus on compliance to a comprehensive, enterprise-wide policy, which leads to unparalleled quality, innovation, growth, and profit opportunities.

Summary
Overseas manufacturing offers companies great opportunity to lower costs and open new revenue streams in emerging markets, but it is not without risk. U.S. manufacturers can significantly reduce the challenges inherent with overseas manufacturing by making quality assurance practices part of the vendor selection process.

Manufacturers need to take proactive steps to ensure quality production from every source in the value chain, to provide higher customer satisfaction, regulatory compliance and mitigate the risk associated with international sourcing and production. Although the initial costs associated with developing and maintaining an integrated quality program that touches every aspect of the product are significant, the benefits far outweigh the costs and minimize the impact of a recall on brand equity.

###

Rory Granros is the director for industry and product marketing for process industries for Infor, a global provider of enterprise software. With more than 25 years experience in developing and marketing innovative PLM, ERP and Decision Support solutions, Granros leads the global marketing initiatives for Infor's industry-specific process manufacturing capabilities, including PLM, ERP, SCP, SCE, EAM and PM. For more information, please contact [email protected].