Over the past 10 days, I was asked dozens of times about the situation and the story. “Is it true?” “Do these things happen all the time?” “Do you think the company knew about it?” etc.—to which I answered “Probably,” “Yes” and “Probably not.” I have no specific information here about Lumber Liquidators’ products, their sourcing processes or the general moral character of the company’s senior management.
I was asked a lot about lapses in supply chain management, and the disastrous impact that can have and how that may happen. Sensitized by many years of professionally sourcing products in China, I saw cases in which things get missed and perhaps sometimes ignored …
China is clearly getting more expensive since it embarked upon a policy of letting the yuan’s exchange rate float, at least a little, back in the summer of 2005. But by and large, China is still, and will remain for the foreseeable future, the world’s factory for everything from phones to floors to footballs (not the American kind—the round ones). For companies competing with high-cost, American-made products, the China price initially seems alluringly seductive and this can lead to lapses in the diligence required. Being able to offer the “same” product to customers for 30 percent less while making very healthy profits surely is always a tempting business proposition.
The problem with this model, however, appears to hinge on the adjective “same” and which product characteristics actually exhibit this sameness with the higher priced products. When a company is making serious bank and gobbling up tremendous market share on the back of a laying goose, they are generally disinclined to undertake a deep metallurgical analysis of the golden eggs. Content with the trajectory of their business, executives can drop the ball on managing their suppliers. As the old and now outdated adage goes, “The time to fix the big problems is before Mike Wallace shows up at your door.” If that ship sailed, it’s time to embark on costly damage control and remediation—both of which tend to be orders of magnitude more expensive than a few pounds of prevention and monitoring.
China is filled with factories, by some count as many as 22,000,000 of them. As is the case almost everywhere, there are good factories and there are bad ones. These factories may be managed by moral paragons or by the morally bankrupt. But the key to making a successful business sourcing products from China lies in knowing the difference. This requires myriad procedures, controls, validations, verifications and surveillance processes to ensure that your customers are not the ones left to figure out which type of Chinese factory from which you are sourcing your products.
Over many years of sourcing products and services in China, my team and I learned a great many lessons about how to make this work with low risk and high efficiency. The procedures and controls, and the checks and balances are many, and mostly uninteresting to elaborate on here.
So let me just hit the conceptual highlights with a few generalized pearls of hard-earned wisdom.
1. In China, You Do Not Get What You Negotiate, You Get What You Manage
Contracts are all well and good, and of course, they are needed. But the real teeth in most sourcing contracts in China are in the form of remedies—not prevention. If you want a reliable outcome sourcing in China, you need to actively manage the supplier. No contract ever reversed time and put an already escaped cat back into the bag before it escaped.
2. Ambiguity Is Like Arsenic—It Seems Harmless Enough until You’re Forced to Eat It
Yes, there are suppliers that intentionally take shortcuts, so you need to avoid them. But a far more frequent source of product problems is ambiguity in the specifications and expectation. Any factory manager worth his salt is constantly looking for ways to reduce costs, and the low-hanging fruit tends to be changes to the materials and processes used in manufacturing. Often times, it is not sufficient to have just a product spec that defines the key attributes of the finished goods. Buyers must also consider processing changes that may impact the product in unexpected ways, even if these changes do not technically make the final product out of spec.
3. In God We Trust: Everyone Else Is Required to Bring Data
This is a very long topic, which is best addressed fully in a quality assurance (QA) manual. But the most important concept here is that customers and products are not binary, so your product validation should not be either. Don’t allow simple yes/no, pass/fail observations on product attributes for your primary quality assurance and acceptance criteria. If something needs to be flat, make sure the factory and an independent third party is measuring and reporting the actual flatness measurement, and not just reporting whether the product passes its flatness specs.
4. The Product Is a Reflection of Communications—If Communications Are Not Made Safe, the Product Isn’t Either
I can’t tell you the number of times I saw a customer visit China, and beat the crap out of a supplier over a truly insignificant issue with no understanding of the cultural differences in power between our culture and that of China. So many companies inadvertently train their suppliers to not communicate problems, to not revisit financial terms, to generally not make waves. This is a dangerous approach and one that causes more than its share of Mike Wallace visits. If the price of titanium dioxide unexpectedly goes through the roof, you need your supplier to feel safe discussing this with you lest you find your next shipment in need of recall because it was finished with lead-based paints instead.
5. Guanxi Is Gold—Very Rare and Highly Valuable
Most companies reap what they sow with their key suppliers, so pay close attention to your seeds in China. The Chinese business culture is far more relationship-based, and far more dependent upon shared history, shared struggles and shared successes than is the Western business culture. Personal trust is incredibly important, and the earning of trust and the bestowing of trust drives business. Be fair and consistent with your suppliers. Break some bread and drink some wine together. Always live up to your word and your commitments, and make sure that they understand that you personally expect them to do the same.
People do not form bonds with companies and they do not get ticked off at companies. People react and respond to people. Consequently, and of paramount importance here, Chinese people do not worry about disappointing a company—they worry about disappointing people.
Ron Keith is the executive chairman of global manufacturing and supply chain consultancy Riverwood Solutions, which he founded in 2008 and has about five employees in China. Keith spent his entire 25+ year career in manufacturing and supply chain, and consulted for manufacturing companies in 25 countries, including for some of the world’s largest product companies such as Nike, Philip Morris International, Micron Technology, Cisco and Flextronics.