Check Against Delivery.Embargoed until 6:00 PM, 5 November 2010

Managing Product –Quality Risk in the Global Supply Chain

by Kim Hua TanUniversity of Nottingham, UK (OCF Fellow)

Session 8, Workshop 8.3: „Global Market and Supply Chain Challenges“Our Common Future, Essen, November 5th, 2010

Our Common Future, Hannover/Essen, 2-6 November 2010 (www.ourcommonfuture.de)

Managing ProductQuality Risk in theGlobal Supply Chain

Dr. Kim Hua Tan

Nottingham University Business School

•Content1. Background2. New challenges in global supply chain3. Product quality risk in supply chain4. Examples5. The way forward

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•Introduction

• Over the last few years, product recalls due to quality andsafety problems have been surging

• The no. of product recall cases have been doubled in last4 years

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No of product recall in EU countries

Source from Rapex, 2010

•Examples of Product Recall

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Product Country ofOrigin

Recalltookplace at

Year Description

Sausages, pizza,ready meal containdioxin

Ireland E.U., U.K. 2009 Irish pork products were contaminated bydioxin. The source of dioxin was found in theanimal feed in the pig farms

Toxic drywall China U.S. 2009 Chinese made drywall used in house’sinteriors was found contained toxic level ofpollutants, such as sulfur

Toxic sofa China U.K. 2009 Argos and Homebase recalled their toxicsofa contained DMF which was added onthe leather service during storage

SalmonellaPeanut products

U.S. U.S. 2009 Peanut Corporation of distributescontaminated peanut butter to 70 consigneefirms as ingredient for cookies, cracker, ice-cream, etc.

Flaming laptopcomputer

China,Taiwan

U.S. 2006,2008

Apple, Dell, Toshiba and HP recalled theoverheat batteries which were purchasedfrom Sony

Mattel lead toy China U.S. 2007 High level of lead was found on the taintedtoys because of lead paint used by theoutsourced vendor

Melamine milk China All aroundthe world

2008-2009

Sanlu’s milk contamination caused Cadburyto recall some of its chocolate bars from themarket, as one of the Cadbury’s suppliers’suppliers happened to use contaminatedmilk from China.

Recent product recalls also suggest that manufacturing firms are particularly vulnerable to product qualityand safety where goods and materials have been sourced via a global supply chain.i.e. Quality risk in global sourcing

China Toxic Drywall

Argos ToxicSofa

Dell Flaminglaptop

Dioxin pork

Lead Toy

Sanlu

Consequences of Quality Risk

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Consequencesof Quality Risk

Reputational issue

Safety issueMajorly happen in end-product•Legal responsibility•Claims from customers(smoke/fire/shock hazard)•Product replacement

Compensation issue•Product/Partsreplacement•Repair/Rework cost•Operational cost•Logistics cost

Limitation of current risk managementresearch

• Supply chain risk management (SCRM) is welldocumented in both academic and industry

• Typical SCRM model involves: Risk identification,evaluation, prioritization, control and monitoring

• These models may work on supply disruption risk, butnot work effectively in quality risk control

• Why? We face new challenges in new evolving supplychain.

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New Challenges in Global Sourcing• The root causes for these quality risk issues are:

• Supply chains become more complicated due to globalization (Lyles etal., 2009; Roth et al., 2008)

• More materials are sourced globally (Roth et al., 2008)

• Supply chains are stretched across country boundaries (Lyles et al., 2009)

• Products become more complex (Heerde et al., 2007, Roth et al., 2008)

• Supplier outsource production to other firms and it may continue(Lyles etal., 2009)

• Too many sources of uncertainties in a supply network , hardto identify risk !!

Focal FirmTier 3

Supplier

Tier 2

Supplier

Tier 1

Supplier

Tier j

Supplier….

JapanChinaUnknown?

Unknown?

HongKong

uncertaintyuncertaintyuncertaintyuncertainty

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Global sourcing in ipod (5th)

Hard DriveSupplier: Toshiba(Japan)

Display AssemblySupplier: Toshiba-Matsushita (Japan)

Battery PackSupplier: TDK (HongKong)Processors 1 (Video/Multimedia)

Supplier: Broadcom (US)

Processors 2 (Controller chip)Supplier: PortalPlayer (US)

Memory 1 (Mobile SDRAM)Supplier: Samsung (Korea)

Memory 2 (Mobile RAM)Supplier: Elpida (Japan)

Memory 3 (FlashMemory)Supplier: Spansion (US)

Assembly done by Taiwanese andmultinational companies in China

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There are altogether 451 components in ipod,and everyone of them has a supply chain inbehind

Source: Dedrick et al.,2009

Example: Three uncertainty dimensionsin China sourcing

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‐Uncertain.es accumulate in mul.‐.ered supplychain‐Informa.on asymmetry in supply chain layers

‐Manufacturing flaws‐Product complexity and testability

‐ Labour‐ Cultural‐ Pressure to lowerthe price

…

WestChina

Upstream suppliers Downstreambrand owner

‐Subs.tute unauthorizedor counterfeit materials

‐Design flaws

Supply chain structural dimension

Design and manufacturingdimension

Cultural and economicdimension

We have proposed three dimension of uncertainties in China supply chain

Meeting the new challenges

• Knowing how to handle quality risks through proper risk management

practices are definitely important for firms to sustain or compete in themarket.

• What is vital though, is how to manage and control quality risk(harmful products reaching the consumers) in the global supply chain.

• In other words: What practices are appropriate to manage andcontrol product quality risk in the global supply chain in short and longrun?

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•Where are We ?

This research is endorsed by (i) Institute ofSupply Management – PRD and (ii) IPSHK

Research aims : (i) Understand the root-cause of quality risk; (ii) propose possiblesupply chain risk management strategies toreduce quality risk

Target of respondents :Purchasingmanagers, supply chain managers and qualitymanagers of each organization was the targetinformant.

Data will be collected through survey of theHong Kong manufacturing firms (2000+) in thePearl River Delta in China

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