Is Offshoring Leading to Increased Numbers of Product Recalls?

Over the last two decades, increased competition and a globalized economy has led firms to deploy outsourced manufacturing and captive offshore policies across multiple industries. Enterprises have sought to achieve reduced production costs and labor arbitrage in the quest for cost competitiveness. However, in the rush to source globally from low cost countries, the risk of product quality defects resulting in products recalls has often been overlooked by supply chain managers.  This was the topic of a recent paper I worked on with Manfredi Bruccoleri from the University of Palermo.

This is starting to change…quickly! The increase in the number of product recalls in recent years has been attributed to higher levels of outsourcing and captive offshoring of manufacturing and distribution. Examples of recalls in 2016 alone span many products, including cell phones (Samsung Galaxy), automobiles (Volkswagen), bicycles (Trek), kitchen products (Cuisinart), computer batteries, toys (Toys R Us), faucets, lightbulbs, tools, pharmaceutical products and multiple other products (http://www.cpsc.gov/en/Recalls/2016/).

Globalized supply chains have presented multiple unexpected challenges for executives, including delays in product sourcing, distribution issues, and quality defects. These events may occur for a number of reasons, including poor communication due to geographical distance between customer and supplier, diversity of regulatory standards, socio-cultural diversity, and complexity in coordinating and exchanging information between different actors. For example, in the pharmaceutical industry, a typical supply chain design consisting of sourcing, manufacturing, packaging and distribution occurring in disparate global locations globally. This supply chain design has increased the risk of contamination or substitution of active ingredients, as in the case of the 2008 heparin incident[1]. In the toy industry, some researchers argue that poor product quality of toys produced in China may not be due to the poor quality of Chinese manufacturing, but rather by the long and more complex supply chains that lead to poor oversight. In a domestic supply chain, the brand owner designs the product and develops procedures for internal manufacturing, storing, and distribution, and defines the standards for quality control and testing. In extended complex supply chains it becomes more difficult to guarantee that every supply chain actor understands and complies with procedures at every node, from raw materials to the point of sale. This gap in communication of requirements increases the risk of product quality failure and product recall, especially in cases where the company is not well versed in global sourcing.

One fact remains certain; the trend of outsourcing and offshoring manufacturing is not likely to abate anytime soon. With Trump’s call to limit global sourcing imports into the US, the global offshoring model may be at risk for a number of different reasons. Despite research pointing to offshore manufacturing as the primary root cause for recalls (there is actually very little in the scientific literature that explores how enterprises should respond to product quality failures that result in a recall. Direct product recall costs are a function of the number and dimension of the lots to be withdrawn from the market, as well as the resilience of the supply chain structural design to cope with the damage (costs) inflicted by the recall. Upon learning of a product quality failure, the ability of a supply chain organization to dampen the magnitude/severity of the disruption (e.g. the volume of product recalls) can directly reduce the costs of recalls.

The extent to which an enterprise responds well or poorly to a product recall event is a relevant question, as product markets continue to experience product recalls on a regular basis. For example, the cost for repairing the vehicles involved in General Motors’ recall crisis in the first three months of 2014 was about $1.3 billion, and involved more than 6 million cars worldwide produced since 2002[2]. Why were so many cars involved in the recall? Why was General Motors’ so unprepared for such a disruption? How much would GM have saved shareholders if its supply chain had been more resilient, and could have minimized the number of vehicles impacted by the recall?

People are increasingly beginning to argue that global sourcing increases the complexity of the supply chain and contributes to the severity of supply chain disruptions. In applying this rationale, it may well be that offshore outsourcing and captive offshoring negatively impacts an organization’s product recall resilience.

[1] China and U.S. clash over cause of heparin deaths. Bloomberg.com. 21-Apr-2008  www.bloomberg.com/apps/news?pid=newsarchive&sid=aUAE9VN4.xX0&refer=home# accessed May 12, 2011.

[2] CBS News. General Motors announces 30th recall of year. 23-May-2014  www.cbsnews.com/news/general-motors-announces-30th-recall-of-year