Quality control standards for products made in low cost countries are proving a concern among manufacturers in established markets, a new study has shown.
More than three-quarters (78 per cent) of global manufacturing executives now believe that sourcing products in emerging markets presents a real risk to their business, the Deloitte’s Global Manufacturing Industry Group study claims.
A year of high profile product recalls has seen product safety, product quality and environmental standards in emerging markets rise up the boardroom agenda.
The study shows the importance given to risk at a senior level within manufacturers is increasing. Forty-nine per cent of executives from developed market manufacturers report that the issue of product quality is viewed as “much more important” by their organisation than 12 months ago.
Product safety (37 per cent) and environmental standards (35 per cent) are also increasingly of concern. However, one area which may be being overlooked is sub-contracting by emerging market suppliers. Many emerging market companies sub-contract much of their work, raising the complexity of compliance.
Only 35 per cent of developed market manufacturers say they perform extensive monitoring of subcontractors, leaving many other businesses vulnerable to risk.
Jane Lodge, Deloitte’s Birmingham-based UK manufacturing industry leader, said: “Companies in developed markets have little visibility into the sub-contractors used by their suppliers. As this is where many of the problems have emerged, developed market companies will need to take a more active role in reviewing sub-contractors and including them in their monitoring programmes.
“Going forward, it is likely that these companies will seek out emerging market suppliers that can provide more transparency regarding their sub-contractors in addition to overall higher standards.”
Other key findings from the report, which captures the views of more than 650 global executives, show that around 25 per cent of executives reported that their company had been involved in a product recall in the past five years.
In addition, roughly 75 per cent of executives from developed market manufacturers reported an increased use of suppliers in emerging markets in the last three years, while around two-thirds of developed market executives expected increased production in company-owned facilities in the future.
More than 75 per cent of respondents thought it was likely their company would favour sourcing from markets with stricter standards. The study also found that more than one-third of the developed market executives questioned by Deloitte felt that 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.
“We found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency,” added Ms Lodge.
Forty-one per cent of the 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 per cent believing these were very likely.
“Manufacturers have the opportunity to turn this situation to their advantage.”