Having trouble answering this question about outsourcing and product quality...looking for help

[Ken Burch]

I was discussing trade(TPP specifically)with someone. Was talking about how companies don't seem to care about loss of product quality due to their decision to outsource production to other, less-regulated countries with lower wage scales.

He was having trouble understanding why they wouldn't care about the fact that, at some point, this would lose them customers when the product quality became too bad to tolerate. He felt loss of customer loyalty should self-regulate this from getting too bad.

I was saying that some companies were willing to accept decline in quality and loss of customer loyalty because all they cared about was the short-term cash in, but he wouldn't accept that, and I'm sure there has to be more to it than that.

Any links I might go to to find more detailed answers questions would be appreciated.

Also, I'm willing to hear from people who think I'm wrong about the quality decline issues.

[Sherman A1]

1. You have answered the question

it is all about short term profits. There exists little if any long term thinking of which I am aware. It's all about the next quarterly report. Companies are willing to cannibalize the future for the short term.

[Hoyt]

2. If the quality of say a Samsung TV is low, I can probably buy 2 of

them with the latest technology for what an American made TV would cost. I've looked.

Do you have some examples of what you are talking about?

I've recently been looking at mandolins. I can buy a decent Asian made for $500. It won't be as complex anpd rich sounding as an American mandolin, which will cost upwards of $2000. I appreciate that difference, but most people won't. Is that low quality? And I know the Asian workers don't make as much as American workers, but these are newly skilled workers who are doing a lot better than they were in rice paddies.

I know what you are getting at, and empathize. We better figure out the best way to handle this because most people are going to demand cheaper products.

[haele]

3. A company that is publically traded has a fiduciary responsibility to the stakeholders.

Here's the real deal, as we studied it in my Business classes.

Company A is privately owned nationally-based manufacturing corporation; the textbook formula is that privately owned corporations will typically see an average of 2% growth per year after paying costs (labor, materials, leases, etc). They depend on selling a quality product and maintaining a loyal customer base to see that growth. They could go into the international markets, but the cost of doing so is such that to go international, they either have to figure a way of cutting their operating costs, go public, partner with a corporation that is already in those markets, or attract a venture capitalist. Or, they can decide the revenue to remain in local markets is sufficient to keep up with costs, and stay where they are.

Company B is a publically traded nationally-based manufacturing corporation; the textbook formula is that publically traded corporations typically see an average of 5% growth per year between stock sales and sales of the product. Because the investors want a return, Company B has to cut the costs to make their product to attract all that sweet, "free" money that is constantly moving on and off the ledger books at a quarterly rate. And if they want to enter international markets, they have some of the same choices; partner with a corporation that is already in those markets, or attract a venture capitalist, or convince their shareholders to spend more money to enter those markets with the promise of higher returns. But whatever they do, they have to convince their shareholders however they move will bring a greater financial return.

Quality of product takes a backseat, because quality is a cost driver. Just as labor is.

It's very rare that shareholders won't reward a company that reduces costs by investing in it at a greater rate.

Haele

[Warpy]

4. Like hell they do

They overpay their top executives and hide profits offshore for the express purpose of stiffing the stockholders.

[haele]

5. Well, they're still after that free money stockholders give them.

Claiming they have a fiduciary responsibility tricks the rubes - especially if the corporation has a good PA department - gets them off the hook when it comes to cutting labor and quality costs...

It's easier and cheaper in the short run to use money to make money. And that's sooo attractive to the small number of over-privileged sociopaths out there playing musical Board of Directors.

Haele

[JHB]

10. Not stakeholders. Shareholders...

...and then, in theory, plenty of examples of not in practice, particularly for executive compensation.

Stakeholders would include employees, customers, local community, etc.

[bettyellen]

6. You're right- quality in most manufacturing has gone down sharply....

The changes over the last 25 years have been striking and it's a combination of things- outsourcing, lack of domestic QA and less competition for placement in stores.

Years ago stores used to buy from a lot of sources - if one went bad, fuck it you stop buying from them. Almost all stores had in house QA depts, some stringent and some more or less lax- as long as it sold. Even if it was just one fussy and diligent person, they looked at the product at least once.

QA depts disappeared. People even stopped asking for "test reports" because they didn't know how to read them. Stores have cut out the middle man and have Asia make product to their specs, their is much less hands on state side.

But their buys are "planned" now as part of an overall marketing plan, and they freak out if any piece of it is missing. You could get an awful piece of garbage (like a tee shirt that is tight and supposed to be stretchy, but now doesn't stretch so it fits two sizes too small) and your coworkers will be pissed off if you want to reject it or delay it to fix. All corporate crap is so preplanned that any deviation from the plan is a bigger deal than the fact you are getting crap.
Also when people do test for quality they mostly leave it to the factories themselves to do. Needless to say, sometimes you get these glowing reports before they even have something to test. And my friend who does "product safety" gets pressured to look the other way while high heels break off (and break ankles) and lead leeches in through the footbed on your shoes.

The manufacturers know that it has to be horrible to get rejected by the stores, and they act accordingly.
If you ever stand between the upper management and their "plan", there is hell to pay. And management hires inexperienced people who don't even know how screwed up stuff is- they save money on salary and have someone disposable to blame.

[Qutzupalotl]

7. Don't forget call centers.

Although cheaper to operate, they turn customers off when someone with a heavy accent answers. I know I've had trouble understanding them. Several major companies have abandoned the offshored call centers due to high levels of complaints.

[Panich52]

8. Maybe they'll care when buildings fall, autos fail from inferior imported steel

I chose steel because as Trump was in Pennsylvania telling coal miners & steel producers GE was going to put them back to work, he was importing Chinese steel f/ his buildings.

Safety concerns over fabricated Chinese steel flooding Australian market: http://mobile.abc.net.au/news/2015-11-17/safety-warning-over-fabricated-chinese-steel/6949506


Pro-import article:
Welcome cheap Chinese steel, dump tariffs http://www.bostonglobe.com/opinion/editorials/2016/05/21/welcome-cheap-chinese-steel-dump-tariffs/VAeBAyRi4ewRFwdsQbcU3N/story.html?event=event25 via @BostonGlobe

Another anti-tariff article w/ links to pro ones:

Imposing 266% tariffs on Chinese steel imports will punish US manufacturers and consumers, not China
http://www.aei.org/publication/imposing-266-tariffs-on-chinese-steel-imports-will-punish-us-manufacturers-and-consumers-not-china/

Good luck

[duncang]

9. First define quality to cost

Most parts are designed with "x" expectation. The expectation can be anything from 1 out of a thousand + failure rate or 1 out of 20 failure rate over the period of a couple years. A couple examples would be a airbag and the mechanism for a window. A airbag (Note recent failures on car airbags) is not acceptable to the public if there are multiple failures and loss of life. Even over a long period of time. A window mechanism if it fails due to the use of plastic parts instead of brass is barely noticed if it even lasts only a couple years. It won't make the news, no loss of life, and lower chance of recall. So no noticeable loss of income for the company.

Even items made here go through "quality" control. And failures may be acceptable. A company may look at known failures at the component level. Or likely failures if a history isn't known. Compare what "costs" a particular failure will be. If costs of manufacturing out weighs costs of failures. Decisions will probably go toward the cost of manufacturing. A lot if not most consumers when presented with close to the same item will pick the lower price one. Unless they have checked out reviews or otherwise found out about problems with one or the other.

One factor for items made overseas is the actual company making the equipment. If they don't do consistent and proper testing of material to make the component it can cause big problems. Next the oversight of the company buying the component overseas may not be as consistent also. Due to logistics of visiting and insuring product standards.

[Lee-Lee]

11. Companies don't care because most consumers don't care

That's the simple truth. Most people want what they perceive as the best deal that fits their needs and will buy that.

Here is one example. There are still good brands of tools made in the USA that are far better than any imports. But what is the fastest growing tool company in the US? Harbor Freight, a company even with a name that screams "imported crap" and who sells not just imported tools but really poor quality ones.

But for their customer base who occasionally uses tools and doesn't make a living with them the tools are 1/2 the cost of going to Sears and buying US made ones, and they choose lower cost of a better product and American jobs.

We literally have nobody to blame but ourselves. If Americans didn't buy the imports nobody would keep sending the jobs overseas.

[ChoppinBroccoli]

12. This Is Anecdotal, But I Find It Very Telling

My dad always told me a story about my Grandpa, who was an engineer for Westinghouse back in the '50s. Westinghouse came to my Grandpa and asked him to study their clothes dryers because they wanted to see if they could remove two small screws (I think it was from the door). My Grandpa did his study and made his conclusions, then went to the execs and told them that they could remove those two screws and the dryer would work fine, but it would break down within a few years (back then, appliances were built to last for decades). The execs told him to remove the screws anyway. Why? Because each one of those screws cost them one-quarter of one cent. That's right, they began selling dryers that they KNEW would break down quickly in order to save a half-cent on each one sold. This is the mentality we're dealing with today. Everything is disposable and built to break down quickly so you have to go out and buy it AGAIN. Customer service/quality products are secondary to the Almighty Dollar. And the American consumer just accepts it.