Chinese quality crisis creates 'import czars'

With tainted and defective imports in the spotlight, corporate chiefs meet to defend their supply chains. Fortune's Matthew Boyle and Telis Demos chronicle the battle for quality control.

By Matthew Boyle and Telis Demos, Fortune writers

NEW YORK (Fortune) -- The Greenbrier resort in Sulphur Springs, West Virginia, with three golf courses and a spa the size of a football stadium, is a long way from China's factory floors. But in early June, the 229-year-old Georgian-style estate hosted a retreat for dozens of CEOs and other executives from U.S. consumer product companies. And Chinese manufacturing was on their minds.

With seemingly daily reports of recalls and bans of Chinese-made products making headlines - from contaminated toothpaste to faulty tires to lead-tainted toy trains - CEOs like A.G. Lafley of Procter & Gamble (Charts, Fortune 500) and David Mackay of Kellogg (Charts, Fortune 500), who spoke together on a panel at Greenbrier, believe companies need to ramp up the executive muscle they dedicate to making sure their supply chains are producing safe goods. So does this mean the "chief imports officer" becomes the newest addition to the C-suite?

"The change is coming, and it's coming quickly," says Grant Aldonas of the Center for Strategic and International Studies, a former Commerce Department official and panelist at Greenbrier. "This is something we agreed everyone had to get a hold of, and do it really quickly."

While importing goods from China is not new, the explosion in the volume and diversity of goods has overwhelmed even the biggest companies tasked with evaluating dozens of supply chains, many of which run two or three suppliers deep. "Only a few importers really understand how their products are being made," says Dan Gilmore, editor of Supply Chain Digest.

Currently, most companies assign managers in various departments - quality assurance, logistics, or foreign procurement - to oversee different aspects of global sourcing. There's no central manager. "It's always somebody with other responsibilities," says Bill Kitzes, a former director at the Consumer Product Safety Commission and now a recall consultant who has worked with clients like Cisco, Hilton Hotels, and Restoration Hardware. "Not nearly enough companies are looking into creating a czar position."

Companies also typically rely on third-party firms like Bureau Veritas of France, SGS of Switzerland, and Britain's Intertek, to test boatloads of their goods and audit factory conditions. Times are good for such companies: Bureau Veritas' revenues from its consumer sector, which tests toys and other products, increased 19% last year, and it has opened new labs in China.

But many firms have decided they need to do more - and with their own people. Discount retailer Family Dollar (Charts, Fortune 500), which imports 40% of its low-priced merchandise from overseas, just named a former Target (Charts, Fortune 500) executive to be its senior vice president of global sourcing, a brand new position. Toys R Us (Charts, Fortune 500), which pulled 128,700 Chinese-made toys off its shelves in April, is beefing up its quality-assurance team. Meanwhile, food giant ConAgra, maker of brands like Chef Boyardee and Slim Jim, in early April named a Kraft veteran, Paul Hall, as vice president of Global Food Safety. It has also created an independent advisory board chaired by Michael Doyle, a widely-quoted professor the University of Georgia's Center for Food Safety. The panel is so new, however, that its exact function has yet to be determined, according to a spokeswoman.

This early confusion is a common thread for companies seeking an import czar. "It's the sixty-four thousand dollar question," says Aldonas. "Should this person be in the U.S, at headquarters? Should it be the person managing supply chain? Or a separate function like compliance? That's what people haven't figured out yet."

Other experts don't think such a position is even necessary: "One person can't be held responsible," says industry consultant Joel Warady. "It is more important to have a corporate policy as to what standards must be met."

Wal-Mart (Charts, Fortune 500) hasn't gone so far as to create a new position, but it is quietly encouraging Chinese suppliers to set up offices near its Bentonville headquarters, just as American suppliers like P&G and Kellogg have done. The retail behemoth imports nearly $20 billion in products from China every year, and CEO Lee Scott wants to increase the amount of goods Wal-Mart buys directly from Chinese manufacturers to cut out the costs (and potential compliance risks) of working with middlemen.

So far, no Chinese company has hung a shingle in Bentonville, but local officials say it's only a matter of time. "We know it's going to happen," says Ed Clifford, president of the Bentonville/Bella Vista Chamber of Commerce. "One big supplier will do it, and bingo." With federal oversight and policing spread thin between various agencies, all with limited resources, business leaders know that they need be doing more.

"I think we are all a little more vigilant," says Costco (Charts, Fortune 500) CEO Jim Sinegal, who has strengthened his company's global purchasing standards several times since instituting them four years ago. "We will all learn a lesson from this."  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.