Toys. Pet food. Toothpaste. You can't open a newspaper these days without reading an article about yet another high-stakes product recall. Many of the high-profile stories this year have related to products produced by contract manufacturers (CMs) in China or India. Clearly, controlling the quality of outsourced goods is critical. Reputations built over decades can be destroyed overnight, especially when emotional issues, such as lead-paint-infested toys, are involved.

But damage to brand image is not the only harm that arises from poor quality. Quality-related expenses, such as warranty claims, supplier chargebacks, and disposal costs, can take a huge bite out of manufacturers' bottom lines, something that most can ill afford given the pressures of globalization and other economic realities. Many companies that outsource production in pursuit of lower costs quickly find that the ultimate price of entrusting a third party with their brand is very high indeed.

"Managing supplier quality and in-process quality — those are huge challenges for manufacturers in a CM environment," says Simon Jacobson, senior research analyst for AMR Research. "Autonomous facilities resist having to march in the same line, so getting composite metrics across plants is elusive."

Ironically, CMs, themselves, seem to place more emphasis on quality than do their customers. According to a recent survey by AMR, brand owners rank lowering costs as a more important reason for using CMs than improving quality.

That's beginning to change, however. According to AMR, quality management has been elevated to a concern of strategic importance for manufacturers across vertical markets and has become a key metric to measure overall supply chain performance.

Responsibility and Control

Intuitively, most people understand that responsibility should follow control. After all, if you weren't driving the car, you should not be held liable for the accident. But this well-established legal principle breaks down in a world where fewer and fewer "brand owners" make their own products anymore. Just because you didn't make the item (that is, control its manufacture) does not mean you will escape liability if something goes wrong. This is a lesson hitting the consumer packaged goods companies particularly hard these days.

But it's not just consumer goods and food and beverage manufacturers that are plagued by costly quality problems leading to recalls. As longtime users of CM services, high-tech manufacturers well understand the importance of controlling quality. With the cost of scrap and rework sky-high (not to mention the cost and public black eye of a recall), it is a common practice among high-tech manufacturers to qualify suppliers and accept goods only from qualified plants. In the semiconductor space, "quality is overseen and managed by people whose only job is to do this," says Anand Iyer, fellow at supply chain management software vendor i2. "They have a lot of visibility into where the product lot comes from."

The stakes are even higher in the pharmaceutical industry as lives could be jeopardized by sub-par manufacturing. Like the public, the FDA does not look kindly on companies, such as Boston Scientific, that have been found to market faulty medical devices — for example, pacemakers and defibrillators.

And automotive manufacturers have been at this longer than most, paying out warranty claims of up to 5% of their annual revenues, according to Warranty Week newsletter. The total cost of warranty is closely linked to quality, with lean ace Toyota consistently paying out the lowest warranty claims in the industry.