The True Cost of Outsourcing: Loss of Trust

An excellent column in The New York Times this week says a great deal about the dangers of outsourcing and what customers regard as value.

            In his “Economix” column, David Leonhardt discusses the recent recall of Thomas & Friends toy trains after they were found to contain lead paint.

            The trains are made under the auspices of HIT Entertainment, a British company that holds the right to a number of children’s characters, including Thomas & Friends, created by an English writer in the 1940s.

            But HIT has outsourced the actual manufacturing of Thomas trains to RC2, a Chinese company. HIT seems to think that the arrangement included outsourcing of responsibility. Leonhardt writes:

            Except for a small link on the Thomas Web site to RC2’s recall announcement, HIT has otherwise acted as if it has nothing to do with the situation. Its executives haven’t even said that they regret having been promoting toys with lead paint in them. They haven’t said anything publicly.

When I suggested to the company’s public relations agency, Bender/Helper Impact, that this might not be the smartest approach, the agency e-mailed me a two-sentence unsigned statement. It said that HIT appreciated the concerns of its customers and was working with RC2 on the recall, but that the recall was “clearly RC2’s responsibility.”

In effect, HIT has outsourced Thomas’s image, one of its most valuable assets, to RC2. And RC2 has offered a case study of how not to deal with a crisis, which is all the more amazing when you consider that the company also makes toys for giants like Disney, Nickelodeon and Sesame Street.

When it first announced the recall, RC2 said that its customers would have to cover shipping costs to mail back the trains. It reversed that decision after parents reacted angrily, but it is still going to wait about two months to send the postage refunds. Why? “Because finance is in another building,” as one customer service employee on RC2’s toll-free hotline told me.

Most important of all, the company hasn’t yet explained how the lead got into the trains or what it’s doing to avoid a repeat. Like their counterparts at HIT, the RC2 executives have stayed silent.

            Look at this from a lean standpoint. Lean is all about providing customers with value: what they want, when they want it. In this case, value consists of a particular toy that is safe for children. Value also includes trusting the company you do business with. When there is a problem, customers want the company they bought it from to solve that problem – now. And in a flat world, having something made in a faraway place doesn’t cut you any slack with customers. As Leonhardt puts it:

 

            In many businesses, outsourcing has simply grown too big to stay behind the curtain. What happens in Chinese factories determines how good — how reliable and how safe — many products are. So there is no way for executives to distance themselves from China without also distancing themselves from their own product.

 

            Many lean advocates urge manufacturers to look at the true cost of outsourcing, not just the savings from cheap labor, and they usually mention a variety of often-overlooked expenses. One item you usually don’t see on those lists – and should – is loss of trust.