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If you think that only smaller Chinese manufacturing plants pose ethical or operation challenges to your product line, you’d be mistaken. Unfortunately, the immense size of China’s industrial sector means that factories of all sizes, shapes and capacities have the capability of pulling a shady trick or two on their off-shore contracting partners. While there are laws against such nefarious practices, there’s also little enforcement, and sometimes even the enforcers are in on the plot.

Pharma Mega-Corp Affected By Supplier Partner Failure

In early 2014, the pharmaceutical giant Pfizer was embarrassed and appalled when it found out that one of its Chinese drug manufacturing plants had been keeping two sets of books, one that recorded data for purposes of U.S. Food and Drug Administration (FDA) compliance, and another one that recorded what was really going on. Instead of issuing the highest quality medicines as required by the U.S. government, the plant had been using expired or unconfirmed materials, retested failing products until they “passed,” and hidden quality failure test data altogether.

That it happened to the global drug manufacturer was a bit of a surprise. Pfizer prides itself on its   supply chain management systems and touts the fact that it is a leader in supply chain security. It certainly has an unmatched depth of experience in managing all aspects of product development: its 55 internal manufacturing sites and 200 plus supply chain partners ship over 600 Pfizer products through over 130 distribution sites to 175 markets around the world. So why did this particular supply chain partner factory fail?

Chinese Industrial Factory Culture

The Chinese mindset about “partner responsibility” can be decidedly different from the mindset of westernized industrialists. In Westernized countries, contracts are the deciding terms between partners and those terms guide the relationship from beginning to end. The Chinese think differently, however. Chinese factory management may tell you that they will fully comply with your contract but happily toss it aside if presented with a better contract from a different customer. To them, they are “doing good business” by going after the most lucrative deal, which is a highly laudable principle to the Chinese. Unlike the Western ethical challenge, which would declare the act as a breach of contract worthy of an award of damages, the Chinese consider their act to be one that is right for their community, so there would be no punishment or penalty considered.

The Pfizer case also demonstrates another risk that off-shore producers face when sourcing in China: the patently fraudulent supply chain “partner.” This particular factory was illegally modifying its books to appear to achieve contract compliance, and it intentionally offered false evidence to prove it. To many, even Chinese observers, creating the fraudulent books made no sense. The Pfizer contract promised the factory and its workers potentially decades of steady, reliable work, for good pay, and in safe environments. By cheating the drug giant and potentially ruining its reputation, plant management lost that opportunity – probably forever. There are, after all, hundreds of other factories that can do the job in a compliant manner. It is not inconsequential that, at the end of 2014, Pfizer’s Supply Chain Security Progam launched a number of capacity building teams to work directly with local Chinese businesses to  mitigate the risk that the embarrassing incident could ever happen again.

Supply Chain Risks are Real

If a global industrial behemoth like Pfizer can be duped, how can a small or medium sized enterprise hope to secure and maintain quality supply chain partners? Simply put, a locally-sited industry expert with the knowledge of the sector as well as the factory can provide reasonable assurances that your contracting facilities are legitimate, and that they will comply with contract terms.

In my almost twenty years of experience, I’ve found that the work of a supply chain sourcing agent is often the critical key to Chinese factory partnering success. Local agents can assist with all aspects of risk management processes, from developing an appropriate corporate strategy for working in the sector, through operational hazards and conditions, to improved outcomes and happy customers. In my book, Red Flag, I discuss many of the challenging “practices” I witnessed while working as an agent for off-shore clients. If you have a particular issue or would like to find out more, you are welcome to download a some complimentary chapters of the book here.

 

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