Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?


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Globalisation has made outsourcing to low-cost countries fashionable but firms face several challenges that fade outsourcing fashion.To survive in this outsourcing wave adopting proper sustainable strategy is needed.Using four case studies and four competitive strategies (‘‘Generic Strategies’’,‘‘Sandcone’’,‘‘Core Competences’’and ‘‘Value-Chain Analysis’’),this paper proposes sustainable
competitive advantage framework to over come quality issues in outsourcing to China.

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Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?

  1. 1. Quality issues in outsourcing to China: Is it still a sustainable competitive advantage? Ruta Armalyte a , Nachiappan Subramanian a, *, Angappa Gunasekaran b a Nottingham University Business School China, The University of Nottingham Ningbo China, 199 Taikang East Road, Ningbo 315 100, China b Department of Decision and Information Sciences, Charlton College of Business, University of Massachusetts – Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA Introduction In the recent years, outsourcing to China has become an important business strategy. Firms achieve competitive advantage by producing or sourcing products and services more effectively from a low cost country. Other than cost reductions, firms gain competitive advantage through premium quality, improved flexibility and dependability according to changing business environment and market demand (Kakabadse and Kakabadse, 2000; Jennings, 2002; Lynch, 2004; Fallah and Lechler, 2008). Therefore, outsourcing is one of the ways created by the globalisation as a fashionable strategy. China presents enormous business opportunities for the Western countries, not only as a low-cost labour country for cheap production, but also as a growing giant for potential market and high profits. Today J. Eng. Technol. Manage. xxx (2013) xxx–xxx A R T I C L E I N F O Keywords: Outsourcing Sustainable competitive advantage Quality issues A B S T R A C T Globalisation has made outsourcing to low-cost countries fashion- able but firms face several challenges that fade outsourcing fashion. To survive in this outsourcing wave adopting proper sustainable strategy is needed. Using four case studies and four competitive strategies (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core Competences’’ and ‘‘Value-Chain Analysis’’), this paper proposes sustainable competitive advantage framework to overcome quality issues in outsourcing to China. ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved. * Corresponding author. Tel.: +86 574 8818 0197. E-mail addresses: zx09969@nottingham.edu.cn (R. Armalyte), nachiappan.subramanian@nottingham.edu.cn, sp_nachi@yahoo.com (N. Subramanian), agunasekaran@umassd.edu (A. Gunasekaran). G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003 Contents lists available at ScienceDirect Journal of Engineering and Technology Management journal homepage: www.elsevier.com/locate/jengtecman 0923-4748/$ – see front matter ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.jengtecman.2013.07.003
  2. 2. China is the fastest growing market in the world and until now it is regarded as ‘‘the world’s factory floor’’ (The Economist, 2005). However, outsourcing can also lead to loss of competitive advantage. Ting (2004) reported that ‘‘Outsourcing to China helped many firms to save money, but it would be frustrating if not done right’’. China is classified as a risky and demands a tight control over poor intellectual property protection, fading quality of production and high level of corruption by many firms (The Economist, 2005). Due to increased global competition and the need for cost reductions, many international companies outsourced or established their production to China, however not all of them managed to achieve success, resulting in many issues, such as quality fade and loss of competitive advantage. Plethora of studies have been carried out to understand the motivation and benefits associated with outsourcing to China in different industries starting from manufacturing to information technology and financial industries (Bon and Hughes, 2009; Chadee and Raman, 2009; Contractor et al., 2010; Andersen, 2008). In addition to this, few studies reported major hiccups to the firms that outsourced to China (Kakabadse and Kakabadse, 2000; Kliem, 1999). Furthermore, few researchers specifically stated the management control and quality issues as dominant issues in manufacturing industry (Freytag et al., 2012; Fleisher et al., 2010). Even though there were many media reports about quality issues in manufacturing industries in the recent years, however, there was no adequate study which discusses on how to overcome quality issues within the specific manufacturing sector of the Chinese operations. Furthermore, enormous efforts have been made by researchers to understand why companies should backshore its production from China (Kinkel and Maloca, 2009). However not much was done to identify how to survive in China without quality and financial losses and to maintain its competitive and sustainable strategy. Hence, this paper aims to answer the following research questions. How a firm within a specific industry transforms Chinese operations (fashionable outsourcing) into competitive and sustainable strategy? How to overcome the quality issues with the Chinese operations? The major contributions of this study are twofold: theoretically this is a contextual perspective study to suggest guidelines to succeed and to develop a sustainable competitive advantage framework. Practically this study serves as a guide to those companies on how to survive in the Chinese market. Furthermore, this research also can help new entrants on how to deal with quality issues if they prefer to source or operate in China. The reminder of the paper is structured as follows. The background for the research is presented next, followed by competitive advantage theoretical perspective and research methodology. Results, discussion and managerial implications are then presented respectively. Background for the research A large number of studies have analysed the issues associated with Chinese outsourcing through theoretical and empirical perspective (Deloitte, 2005; Freytag et al., 2012; Chou and Chou, 2011; Harland et al., 2005). Outsourcing or operations in low cost country would lead to increased competition and loss of innovation due to gained knowledge by its contractors (Hoecht and Trott, 2006). Power et al. (2007) claimed that many organisations and its subcontractors failed to provide full commitment, loyalty and discipline, in order to gain from outsourcing. It leads to the misunderstanding of the employees, processes and methods of outsourcing. Jennings (2002) in his findings states that outsourcing can lead to leakage of critical knowledge, which would then increase the competition. Furthermore, Domberger (1998) concluded that the loss of cross-functional skills or development of wrong skills and the loss of the control of the suppliers are the main concerns of outsourcing. Beaumont and Sohal (2004) state that outsourcing can lead to decreased flexibility by the company, due to its contractual agreement, which in case of the business environment or demand change cannot R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx2 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  3. 3. be adjusted as quickly as it could have been by the managerial fiat. According to Dankbaar (2007), outsourcing can damage industrialisation and innovation capability of the firm. Furthermore, Plambeck and Taylor (2005) claims that although contract manufacturing can lead to lower costs, it can result in quality fade and weaken the incentives for innovation, by shifting the focus from innovation to costs. Kakabadse and Kakabadse (2000) in their study signalled that the companies must understand their own business processes and problems associated with it when souring or operating in different locations. In addition to this, the supplier also needs a greater understanding of its client’s service. Otherwise outsourcing to third party can lead to increased costs and unfilled service quality expectations. This was further discussed and proved by Kliem (1999) that a firm’s dependency of the outside supplier can lead to hidden costs such as managing failing relationships and other critical success factors of the company. Another study related to information systems outsourcing stated that outsourcing can have hidden costs associated with hiring, training and transferring staff, searching and contracting the vendor or cost of switching vendors (Gonzalez et al., 2005). In addition to this, Barthe´lemy (2003) states that outsourcing can encounter additional costs when managing the transfer of products, knowledge and equipment to the outsourcing partner. In manufacturing industry, McIvor and Humphreys (2000) through cost and benefit analysis found that increased outsourcing of components which were previously made in-house can result in increase of unexpected costs due to company’s operations becoming more dependent on much wider range of suppliers. This is due to the fact that many companies have inadequate costing systems, such as direct labour hours being used for allocating overheads, even though the production process is highly automated. This incorrect costing system leads to overpricing profitable products and expanding unprofitable production lines (Lutz and Ritter, 2009). Other problems, such as difficulties in coordination of global supply chains and the loss of intellectual property rights due to legal and political issues in China, need to be taken into consideration when choosing outsourcing location (Meixell and Gargeya, 2005; Lutz and Ritter, 2009). Finally, issues associated with communication challenges and misunderstandings, due to cultural differences, were also discussed in the literature (Campbell, 1995). Lutz and Ritter (2009) through empirical evidence showed that lack of communication and cultural understanding between international companies and the Chinese suppliers leads to incorrect orders, loss of flexibility, increased costs and loss of competitive advantage (Domberger, 1998; McCarthy and Anagnostou, 2004). Our study views the causes of quality issues using Gordon et al. (2009) six main categories classification. Six major causes are human default, machinery failure, poor quality of raw materials, management and control issues, legal issues and communication problems. Human resource failure Most of the quality issues are associated with human resource failure. This is primarily due to lack of motivation and interest, shortage of skilled people, lack of skills and training needed to process the tasks (Campbell, 1995). Most common human resource failure occurs due to human ‘cut-corners’ philosophy. Chinese suppliers in general to increase their profits in short period cut quality and do not see beyond the next order. Furthermore, evidence of ‘product fade’ is a common issue of human error, where the owner of the factory ensures that the first few orders meet the required standards and in the following orders the quality of the goods decreases as material inputs are replaced with cheaper ones in order to cut costs (The Economist, 2007). Machinery failure Machinery failure is another important reason why quality of the goods does not reach their standards. Problems associated with machinery are lack of maintenance, lack of new technology needed to produce the goods or improper setup. Furthermore, most industrial centres lack capital, which is needed for updated technology in order to meet the product requirements (Gordon et al., 2009). R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 3 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  4. 4. Material inadequacy 30% of defaults occur due to wrong or default raw materials being bought from suppliers (UNIDO, 2006). Furthermore, manufacturers often subcontract to other companies for supply of raw materials; hence the quality of it may vary depending on the supplier (Forward Forever, 2011). Management and control issues It is important for the companies to understand that only reliance of Chinese manufacturers are not enough to ensure good product quality. Importing companies should take careful steps when contracting a Chinese supplier; understand the quality control and safety testing procedures of the manufacturers (Waldmeir, 2007). Furthermore, increased on-site monitoring should be used by international companies who want to establish a long term presence in China. Furthermore, if foreign companies do not focus on establishing long-term relationships and implementing quality processes, but only concentrate on cost savings, suppliers will continue cut-corners in quality, resulting in some very unpleasant import quality issues (Industry Week, 2008). Management and control are essential factors for quality assurance, hence additional supervision such as detail reports about the product design, its production process, representations and warranties regarding the product quality as well as specifications of product design, its prototypes and samples need to be established (Fremlin, 2008). Legal issues China is still in its early age of development and product-liability or product-recall systems are not fully established in China. This leads manufacturers abuse the system and not be punished for it (Reisman, 2006; Wharton, 2012). According to USA trade statistics, in 2009 the US copyright and software industry lost $48 billion due to intellectual property rights (IPR) infringement in China. Furthermore, this is not a problem only for international, but also for domestic companies in China. An official study in Beijing states that pirated software cost $20.9 billion for domestic companies in 2010 (Tandon, 2011). It is generally reported that greedy and cut-throat owners of the manufactures take advantage of the weak legal enforcement and even encourage cheating as a business culture, where corruption and bribery are flourishing (Barboza, 2007). Communication issues An essential part of any business is to clarify the requirements and manufacturing processes that depends on the quality and production of the final goods. To achieve this, close relationship between manufacturing and management has to be established and constant communication is required. However, when companies produces from China, the time difference, distance and language barriers become the biggest issues to communicate (Blackerby, 2003). As a result, communication becomes an issue and can result in a quality fade, if the supplier does not speak international language or does not fully understand the requirements (Campbell, 1995). Furthermore, some issues cannot be solved by communicating through phone or email and hence it has to be solved on site, however due to the distance this option becomes limited and can lead to further complications. Due to reliance on communication through phone or email may result in lower productivity, choice of poor raw material quality or incorrect manufacturing processes (Wharton, 2007) (Table 1). Competitive advantage theoretical perspective Our study considers four different competitive strategies that indicate four different ways of how a company can achieve and maintain its sustainable competitive advantage when outsourcing to China. R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx4 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  5. 5. Focus on single objective–‘‘Generic Strategies’’ Porter (1980) believed that in order to be competitive in the market, companies should achieve sustainable competitive advantage through differentiation theory, proposed in 1980. Porter (1980) named three generic strategies for firms to be successful: cost leadership, differentiation or focus. Cost leadership attempts the firm to be the lowest-costs producers of goods and services in the industry. The firm with the lowest costs would achieve the highest profits and outperform its competitors (Devaraj et al., 2004). Differentiation strategy occurs when a firm offers unique products and hence, it can often charge a premium price for it in the market. Furthermore, a focus strategy occurs when a firm concentrate on specific niche in the market and produce specialised goods for this niche market. Competitive advantage can be achieved through focusing on the differentiation or leadership approach with regard to the focus strategy (Eonsoo et al., 2004). It is important to note that Porter (1980) warns the firms not to be stuck between two chairs. By this phrase Porter (1980) refers to differentiation and cost leadership strategies, which cannot be achieved simultaneously and therefore a company should decide whether they want to be the ‘cheapest’ or the ‘best’ in the market. There is an argument that if the firm adopts both differentiation and cost leadership strategies do not have a competitive advantage and therefore has a poor financial performance. However, Dess (1984) has proved that even if companies combine the generic strategies, they can still be successful and profitable. Few firms use Porter’s generic strategies to gain advantage such as differentiation or cost reduction by sourcing part of their business (Eonsoo et al., 2004). According to McIvor (2005) outsourcing, manufacturing or administrative parts of the business leads to the cost structure of the business. On the other hand, outsourcing creative part of the business such as design is done to gain differentiation purposes (Eonsoo et al., 2004). It is claimed that regardless the reason for outsourcing, it has to be aligned with the overall strategy of the business (McIvor, 2005). Table 1 Issues and consequences of outsourcing to China. Issues Consequences Source Human Resource Failure Quality loss UNIDO (2006), Wharton (2007), Freytag et al. (2012), Campbell (1995)Delays in shipment Failure to realise the cost of outsourcing Machinery Failure Loss of profit Beaumont and Sohal (2004), Gordon et al. (2009), Lynch (2007)Loss of flexibility Material Inadequacy Hidden costs Kakabadse and Kakabadse (2000) Failure to realise the cost of outsourcing Kliem (1999), Gonzalez et al. (2005), Harland et al. (2005), McIvor and Humphreys (2000), McCarthy and Anagnostou (2004)Increased operating costs Loss of Management and Control Quality fade Hoecht and Trott (2006), Power et al. (2007), Jennings (2002), Domberger (1998), Dankbaar (2007), Plambeck and Taylor (2005), Freytag et al. (2012), Fremlin (2008), Yamashita (2010), Dabhilkar et al. (2009) Inaccurate work Loss of core competences Increased competition Leak of knowledge Risk of losing customers Loss of innovation Loss of competitive advantage Legal Issues Loss of competitive advantage Meixell and Gargeya (2005), McCarthy and Anagnostou (2004), Gordon et al. (2009), Tandon (2011), Barboza (2007) Loss of core competences Loss of intellectual property Loss of Communication Incorrect execution of processes Blackerby (2003), Wharton (2007), McCarthy and Anagnostou (2004), Lutz and Ritter (2009), Campbell (1995) Improper material usage Delays in shipment Loss in efficiency R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 5 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  6. 6. Satisfy all five dimensions – ‘‘Sandcone’’ Ferdows and De Meyer (1990) suggest that there is a specific order for the competitive measures and if the company follows it, the competitive measures will reinforce each other rather than replacing each other as suggested by Skinner (1974). It claims that quality in regards to customer’s expectations associated with the brand is the crucial and most important factor in order to be competitive, and then comes dependability, flexibility, cost and innovation. Ferdows and De Meyer (1990) claim that until the solid ground for quality expected from consumers is not implemented then there is no use to reduce costs and increase flexibility. Furthermore, Ferdows and De Meyer (1990) identified that for the companies who competeonthehighquality, premium costdisadvantageisonlyanillusion. Ferdowsand De Meyer (1990) argued that before the technological boom, trade-off between cost and flexibly might be an issue, but due to current innovation and high technology era, any kind of mix in the production is possible. It is obvious that increased dependability can eventually lead to higher flexibility. This is due to the reason that when a company has all its processes under control (wholly owned subsidiary), it might then find it much easier to meet sudden change in the order rather than request this from an outside supplier who might have already problems delivering the regular order on time. ‘‘Sandcone’’ model states that companies can and must compete on several dimensions simultaneously. Combining ‘‘Sandcone’’ and Hill (1988) suggestions, a company to achieve competitive advantage has to compete on several dimensions such as quality and dependability has to be maintained within the customers expected standards. Concentrate on core competences – ‘‘Core Competences’’ Prahalad and Hamel (1990) suggest that core competences are the wellspring of the new business strategy and are achieved through collective learning in cooperation, paying special attention on how to coordinate diverse production abilities and integrate compound stream technologies. They argue that only if the company is considered as a hierarchy of core competences, core products and market focused business units then it will be ready to fight and succeed. Outsource non-value adding activities ‘‘Value-Chain Analysis’’ According to Porter (1985) value chain analysis will enable the organisations to improve overall performance and increase their profit margin of the company, by performing activities efficiently, so that the value the customer will be willing to pay exceeds the cost of the activities in the value chain. Value chain analysis distinguishes core activities of the firm (value added activities that provide competitive advantage over its competitors) from the secondary activities (necessary for the organisations presence) which do not add-value to the company. Those activities might be costly for the company and thus company might want to reduce the fixed costs by outsourcing them to the third party. A company can then create a cost advantage over its competitors by evaluating cost of each activity in the value chain. The efficiency can be achieved through reducing costs of individual value chain activities or by reconfiguring the value chain (outsourcing some parts of it). A firm may specialise in one or more value chain activities and outsource the rest, depending on the strengths and weaknesses in each activity in terms of cost and differentiation. Understanding the linkages between the individual activities can help the managers to make a better make-or-buy decision that can result in cost reduction or differentiation advantage (Chang and Hwang, 2002). Research methodology Research design and setting The purpose of this study is to develop a new theoretical framework based on the research and existing literature on quality issues when outsourcing to China. Due to the nature of the research topic, case studies were appropriate for the theory building, because it allowed us to answer ‘how’ questions R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx6 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  7. 7. about the contemporary set of events in which we are and ‘why’ questions in order to understand the scope of the problem. As a result, we conducted in-depth case studies with interviews in order to explore and interpret the phenomena from real world experience and try to answer the question of why companies still keeps its production in China, when the quality of the production affected them negatively. We conducted an in-depth case study of four companies which are in automotive and toy industries which are important and more sensitive to human being if there are quality issues. Company A is most recognised for its quality and design brand toys in the world. Furthermore, amongst the toys collectors it is best known for its pricey and highly collectible teddy bears. Company B on the other hand is now known as the biggest designer and manufacturer of broad variety of toys. It produces all the toys overseas with many wholly owned manufacturing facilities in China, Malaysia, Indonesia, Mexico and Italy. Other two companies were chosen from the automotive industry. Company C is a world’s leading automotive manufacturer and supplier for driveline and chassis technology and Company D is a diversified global provider of power tools and accessories, hardware and home improvement products as well as technology based fastening systems. Table 2 provides an overview of the respondent profiles and their experiences. Furthermore, additional four Chinese manufacturing companies were interviewed and the feedback was incorporated in this study to get a more profound general idea about the causes of quality fail in China. From Table 2 it can be concluded that all the respondents had experience with at least 4 years in the company and somehow related to the quality issues of outsourcing. It is important to note that some of the respondents were unwilling to disclose information about their firms. Therefore some interpretation was made in regards to their answers. Finally, none of the interviewees wanted their names or their work positions to be disclosed for sensitivity of the research topic and confidentiality reasons, therefore no names will be mentioned in the analysis. Data collection and analysis The choices of four case studies were based on Eisenhardt (1989) argument that multiple cases are better to extend external validity and give a more objective assessment of the phenomena. In particular 4–10 case studies are likely to create more robust and testable theory. The four companies were collected in a way to have different scenarios of outsourcing success or failure. This helps to compare and contrast the broader spectrum of the issue considered for the study. First of all, all four companies selected for this research produce consumer durables. In addition to this, the studied activities had to cover the definition of outsourcing identified in the research, which stated that all companies should have been outsourced at least part of its production process to a foreign Table 2 Respondents and the industry details. Company Respondent position Industry/main products Company A Reporter Supervisor in supply chain Toys industry: stuffed animals, especially teddy bears Company B Supervisor Branch Manager Toys industry: games for children, collection toys, toys from famous children TV programmes and movies Company C Manager Supervisor Automotive industry: parts for cars Company D Branch Manager Manager of Quality Assurance Manager of Engineering Department Power tools and accessories: drills, home durables Chinese Manufacturer 1 Manager Petrochemicals Chinese Manufacturer 2 Director Cement industries, construction materials Chinese Manufacturer 3 Director Medicine and medical products Chinese Manufacturer 4 Manager Industrial. IT and home technology (printers, scanners, industrial paper machines) R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 7 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  8. 8. country (our case China), by contracting its portion of activities to the third party or creating a wholly owned subsidiary, in order to analyse the quality issues of manufacturing processes. In addition to this, the critical events of outsourcing have already taken place and the chosen cases should have different outcomes of it (Gadde and Ha˚ kansson, 2001). Therefore, two companies were chosen to represent the negative outcome of outsourcing whereas other two companies were selected to represent successful outsourcing to the Chinese situation. This selection of the companies enabled to identify different causes of quality issues and diverse competitive strategies. The data on the four case studies were collected through primary and secondary data sources, because evidence from multiple sources is considered to be more appealing and robust (Yin, 1994). Secondary data included academic journals and books, corporate reports of the case companies and media publications. In addition to that primary data incorporated semi-structured interviews per telephone, email and face-to-face consultations. Furthermore, open discussion questions were preferred in order to understand the issues from different angles and follow the theoretical literature used for this paper. The explanatory interviews comprised two to three respondents from different departments within the case companies, who had direct or indirect involvement in the problematic or successful outsourcing strategy, in order to gain different opinions about the quality issues and companies’ failure or success. In addition to this, we attempted to verify individual reports by asking similar questions to multiple informants such as Chinese directors and managers from different manufacturing companies (international companies and Chinese suppliers for international companies). However, it has to be noted that some linguistic problems was encountered, therefore translation from English to Chinese had to be done simultaneously, in order to process the interview. The responses were then transcribed and incorporated in the analysis, which gave valuable input to further evaluation of quality fade phenomena when outsourcing to China in the future. All the primary and secondary data collected were used to analyse the quality issues and the effect on case company’s competitive advantage and its success/failure in China. Finally, the findings from the case studies and interviews were then synthesised together to develop a sustainable competitive advantage theoretical framework. The compare and contrast method was also applied in order to relate the findings of the case studies and interviews to identify patterns and to provide suggestions about outsourcing phenomena in China. Results Observations in case Company A Due to very competitive business environment, in 2004 company’s management decided to move some of its production to China in order to reduce costs. This was done through a Chinese contractor. However it experienced quality issues and transportation delays like every other company that outsourced to China. Furthermore, the biggest issue was the nature of the product itself. It was not just about making a high quality teddy bear; it was about being very precise. Furthermore, the long distance offshore production plant became biggest disadvantage when some of its production reached the retail stores 3 months after the initial deadline and there were drop in sales. In order to get a better understanding of the quality failure, the main points from the interviews are summarised in Table 3. According to the reporter, who was directly involved in case Company A noted that Company A encountered quality failures, because the pattern sheets were too complicated for the Chinese sewers and could not accomplish specified quality as in home country. Furthermore, the training of how to sew using this specific pattern took too long time to make them learn. In addition to this, the accuracy was especially important in this manual work, because very small errors in knitting resulted in teddy bear eyes being misapplied, hence making the bears look to sinister for the western customers. The reporter also mentioned that there was no guarantee or restriction to keep the workers after they have been trained to do the work, when there is a better opportunity the workers moved to high payers without any notice. This led to further problems such as delays in production shipments. With respect to management and control issue, both the reporter and the ex-worker in supply chain agreed that lack of control over the production process due to the ownership structure and management communication issues led to many products being produced incorrectly. The quality R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx8 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  9. 9. problem could only be detected once the products reach Europe, hence increasing company’s overall costs, because the teddy bears could not be sold in the market. From the interviews it can be concluded that tight control over the quality and production of the teddy bears was crucial for company’s success. Furthermore, manual work requires special skills and experience which can be obtained with continuous training, however it takes long time to achieve, therefore outsourcing may not always be the most feasible option. Overall we can see that Company A outsourcing strategy in terms of quality did sacrifice to an extent that it led the company to move back its production to Europe. However it is important to note that different from other companies, by outsourcing to China, Company A did not aim to enter Chinese market. Several theories suggest that competitive advantage can be achieved only by being close to its target market (KPMG, 2012). Furthermore, by having the production close to its market, quality assurance is easier to achieve. Company A’s primary markets are Europe and USA, when it moved its certain operations to non-marketing destination lead to loss of control on management and hence it encountered issues in production quality. However, it is arguable and more study is needed to understand how far quality loss could have been offset by gaining the entrance to a huge potential Asian market with increased profits, which Company A did not considered to do. Observation in case Company B According to the worker in Company B, the main issue with quality errors is the human resource problem, because some Chinese suppliers try to ‘cut corners’ by providing lower quality materials and resulting in poor quality production of toys. However, there is no doubt that Company B will stay in China and even though the recent quality issues brought a lot of damage to the company’s reputation and hurt its sales, Asia market accounts a large part of sales. According to the worker, China is a huge market for enormous profits in the next decade; therefore Company B plans to expand its international footprint in Asian markets by building new franchises and entertainment partnerships in order to achieve sustainable growth. Even if the quality reduces and more attention has to be paid to the supervision and management of the production, there is no doubt that this sacrifices will only be a smaller concern with the development of Chinese economy and increase in the consumption of goods. On the other hand, the worker argued that Company B outsourced to China due to low cost production and the reason why Company B still keeps its production in China is also due to its lower labour costs (Table 4). With the raising demand for toys, the ability to create the toys and meet the demand became the biggest concern for Company B. Toys business is lucrative whereas it depends on how firms are going Table 3 Quality issues reported by Company A. Cause of quality issues Human resource Machinery Raw materials Management and control Communication Legal Reporter Employees were not trained enough. Complicated knitting techniques, to slow in learning N/A N/A No control over production due to loss of ownership Not understanding the need for accuracy No guaranties or restrictions to keep the workers after they have been trained Ex worker in supply chain Employees did not have the skills N/A N/A There was no control over production, not enough instructions and training due to change in employees Not being able to explain the accuracy need N/A R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 9 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  10. 10. to handle inconsistency in production volumes, seasonality and market life of less than a year. These non-core production toys were a huge pool for high profits, however dependability was crucial to its success. Due to these high demand fluctuations, non-core toy production was outsourced to China. Company B operated through network of approx. 35 vendors that were contracted to manufacture Company B’s production. The manager in China selected the vendors very carefully depending on the expected time to market, political expertise and price. During that time, this was a very successful strategy for Company B, due to its low investment costs (no capital needed for wholly owned manufacturing) and increased flexibility due to demand variability. The relationship between the manager and the vendors was of the crucial importance for the quality reliability, due to its complexity and high volume production where a lot of the emphasis was put on the price but not quality. In 2007 Company B recalled 1.5 million toys which contained lead-paint and were produced in China. Several weeks later, Company B had to make another announcement and recall 9 million more China-made toys. The problem arose when the subcontractor of Company B outsourced the work of painting parts of the toys to an outside vendor, who in order to save costs acquired the paint from a non-authorised supplier. It is important to note that the third party supplier had close relationships with subcontractor, hence it was believed by subcontractor to be a trustworthy supplier. It led to the production of final goods which contained ‘‘impermissible levels of lead’’. These recalls lead not only to a drastic reduction in Company B sales, but also it damaged Company B reputation and trustworthiness. Even though Company B understood the importance of quality control in its outsourcing strategy, due to its cost leadership strategy they did not put enough emphasis on quality. Hence the product recalls showed that the quality issues outperformed cost leadership advantage. According to the report made by Xinhua, who was the spokesman of China’s general administration of quality supervision and inspection, Company B did not establish tight quality supervision over its production in China and the manufacturers were doing what the importers requested. Regardless of all the quality issues and production recalls, Company B keeps its outsourcing option in China and does not consider any other relocation of manufacturing plant in the near future. To improve the quality Company B has to follow ‘‘Sandcone’’ model instead of cost leadership strategy to satisfy the order winning criteria. Observations in case Company C Company C entered Chinese market in early 1980s by engaging in sales and service licence agreements with two Chinese manufacturers of clutch and shock absorber. Later Company C opened its representative office in Shanghai through joint venture and carried out its look-and-see strategy in order to understand Chinese market and risks associated with it. The company’s strategy towards Chinese operations is not a short-term cut-cost option rather than it is a long-term strategy with full commitment to Chinese market in terms of RD, manufacturing and sales. In 1998 Chinese Government relaxed its regulations and allowed ownership of foreign affiliates in the automotive industry. During that time Company C quickly took advantage and successfully Table 4 Quality issues reported by Company B. Cause of quality issues Human resource Machinery Raw materials Management and control Communication Legal Subcontractor in China N/A N/A Due to cost savings poor quality materials can be chosen Lack of instructions and control Lack of communication between the management and supplier N/A Worker Do not pay attention to details. Trying to ‘cut corners’ N/A N/A N/A N/A N/A R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx10 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  11. 11. established a fully owned production plant which was crucial for its later development. ‘‘Customer- oriented’’ focus with customised production and research and development is considered to be the successful strategy for Company C. Today Company C is a leader in chassis and powertrain business and continues its growth with astonishing results. Furthermore, engineering departments being located in China, many new innovative applications are developed and distributed to other countries. Company C values more the quality of its products and process efficiency. Dependability and top quality are the ultimate criteria and it is achieved through standardisation. In order to ensure high quality, Company C’s production group has a highly qualified team with a superb command of material and processes. Furthermore the whole value chain activities such as manufacturing, engineering, logistics and quality assurance are integrated into the processes from very beginning. Moreover, high automation ensures highest level of efficiency and dependability. Cutting-edge technology is used for production and quality assurance which is integrated into the production process. Furthermore, quality circle teams are essential part of quality control and improvement. The highest efforts are put into ensuring error free production. According to the supervisor of quality assurance department, the main reason that causes quality issues are lack of understanding of design and manufacturing requirements. However they avoided quality issues through high manufacturing process automation. Furthermore, full control to the ownership structure helped them to keep all the processes under strict quality checks in every part of the production process. The manager of the Chinese operations agreed that management and control skills are the key factors to overcome quality issues. Chinese operations started incorporating quality into company’s strategy. Furthermore, the manager believes that China has the ability to compete in the world for quality production through tight quality control. In conclusion, the manager argues that cost advantage in China is diminishing, therefore for Company C China is an important market for the sales of their production, that is why they believe most of the companies still prefer to stay in China (Table 5). Company C experiences reveal that China is a huge pool of opportunities and development. Implementation of quality assurance in every step of the process lead Company C to be the leaders and experts in its production all over the world. Observation in case Company D In the past decade Company D’s strongest competitors are able to produce at lower cost due to their location strategy and supply standardised products worldwide. Therefore, Company D continuously started losing its market share and had to react to increasing production costs as soon as possible in order to sustain its competitive advantage. Therefore, Company D decided to adopt global cost leadership strategy and as a consequence in 2002 they shifted some of its production and operations to China by subcontracting and also establishing a wholly owned subsidiary. Due to its standardised production restructuring with high automation, new products are produced quicker which ultimately Table 5 Quality issues reported by Company C. Cause of quality issues Human resource Machinery Raw materials Management and control Communication Legal Subcontractor in China N/A For high standardised products it is important N/A Could cause if management and control is not good N/A N/A Supervisor in quality safety N/A N/A N/A N/A Not being able to explain the instructions face to face, misunderstanding occurs N/A R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 11 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  12. 12. increases company’s flexibility. Functional managers were further given coordination responsibility with country’s management. Furthermore, Company D implemented new point of sales software application system with strict supply and demand control for all the products manufactured in China. With its new software system, Company D managed to capture demand changes on time and respond to it quickly (Table 6). Based on the interview and the data collected through questionnaire, it can be concluded that Company D does not encounter any huge quality issues due to strict quality control and inspection, not only in production process, but also when the goods are shipped to Europe and America. Furthermore, some respondents agreed that minor quality issues occur due to human resource failure, more precisely due to lack of responsibility in fulfilling all the requirements by the Chinese workers. Therefore, according to the respondent from quality assurance department, a lot of additional investment in training has to be devoted in order to maintain approximately the same quality standards as in other manufacturing locations. Furthermore, incentives such as quality bonuses for the managers are the encouraging ways to ensure that there will be no leak in quality of the production. In addition to this, quality production double check, plant audits and on site quality inspectors are needed to ensure error free production: ‘‘The quality is maintained especially with additional resources for quality inspections’’. On the other hand, standardised and highly automated production of goods Table 6 Quality issues reported by Company D. Cause of quality issues Human resource Machinery Raw materials Management and control Communication Legal Branch Manager Some issues occur due to unskilled workers who sometimes do not pay enough attention to details N/A N/A No control over third party supply sometimes cause minor quality errors Due to German– English– Chinese language mix some important issues are not understood N/A Manager Never admitted to having made a mistake N/A N/A Important to keep very high control and give incentives for good work such as quality bonuses. Important to keep responsible QS managers on the site. Very important to communicate regularly in order to monitor actions to eliminate the root of failure. If some problems occurred Chinese manufacturers did not take any responsibility for it, nor did they put effort to help Manager of Quality Assurance Department It has to be put a lot of additional training for human resource in order to overcome quality issues N/A N/A The quality was not hurt mainly due to additional resources which were allocated for quality inspection N/A N/A Manager of Engineering Department Some minor quality errors occur because workers sometimes do not follow the strict instructions in production process No quality issues because products are standardised and very little human interface is needed in the production process. High automation N/A Some quality issues can occur due to inability for the engineers to be on site all the time. However it does not happen very often, but additional resources for inspection is crucial N/A N/A R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx12 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  13. 13. leads Company D to minimize human interface and to ensure quality. Since the early 90s Company D has never encountered any big quality issues. Overall it can be concluded that Company D case study show some evidence when compared to all the above mentioned competitive advantage theories. However, it is important to note that in a dynamic environment focusing only on one competence is not enough to be competitive. The company has to focus all the five factors (quality, cost, flexibility, dependability and innovation) through strict implementation of control and management. Sustainable competitive advantage framework Overall insights to deal with quality issues Based on the case studies observations it is obvious that outsourcing to China does not have any negative effect on production quality. Most of the respondents agreed that quality fade can be avoided with strict controls and checks. On the other hand, Chinese manufacturer 3 agreed that outsourcing to China does have a negative effect on quality because some Chinese suppliers put ‘‘cost control’’ on their orders and to gain margins they find ways to reduce quality in order to minimise costs. Furthermore, from Company’s A and B responses, it can be determined that outsourcing to China can have radical consequences. From the consolidated observations summary shown in Table 7, it can be emphasised that common cause of quality issues in China are due to the unskilled or unspecialised workers (human resource) with lack of accuracy and responsibility in their work. It is to be noted that management and control (Lack of coordination and regulation) is also the major significant factor that causes quality issues in the production. Few respondents highlighted, if production is not automated then additional control and guidance is needed to meet the requirements. However this is not always possible to achieve due to distance, language barriers or prohibition of control over the processes and ownership structures. Other problems such as machinery and legal disputes play only minor roles with respect to quality issues in China. Most of the respondents agreed that cheap labour costs are still a significant motivation for international companies to have their presence in China regardless of quality issues associated with it. However, some respondents argued that rapidly increasing labour costs and continuously appearing quality issues make China as a less attractive destination. However, many companies prefer to keep its operation in China to capture the bug Asian market which is a significant profit pool for international companies. Company D followed a step by step approach, at the very beginning the company outsourced some of its production to China because of the cost reasons and subsequently established a wholly owned subsidiary based on the market potential and it started sales to the Asia market. Overall it can be said that both international and Chinese manufacturers believe that quality issues with respect to human failures can be dealt with strict quality check systems in the production process. Furthermore, it is essential to train specialised workforce for manual manufacturing processes and naturally with more time and effort. Finally, Chinese manufacturers emphasised that quality does play a crucial role in company’s competitive advantage and only by achieving the quality standards the firms can be successful in the developing markets. A respondent highlighted that on supply side Chinese market is saturated with cheap low quality production whereas the fast growing economy makes the demand side more attractive with high affordability of Chinese customers for good quality products. In addition to this, a report prepared by chief executive of Bangkok bank stated that Chinese customers have the capability and are also willing to pay higher price for the quality goods, therefore companies which are entering into the Chinese market should ensure good quality to sustain and outperform the competitors (Songwanich, 2009). Overall insights based on competitive strategies Table 8 shows that Company A encountered huge quality issues when outsourcing to China, because it followed Generic strategies. Before the outsourcing Company A competed based on quality. However, by outsourcing to China, they gave up quality priority and tried to compete on cost factor. R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 13 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  14. 14. Table 7 Case companies responses. Company Does outsourcing to China compromise product quality? To what extent? Causes of quality issues in China? Reasons of having presence in China even though it has quality issues and generate huge losses to them? Additional comments A Yes, had to move back to Europe Human resource, Management and Control, Communication, Legal Moved back to Europe. Company A did not sell its production to Chinese market The stuffed teddy bears could not be made accurate enough. For manual production China is not the best option B Yes, many recalled toys, damaged reputation Human resource, unsuitable Raw Material Management and Control, Communication Low labour cost, access to certain materials new sales market ‘Made in China’ is moving towards high end of the market C No, because of implemented quality checks Poor quality control and management, communication Entry to huge potential market, because cost advantage in China is diminishing Quality in China is improving due to continuous training provided by Company C. China still needs to learn a lot from western companies. Only products with good quality can survive in the market competition D Not necessary, if the quality control is reliable and strict big quality issues can be overcome. However, additional resources have to be allocated to it. Incentives for quality such as quality bonuses work well Do not encounter quality issues due to quality control technologies. However minor errors occur due to Human Resource of the third party suppliers. Lack of legal agreements between parties may give incentives to cheat on quality standards At the moment still for lower cost reasons Quality is an issue due to the Chinese mind- set of ‘cut corners’ and achieve short term profits. The quality was kept approximately the same due to additional resources to quality inspection Chinese manufacturer 1 Not necessarily. China has capability to produce low quality and high quality goods Communication and management issues New market China has the ability to produce low and high quality goods. The quality is improving Chinese manufacturer 2 No. Quality has been improving in China Keeping up with new technology in machinery, communication Enter the market Quality in China is improving Chinese manufacturer 3 Yes, it has got worse due to increased labour and material costs Lack of quality control Cheap labour is a big attraction Some products improve in quality, but many are even less trustworthy due to ‘cost control’ Chinese manufacturer 4 No, very high quality control checks ensure the highest quality. China has the technology to make good quality goods Under capacity of specialised workers Still for cost reduction The products we produce are perfect substitute of imported products from the perspective of technology, quality and customer recognition R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx14 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  15. 15. This led to a huge failure, because consumers’ expectation of the product quality was not only not maintained, but deteriorated due to lack of specialised workers and absence of quality control when outsourcing to China. From the Company B point of view, it attempted to embrace ‘‘Generic Strategies’’, ‘‘Core Competences’’ and ‘‘Value Chain’’ competitive strategies. Still it encountered quality issues because of lack of implementation of quality control standards. Even though Company B’s focus is towards cost leadership it compromised quality standards which are the basic in Sandcone Model. It can be concluded that if Company B followed ‘‘Sandcone’’ Model, the quality issues may not have occurred and outsourcing to China would have been successful. Company C followed quality differentiation strategy and sustained with it to be successful in the Chinese outsourcing. Company C reveals that ‘‘Sandcone’’ Model in a dynamic business environment is crucial to maintain its competitive advantage and firms should concentrate on several dimensions in order to succeed. Furthermore, it supports the theory that quality assurance does not always require higher costs, because Company C managed to achieve cost reduction without hurting quality. Company D also supports ‘‘Sandcone’’ Model and revealed that even though quality is not a prime factor they have to maintain (qualifying aspect) it to a desired level to gain competitive advantage. Overall it can be concluded that ‘‘Sandcone’’ Model shows the highest importance when outsourcing to China. Through the observations from literature and case studies it is obvious that concentrating on one factor (Generic Strategies) or focus on ‘‘Core Competences’’ keeping its value adding activities in-house might still lead to quality issues in China. This then can not only damage company’s reputation, but also reduce its profits and decrease or even diminish its competitive advantage in the global world. Table 8 Competitive strategies pattern in the case companies. Competitive advantage strategy Case Company A Case Company B Case Company C Case Company D Importance of the model in terms of quality when outsourcing ‘Generic Strategies’ Model by Porter (1980) Did not follow after outsourcing Followed by choosing cost leadership strategy Followed by choosing to compete on Quality Followed by choosing cost leadership strategy Moderate importance ‘Sandcome’ by Ferdows and De Meyer (1990) Did not follow because quality standards was not safeguarded Did not follow, by not maintaining quality expectation standards Followed by ensuring quality standards before flexibility and competitive costs was achieved Followed by maintaining expected quality as the basement High importance ‘Core Competences’ by Prahalad and Hamel (1990) Did not follow Followed by keeping concentrating on its core competences Did not follow by outsourcing its core competences (RD, engineering manufacturing) to China Followed by keeping its core competences (engineering, RD) Moderate/ low importance ‘Value Chain’ by Porter (1985) Did not follow Followed by keeping its value adding activities in- house Did not follow because most value-adding activities was outsourced to China Followed by keeping its most value added activities (RD, engineering, design) in house Moderate/ low importance Overall result Failed in terms of quality outsourcing to China Failed in terms of quality when outsourcing to China Succeed in terms of quality when outsourcing to China Succeed in terms of quality when outsourcing to China R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 15 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  16. 16. Based on the above discussions we have highlighted the survival aspects to encounter quality issues while outsourcing to China and the corresponding survival approach (see Table 9). Based on the findings of this study, the following propositions are made: Proposition 1To be successful in the Chinese operations companies should compete on several dimensions simultaneously and maintain quality standards. Proposition 2Outsourcing to China because of cost savings has no negative effect on quality. Proposition 3The entry into new potential market through Chinese operations is the main determining factor for the multinational companies regardless of quality issues and raising labour costs. Managerial implications and limitations Study findings reveal that manufacturing companies have to manage their Chinese operations efficiently to avoid potential loss due to quality issues and to enter into the largest market. This is a way in which a huge pool of new sales can be generated and potential loss in quality may be offset by the profits (Deloitte, 2012). Furthermore, managers should realise that by producing abroad, a more sophisticated management needs to be established, since the manufacturing and delivery of the goods beyond international boarders require advanced knowledge and precise planning. Furthermore, as we can see from Company A that long distance supply chains are much more vulnerable and exact schedule of the delivery is not always possible to set. This has to be taken into consideration especially for those companies, which production is very seasonal. Being close to company’s market add additional advantage. Furthermore, It has to be well accounted with the costs advantage considering the risk of missing the time line when the sales has to be done. Another important implication for those managers’ aims to achieve competitive advantage through quality differentiation strategy has to produce with high automated technology and use standardised approach. However, if they prefer to produce goods manually then they have to provide intensive customised training. Other factors such as absence of employer protection, ‘cut-corner’ concept, corruption and communication problems have to be taken into consideration when outsourcing or keeping production in China. Managers should expect the staff to leave the job without notice and as result raise additional costs for the company in terms of hiring and training new staff. On top of that, as Company B case study shows, even long-term relationships can be abused due to Chinese strategy of ‘cutting-corners’ in order to offset the constantly raising raw material and labour costs. Finally, due to the political system and high corruption, it is very hard to find the ‘ends’ when something goes wrong. Besides quality criticism, most of the firms outsourced to China or has its presence in China are successful. Table 9 Sustainable competitive advantage framework. Survival aspects Survival approach Competitive strategy Sand-cone theory: focus on five dimensions Quality, dependability, flexibility, cost and innovation Better quality Human resources Focus more on selection of skilled workers, contextualised training and reduce attrition rate through protecting employees Machinery Continuous improvement approaches and automation if possible Raw material Good governing policy to avoid cut-corners, integrate value chain activities such as manufacturing, engineering, logistics and quality assurance Management and control Well defined ownership structure, transparent supplier evaluation policies, good understanding of quality control and testing procedure Communication Good relationship between manufacturing and top management to overcome time difference, distance and language barriers Legal Educate employees about IPR threat, product liability and product recall system. Not to take advantage of non-existent of well-developed legal system R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx16 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
  17. 17. Qualitative research has some limitations and they are personal disposition of researcher, his beliefs, reactions, cultural and religious background will, indeed, effect the interpretation and investigation of the data (Russell, 2005). Furthermore, verbal and linguistic discrepancies can affect the study since qualitative research is collected through one-to-one interviews rather than standardised questionnaires (Miles and Huberman, 1994). Few limitations of the study are as follows. This study focused only on international companies which outsourced their production to China or have their presence in China. Other issues and benefits regarding financial performance, research and development, information technology and other influencing factors were not taken into consideration when analysing company’s success and competitive advantage. Furthermore, in this study the quality issues are analysed at an organisational level, i.e. risks were tied to the organisation. The focus was on both European/American companies who had outsourced at least part of their production to China either by contracting or by establishing subsidiaries (FDI). In qualitative method there are subjective and perceptive interpretations of the information. They are mainly from few interviews and public available sources such as academic literature and media reports. Since the population interviewed for each case study is rather low, these results cannot be representative for the whole population. Furthermore, the interviewees might have had only limited amount of information and they might not disclosed some particular issues regarding their production quality or did interpreted the issues in their own understanding, thus, the trustworthiness of the empirical data should not be interpreted as exact and thus, is expected to be different if the interviewees were asked the same questions after 1 year time frame. Furthermore, due to limited amount of case studies the findings give only a broad picture of the problem, however, in order to prove or reject the quality issues detailed survey based study needs to be undertaken with bigger sample size. Concluding remarks This study proposed a sustainable competitive advantage framework for multinational firms to adapt and prosper in China. The study listed the major causes of quality and how to overcome them in order to prosper. Four competitive strategy theories (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core Competences’’ and ‘‘Value-Chain Analysis’’) were used to interpret the Chinese operations and to develop a sustainable competitive framework. As per the proposed framework, to gain competence firms have to focus on five dimensions viz. quality, cost, dependability, flexibility and innovation. The dominant quality issues that need attention are human resource, management and control and legal aspects. Furthermore, it is very hard to make a judgement of the cause of the quality issues on such broad- spectrum of business operations. This is due to the fact that each industry within manufacturing sector has unique issues which can cause quality fade and cannot be combined and generalised for overall manufacturing industry. Therefore, detailed empirical survey based study is essential to verify the proposed propositions in different manufacturing sectors. It is also suggested to extend the study to service industries which gains prominence in China. It would also be interesting to carry out further research on what causes the quality issues, when European companies outsource their production to East or Middle East Europe. Then it would be interesting to compare and see how the quality issues affect company’s competitive advantage. Acknowledgements The authors wish to thank the three anonymous reviewers for their excellent and insightful comments. We are sure that the readability of our paper has improved considerably after carrying out these modifications. We thank the special issue editors for their encouragement. References Andersen, P.H., 2008. Knowledge versus learning in internationalization of offshoring activities in China: a case study. Journal of Engineering Technology Management 25, 184–199. R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx 17 G Models ENGTEC-1382; No. of Pages 19 Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/ j.jengtecman.2013.07.003
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