quality issues in outsourcing to china: is it still a sustainable competitive advantage?

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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 ARTICLE INFO Keywords: Outsourcing Sustainable competitive advantage Quality issues ABSTRACT 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: [email protected] (R. Armalyte), [email protected], [email protected] (N. Subramanian), [email protected] (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

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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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  • Nottingham University Business School China, The University of Nottingham Ningbo China, 199 TaikangEast Road, Ningbo 315 100, ChinabDepartment of Decision and Information Sciences, Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA

    gy. Firms achievetively from a lowpremium quality,ent and marketd Lechler, 2008).

    J. Eng. Technol. Manage. xxx (2013) xxxxxx

    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 rms 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

    All rights reserved.

    G Models

    ENGTEC-1382; No. of Pages 19

    Contents lists available at ScienceDirect

    Journal of Engineering andTechnology ManagementTherefore, outsourcing is one of the ways created by the globalisation as a fashionable strategy. Chinapresents enormous business opportunities for the Western countries, not only as a low-cost labourIntroduction

    In the recent years, outsourcing to China has become an important business stratecompetitive advantage by producing or sourcing products and services more effeccost country. Other than cost reductions, rms gain competitive advantage throughimproved exibility and dependability according to changing business environmdemand (Kakabadse and Kakabadse, 2000; Jennings, 2002; Lynch, 2004; Fallah an

    outsourcing to China.

    2013 Elsevier B.V.Elsevier B.V.Quality issues in outsourcing to China: Is it still asustainable competitive advantage?

    Ruta Armalyte a, Nachiappan Subramanian a,*,Angappa Gunasekaran b

    a

    journal homepage: www.elsevier.com/locate/jengtecmancountry for cheap production, but also as a growing giant for potential market and high prots. Today

    * Corresponding author. Tel.: +86 574 8818 0197.

    E-mail addresses: [email protected] (R. Armalyte), nachiapp[email protected],

    [email protected] (N. Subramanian), [email protected] (A. Gunasekaran).

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

    0923-4748/$ see front matter 2013 Elsevier B.V.Elsevier B.V. All rights reserved.http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19competitive 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 perspectivestudy to suggest guidelines to succeed and to develop a sustainable competitive advantageframework. Practically this study serves as a guide to those companies on how to survive in theChinese market. Furthermore, this research also can help new entrants on how to deal with qualityissues if they prefer to source or operate in China.

    The reminder of the paper is structured as follows. The background for the research is presentednext, 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 throughtheoretical 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 increasedcompetition and loss of innovation due to gained knowledge by its contractors (Hoecht and Trott,2006). Power et al. (2007) claimed thatmany organisations and its subcontractors failed to provide fullcommitment, loyalty and discipline, in order to gain from outsourcing. It leads to themisunderstanding of the employees, processes and methods of outsourcing. Jennings (2002) in hisndings states that outsourcing can lead to leakage of critical knowledge, which would then increasethe competition. Furthermore, Domberger (1998) concluded that the loss of cross-functional skills ordevelopment of wrong skills and the loss of the control of the suppliers are the main concerns ofoutsourcing.

    Beaumont and Sohal (2004) state that outsourcing can lead to decreased exibility by the company, Hduestions.

    ow a rm within a specic industry transforms Chinese operations (fashionable outsourcing) intocomqChina is the fastest growing market in the world and until now it is regarded as the worlds factoryoor (The Economist, 2005).

    However, outsourcing can also lead to loss of competitive advantage. Ting (2004) reported thatOutsourcing to China helped many rms to save money, but it would be frustrating if not doneright. China is classied as a risky and demands a tight control over poor intellectual propertyprotection, fading quality of production and high level of corruption by many rms (TheEconomist, 2005). Due to increased global competition and the need for cost reductions, manyinternational companies outsourced or established their production to China, however not all ofthem managed to achieve success, resulting in many issues, such as quality fade and loss ofcompetitive advantage.

    Plethora of studies have been carried out to understand the motivation and benets associatedwith outsourcing to China in different industries starting from manufacturing to informationtechnology and nancial industries (Bon and Hughes, 2009; Chadee and Raman, 2009; Contractoret al., 2010; Andersen, 2008). In addition to this, few studies reported major hiccups to the rms thatoutsourced to China (Kakabadse and Kakabadse, 2000; Kliem, 1999). Furthermore, few researchersspecically stated the management control and quality issues as dominant issues in manufacturingindustry (Freytag et al., 2012; Fleisher et al., 2010). Even though thereweremanymedia reports aboutquality issues in manufacturing industries in the recent years, however, there was no adequate studywhich discusses on how to overcome quality issues within the specic manufacturing sector of theChinese operations.

    Furthermore, enormous efforts have been made by researchers to understand why companiesshould backshore its production fromChina (Kinkel andMaloca, 2009). However notmuchwas doneto identify how to survive in China without quality and nancial losses and to maintain its

    petitive and sustainable strategy. Hence, this paper aims to answer the following research

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx2ue to its contractual agreement, which in case of the business environment or demand change cannot

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19be adjusted as quickly as it could have been by the managerial at. According to Dankbaar (2007),outsourcing can damage industrialisation and innovation capability of the rm. Furthermore,Plambeck and Taylor (2005) claims that although contract manufacturing can lead to lower costs, itcan result in quality fade and weaken the incentives for innovation, by shifting the focus frominnovation to costs.

    Kakabadse and Kakabadse (2000) in their study signalled that the companies must understandtheir own business processes and problems associated with it when souring or operating in differentlocations. In addition to this, the supplier also needs a greater understanding of its clients service.Otherwise outsourcing to third party can lead to increased costs and unlled service qualityexpectations. This was further discussed and proved by Kliem (1999) that a rms dependency of theoutside supplier can lead to hidden costs such as managing failing relationships and other criticalsuccess factors of the company. Another study related to information systems outsourcing stated thatoutsourcing can have hidden costs associated with hiring, training and transferring staff, searchingand contracting the vendor or cost of switching vendors (Gonzalez et al., 2005). In addition to this,Barthelemy (2003) states that outsourcing can encounter additional costswhenmanaging the transferof products, knowledge and equipment to the outsourcing partner.

    In manufacturing industry, McIvor and Humphreys (2000) through cost and benet analysis foundthat increased outsourcing of components which were previously made in-house can result inincrease of unexpected costs due to companys operations becoming more dependent on much widerrange of suppliers. This is due to the fact that many companies have inadequate costing systems, suchas direct labour hours being used for allocating overheads, even though the production process ishighly automated. This incorrect costing system leads to overpricing protable products andexpanding unprotable production lines (Lutz and Ritter, 2009).

    Other problems, such as difculties in coordination of global supply chains and the loss ofintellectual property rights due to legal and political issues in China, need to be taken intoconsiderationwhen choosing outsourcing location (Meixell and Gargeya, 2005; Lutz and Ritter, 2009).Finally, issues associated with communication challenges and misunderstandings, due to culturaldifferences, were also discussed in the literature (Campbell, 1995). Lutz and Ritter (2009) throughempirical evidence showed that lack of communication and cultural understanding betweeninternational companies and the Chinese suppliers leads to incorrect orders, loss of exibility,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 categoriesclassication. 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 lackof motivation and interest, shortage of skilled people, lack of skills and training needed to process thetasks (Campbell, 1995). Most common human resource failure occurs due to human cut-cornersphilosophy. Chinese suppliers in general to increase their prots in short period cut quality and do notsee 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 rst fewordersmeet the required standards and in thefollowing orders the quality of the goods decreases as material inputs are replaced with cheaper onesin order to cut costs (The Economist, 2007).

    Machinery failure

    Machinery failure is another important reason why quality of the goods does not reach theirstandards. Problems associated with machinery are lack of maintenance, lack of new technologyneeded 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.,

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx 32009).

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19Material 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 rawmaterials;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 arenot enough to ensure good product quality. Importing companies should take careful steps whencontracting a Chinese supplier; understand the quality control and safety testing procedures of themanufacturers (Waldmeir, 2007). Furthermore, increased on-site monitoring should be used byinternational companieswhowant to establish a long termpresence in China. Furthermore, if foreigncompanies do not focus on establishing long-term relationships and implementing qualityprocesses, 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 andcontrol are essential factors for quality assurance, hence additional supervision such as detail reportsabout the product design, its production process, representations and warranties regarding theproduct quality as well as specications of product design, its prototypes and samples need to beestablished (Fremlin, 2008).

    Legal issues

    China is still in its early age of development and product-liability or product-recall systemsare not fully established in China. This leads manufacturers abuse the system and not bepunished for it (Reisman, 2006; Wharton, 2012). According to USA trade statistics, in 2009 the UScopyright 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 alsofor domestic companies in China. An ofcial study in Beijing states that pirated software cost$20.9 billion for domestic companies in 2010 (Tandon, 2011). It is generally reported that greedyand cut-throat owners of the manufactures take advantage of the weak legal enforcement andeven encourage cheating as a business culture, where corruption and bribery are ourishing(Barboza, 2007).

    Communication issues

    An essential part of any business is to clarify the requirements and manufacturing processesthat depends on the quality and production of the nal goods. To achieve this, close relationshipbetween manufacturing and management has to be established and constant communication isrequired. However, when companies produces from China, the time difference, distance andlanguage 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 speakinternational language or does not fully understand the requirements (Campbell, 1995).Furthermore, some issues cannot be solved by communicating through phone or email andhence it has to be solved on site, however due to the distance this option becomes limited and canlead to further complications. Due to reliance on communication through phone or email mayresult in lower productivity, choice of poor raw material quality or incorrect manufacturingprocesses (Wharton, 2007) (Table 1).

    Competitive advantage theoretical perspective

    Our study considers four different competitive strategies that indicate four different ways of howa company can achieve and maintain its sustainable competitive advantage when outsourcing to

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx4China.

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19Table 1Issues 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 prot Beaumont and Sohal (2004), Gordon et al. (2009),

    Lynch (2007)Loss of exibility

    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

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx 5Focus on single objectiveGeneric Strategies

    Porter (1980) believed that in order to be competitive in the market, companies should achievesustainable competitive advantage through differentiation theory, proposed in 1980. Porter (1980)named three generic strategies for rms to be successful: cost leadership, differentiation or focus. Costleadership attempts the rm to be the lowest-costs producers of goods and services in the industry.The rm with the lowest costs would achieve the highest prots and outperform its competitors(Devaraj et al., 2004). Differentiation strategy occurs when a rm offers unique products and hence, itcan often charge a premiumprice for it in themarket. Furthermore, a focus strategy occurswhen a rmconcentrate on specic niche in the market and produce specialised goods for this niche market.Competitive advantage can be achieved through focusing on the differentiation or leadershipapproach with regard to the focus strategy (Eonsoo et al., 2004).

    It is important to note that Porter (1980) warns the rms not to be stuck between two chairs. Bythis phrase Porter (1980) refers to differentiation and cost leadership strategies, which cannot beachieved simultaneously and therefore a company should decide whether they want to be thecheapest or the best in the market. There is an argument that if the rm adopts both differentiationand cost leadership strategies do not have a competitive advantage and therefore has a poor nancialperformance. However, Dess (1984) has proved that even if companies combine the generic strategies,they can still be successful and protable.

    Few rms use Porters generic strategies to gain advantage such as differentiation or cost reductionby 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. Onthe other hand, outsourcing creative part of the business such as design is done to gain differentiationpurposes (Eonsoo et al., 2004). It is claimed that regardless the reason for outsourcing, it has to bealigned with the overall strategy of the business (McIvor, 2005).

    Anagnostou (2004), Lutz and Ritter (2009),

    Campbell (1995)

    Improper material usage

    Delays in shipment

    Loss in efciency

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19Satisfy all ve dimensions Sandcone

    Ferdows and De Meyer (1990) suggest that there is a specic order for the competitive measuresand if the company follows it, the competitive measures will reinforce each other rather than replacingeach other as suggested by Skinner (1974). It claims that quality in regards to customers expectationsassociated with the brand is the crucial and most important factor in order to be competitive, and thencomes dependability, exibility, cost and innovation. Ferdows and DeMeyer (1990) claim that until thesolid ground for quality expected from consumers is not implemented then there is no use to reducecosts and increase exibility. Furthermore, Ferdows and De Meyer (1990) identied that for thecompanieswhocompeteonthehighquality, premiumcostdisadvantage isonlyan illusion. FerdowsandDeMeyer (1990) argued that before the technological boom, trade-off between cost and exibly mightbe an issue, but due to current innovation and high technology era, any kind of mix in the production ispossible. It is obvious that increased dependability can eventually lead tohigher exibility. This is due tothe reason thatwhen a company has all its processes under control (wholly owned subsidiary), it mightthen nd it much easier to meet sudden change in the order rather than request this from an outsidesupplier who might have already problems delivering the regular order on time.

    Sandcone model states that companies can and must compete on several dimensionssimultaneously. Combining Sandcone and Hill (1988) suggestions, a company to achievecompetitive advantage has to compete on several dimensions such as quality and dependabilityhas 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 businessstrategy and are achieved through collective learning in cooperation, paying special attention on howto coordinate diverse production abilities and integrate compound stream technologies. They arguethat only if the company is considered as a hierarchy of core competences, core products and marketfocused business units then it will be ready to ght and succeed.

    Outsource non-value adding activities Value-Chain Analysis

    According to Porter (1985) value chain analysis will enable the organisations to improve overallperformance and increase their prot margin of the company, by performing activities efciently, sothat 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 rm (value added activities that providecompetitive advantage over its competitors) from the secondary activities (necessary for theorganisations presence) which do not add-value to the company. Those activities might be costly forthe company and thus companymightwant to reduce the xed costs by outsourcing them to the thirdparty.

    A company can then create a cost advantage over its competitors by evaluating cost of each activityin the value chain. The efciency can be achieved through reducing costs of individual value chainactivities or by reconguring the value chain (outsourcing some parts of it). A rm may specialise inone ormore value chain activities and outsource the rest, depending on the strengths andweaknessesin each activity in terms of cost and differentiation. Understanding the linkages between theindividual activities can help the managers to make a better make-or-buy decision that can result incost 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 andexisting literature on quality issueswhen outsourcing to China. Due to the nature of the research topic,

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx6case studies were appropriate for the theory building, because it allowed us to answer how questions

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

  • about the contemporary set of events in which we are and why questions in order to understand thescope of the problem.

    As a result, we conducted in-depth case studies with interviews in order to explore and interpretthe phenomena from real world experience and try to answer the question of why companies stillkeeps 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 toyindustries 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. CompanyB on the other hand is now known as the biggest designer andmanufacturer of broad variety of toys. Itproduces 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 worlds leadingautomotive manufacturer and supplier for driveline and chassis technology and Company D is adiversied global provider of power tools and accessories, hardware and home improvement productsas well as technology based fastening systems.

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx 7

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    ENGTEC-1382; No. of Pages 19Table 2 provides an overview of the respondent proles and their experiences. Furthermore,additional four Chinese manufacturing companies were interviewed and the feedback wasincorporated in this study to get a more profound general idea about the causes of quality fail inChina. From Table 2 it can be concluded that all the respondents had experiencewith at least 4 years inthe company and somehow related to the quality issues of outsourcing. It is important to note thatsome of the respondents were unwilling to disclose information about their rms. Therefore someinterpretation was made in regards to their answers. Finally, none of the interviewees wanted theirnames or their work positions to be disclosed for sensitivity of the research topic and condentialityreasons, 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 arebetter to extend external validity and give a more objective assessment of the phenomena. Inparticular 410 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 orfailure. 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 denition of outsourcing identied in the research, which statedthat all companies should have been outsourced at least part of its production process to a foreign

    Table 2Respondents 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 PetrochemicalsChinese Manufacturer 2 Director Cement industries, construction materialsChinese Manufacturer 3 Director Medicine and medical productsChinese Manufacturer 4 Manager Industrial. IT and home technology (printers,scanners, industrial paper machines)

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19country (our case China), by contracting its portion of activities to the third party or creating a whollyowned subsidiary, in order to analyse the quality issues of manufacturing processes. In addition tothis, the critical events of outsourcing have already taken place and the chosen cases should havedifferent outcomes of it (Gadde and Hakansson, 2001). Therefore, two companies were chosen torepresent the negative outcome of outsourcing whereas other two companies were selected torepresent successful outsourcing to the Chinese situation. This selection of the companies enabled toidentify 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 andmedia publications. In addition to that primary data incorporated semi-structured interviews pertelephone, email and face-to-face consultations. Furthermore, open discussion questions werepreferred in order to understand the issues from different angles and follow the theoretical literatureused for this paper. The explanatory interviews comprised two to three respondents from differentdepartments within the case companies, who had direct or indirect involvement in the problematic orsuccessful outsourcing strategy, in order to gain different opinions about the quality issues andcompanies failure or success. In addition to this, we attempted to verify individual reports by askingsimilar questions to multiple informants such as Chinese directors and managers from differentmanufacturing companies (international companies and Chinese suppliers for internationalcompanies). However, it has to be noted that some linguistic problems was encountered, thereforetranslation 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 tofurther 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 effecton case companys competitive advantage and its success/failure in China. Finally, the ndings fromthe case studies and interviews were then synthesised together to develop a sustainable competitiveadvantage theoretical framework. The compare and contrast method was also applied in order torelate the ndings of the case studies and interviews to identify patterns and to provide suggestionsabout outsourcing phenomena in China.

    Results

    Observations in case Company A

    Due to very competitive business environment, in 2004 companys management decided to movesome 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 thatoutsourced to China. Furthermore, the biggest issuewas the nature of the product itself. It was not justabout making a high quality teddy bear; it was about being very precise. Furthermore, the longdistance offshore production plant became biggest disadvantagewhen some of its production reachedthe retail stores 3months after the initial deadline and therewere drop in sales. In order to get a betterunderstanding 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 Aencountered quality failures, because the pattern sheets were too complicated for the Chinese sewersand could not accomplish specied quality as in home country. Furthermore, the training of how tosew using this specic pattern took too long time to make them learn. In addition to this, the accuracywas especially important in this manual work, because very small errors in knitting resulted in teddybear eyes being misapplied, hence making the bears look to sinister for the western customers. Thereporter alsomentioned that therewas no guarantee or restriction to keep theworkers after they havebeen trained to do the work, when there is a better opportunity the workers moved to high payerswithout 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 supplychain agreed that lack of control over the production process due to the ownership structure and

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx8management communication issues led to many products being produced incorrectly. The quality

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19problem could only be detected once the products reach Europe, hence increasing companys overallcosts, 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 theteddy bears was crucial for companys success. Furthermore, manual work requires special skills andexperience 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 sacrice to anextent that it led the company to move back its production to Europe. However it is important to notethat different from other companies, by outsourcing to China, Company A did not aim to enter Chinesemarket. Several theories suggest that competitive advantage can be achieved only by being close to itstarget market (KPMG, 2012). Furthermore, by having the production close to its market, qualityassurance is easier to achieve. Company As primary markets are Europe and USA, when it moved itscertain operations to non-marketing destination lead to loss of control on management and hence itencountered issues in production quality. However, it is arguable and more study is needed tounderstand how far quality loss could have been offset by gaining the entrance to a huge potential

    Table 3Quality 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) xxxxxx 9Asian market with increased prots, 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 resourceproblem, because some Chinese suppliers try to cut corners by providing lower quality materials andresulting in poor quality production of toys.

    However, there is no doubt that Company B will stay in China and even though the recent qualityissues brought a lot of damage to the companys reputation and hurt its sales, Asia market accounts alarge part of sales. According to the worker, China is a huge market for enormous prots in the nextdecade; therefore Company B plans to expand its international footprint in Asian markets by buildingnew franchises and entertainment partnerships in order to achieve sustainable growth. Even if thequality reduces and more attention has to be paid to the supervision and management of theproduction, there is no doubt that this sacrices will only be a smaller concern with the developmentof 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 costproduction and the reason why Company B still keeps its production in China is also due to its lowerlabour costs (Table 4).

    With the raising demand for toys, the ability to create the toys and meet the demand became thebiggest concern for Company B. Toys business is lucrative whereas it depends on how rms are going

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19to handle inconsistency in production volumes, seasonality and market life of less than a year. Thesenon-core production toys were a huge pool for high prots, however dependability was crucial to itssuccess. Due to these high demand uctuations, non-core toy production was outsourced to China.Company B operated through network of approx. 35 vendors that were contracted to manufactureCompany Bs production. The manager in China selected the vendors very carefully depending on theexpected time to market, political expertise and price. During that time, this was a very successfulstrategy for Company B, due to its low investment costs (no capital needed for wholly ownedmanufacturing) and increased exibility due to demand variability. The relationship between themanager and the vendorswas of the crucial importance for the quality reliability, due to its complexityand 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 inChina. Several weeks later, Company B had to make another announcement and recall 9 million moreChina-made toys. The problem arose when the subcontractor of Company B outsourced the work ofpainting parts of the toys to an outside vendor, who in order to save costs acquired the paint from anon-authorised supplier. It is important to note that the third party supplier had close relationshipswith subcontractor, hence it was believed by subcontractor to be a trustworthy supplier. It led to theproduction of nal goodswhich contained impermissible levels of lead. These recalls lead not only toa drastic reduction in Company B sales, but also it damaged Company B reputation andtrustworthiness. Even though Company B understood the importance of quality control in itsoutsourcing 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, whowas the spokesman of Chinas general administration ofquality supervision and inspection, Company B did not establish tight quality supervision over its

    Table 4Quality 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) xxxxxx10production in China and themanufacturerswere doingwhat the importers requested. Regardless of allthe quality issues and production recalls, Company B keeps its outsourcing option in China and doesnot consider any other relocation of manufacturing plant in the near future. To improve the qualityCompany B has to follow Sandcone model instead of cost leadership strategy to satisfy the orderwinning criteria.

    Observations in case Company C

    Company C entered Chinese market in early 1980s by engaging in sales and service licenceagreements with two Chinese manufacturers of clutch and shock absorber. Later Company C openedits representative ofce in Shanghai through joint venture and carried out its look-and-see strategy inorder to understand Chinese market and risks associated with it. The companys strategy towardsChinese operations is not a short-term cut-cost option rather than it is a long-term strategy with fullcommitment to Chinese market in terms of R&D, manufacturing and sales.

    In 1998 Chinese Government relaxed its regulations and allowed ownership of foreign afliates inthe automotive industry. During that time Company C quickly took advantage and successfully

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    ENGTEC-1382; No. of Pages 19established 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 thesuccessful strategy for Company C.

    Today Company C is a leader in chassis and powertrain business and continues its growth withastonishing results. Furthermore, engineering departments being located in China, many newinnovative applications are developed and distributed to other countries. Company C values more thequality of its products and process efciency. Dependability and top quality are the ultimate criteriaand it is achieved through standardisation.

    In order to ensure high quality, Company Cs production group has a highly qualied team with asuperb command of material and processes. Furthermore the whole value chain activities such asmanufacturing, engineering, logistics and quality assurance are integrated into the processes fromvery beginning. Moreover, high automation ensures highest level of efciency and dependability.Cutting-edge technology is used for production and quality assurance which is integrated into theproduction process. Furthermore, quality circle teams are essential part of quality control andimprovement. The highest efforts are put into ensuring error free production.

    According to the supervisor of quality assurance department, the main reason that causes qualityissues are lack of understanding of design and manufacturing requirements. However they avoidedquality issues through high manufacturing process automation. Furthermore, full control to theownership structure helped them to keep all the processes under strict quality checks in every part ofthe production process.

    The manager of the Chinese operations agreed that management and control skills are the keyfactors to overcome quality issues. Chinese operations started incorporating quality into companysstrategy. Furthermore, the manager believes that China has the ability to compete in the world forquality production through tight quality control. In conclusion, the manager argues that costadvantage in China is diminishing, therefore for Company C China is an importantmarket for the sales

    Table 5Quality 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) xxxxxx 11of 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 andexperts in its production all over the world.

    Observation in case Company D

    In the past decade CompanyDs strongest competitors are able to produce at lower cost due to theirlocation strategy and supply standardised products worldwide. Therefore, Company D continuouslystarted losing its market share and had to react to increasing production costs as soon as possible inorder to sustain its competitive advantage. Therefore, Company D decided to adopt global costleadership strategy and as a consequence in 2002 they shifted some of its production and operations toChina by subcontracting and also establishing a wholly owned subsidiary. Due to its standardisedproduction restructuring with high automation, new products are produced quicker which ultimately

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    ENGTEC-1382; No. of Pages 19Table 6Quality 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.

    Very important

    to communicate

    regularly in

    order to

    monitor actions

    If some

    problems

    occurred

    Chinese

    manufacturers

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx12increases companys exibility. Functional managers were further given coordination responsibilitywith countrys management. Furthermore, Company D implemented new point of sales softwareapplication systemwith strict supply and demand control for all the products manufactured in China.With its new software system, Company Dmanaged to capture demand changes on time and respondto it quickly (Table 6).

    Based on the interview and the data collected through questionnaire, it can be concluded thatCompanyD does not encounter any huge quality issues due to strict quality control and inspection, notonly 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, moreprecisely due to lack of responsibility in fullling all the requirements by the Chinese workers.Therefore, according to the respondent from quality assurance department, a lot of additionalinvestment in training has to be devoted in order to maintain approximately the same qualitystandards as in othermanufacturing locations. Furthermore, incentives such as quality bonuses for themanagers are the encouragingways to ensure that therewill be no leak in quality of the production. Inaddition to this, quality production double check, plant audits and on site quality inspectors areneeded to ensure error free production: The quality is maintained especially with additional resourcesfor quality inspections. On the other hand, standardised and highly automated production of goods

    Important to keep

    responsible QS

    managers on the

    site.

    to eliminate the

    root of failure.

    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

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    ENGTEC-1382; No. of Pages 19leads Company D to minimize human interface and to ensure quality. Since the early 90s Company Dhas never encountered any big quality issues.

    Overall it can be concluded that Company D case study show some evidence when compared to allthe above mentioned competitive advantage theories. However, it is important to note that in adynamic environment focusing only on one competence is not enough to be competitive. Thecompany has to focus all the ve factors (quality, cost, exibility, 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 anynegative effect on production quality. Most of the respondents agreed that quality fade can be avoidedwith strict controls and checks. On the other hand, Chinesemanufacturer 3 agreed that outsourcing toChina does have a negative effect on quality because some Chinese suppliers put cost control ontheir orders and to gain margins they nd ways to reduce quality in order to minimise costs.Furthermore, from Companys A and B responses, it can be determined that outsourcing to China canhave radical consequences.

    From the consolidated observations summary shown in Table 7, it can be emphasised that commoncause 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 themajor signicant factor that causes quality issues in theproduction. Few respondents highlighted, if production is not automated then additional control andguidance is needed to meet the requirements. However this is not always possible to achieve due todistance, 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 qualityissues in China.

    Most of the respondents agreed that cheap labour costs are still a signicant motivation forinternational companies to have their presence in China regardless of quality issues associatedwith it.However, some respondents argued that rapidly increasing labour costs and continuously appearingquality issuesmake China as a less attractive destination. However, many companies prefer to keep itsoperation in China to capture the bug Asian market which is a signicant prot pool for internationalcompanies. Company D followed a step by step approach, at the very beginning the companyoutsourced some of its production to China because of the cost reasons and subsequently established awholly owned subsidiary based on the market potential and it started sales to the Asia market.

    Overall it can be said that both international and Chinesemanufacturers believe that quality issueswith respect to human failures can be dealt with strict quality check systems in the productionprocess. Furthermore, it is essential to train specialised workforce for manual manufacturingprocesses and naturally with more time and effort. Finally, Chinese manufacturers emphasised thatquality does play a crucial role in companys competitive advantage and only by achieving the qualitystandards the rms can be successful in the developing markets. A respondent highlighted that onsupply side Chinese market is saturated with cheap low quality production whereas the fast growingeconomy makes the demand side more attractive with high affordability of Chinese customers forgood quality products. In addition to this, a report prepared by chief executive of Bangkok bank statedthat Chinese customers have the capability and are also willing to pay higher price for the qualitygoods, therefore companies which are entering into the Chinese market should ensure good quality tosustain 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.

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx 13However, by outsourcing to China, they gave up quality priority and tried to compete on cost factor.

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

  • Table 7Case 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

    prots. 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) xxxxxx14

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    ENGTEC-1382; No. of Pages 19

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    ENGTEC-1382; No. of Pages 19Table 8Competitive 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

    exibility 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 (R&D,

    engineering

    manufacturing) to

    China

    Followed by

    keeping its core

    competences

    (engineering,

    R&D)

    Moderate/

    low

    importance

    Value Chain by

    Porter (1985)

    Did not follow Followed by

    keeping its

    Did not follow

    because most

    Followed by

    keeping its most

    Moderate/

    low

    R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxxxxx 15This led to a huge failure, because consumers expectation of the product quality was not only notmaintained, but deteriorated due to lack of specialised workers and absence of quality control whenoutsourcing to China.

    From the Company B point of view, it attempted to embrace Generic Strategies, CoreCompetences and Value Chain competitive strategies. Still it encountered quality issues because oflack of implementation of quality control standards. Even though Company Bs focus is towards costleadership it compromised quality standards which are the basic in Sandcone Model. It can beconcluded that if Company B followed Sandcone Model, the quality issues may not have occurredand outsourcing to China would have been successful.

    Company C followed quality differentiation strategy and sustained with it to be successful in theChinese outsourcing. Company C reveals that Sandcone Model in a dynamic businessenvironment is crucial to maintain its competitive advantage and rms should concentrate onseveral dimensions in order to succeed. Furthermore, it supports the theory that quality assurancedoes not always require higher costs, because Company C managed to achieve cost reductionwithout hurting quality. Company D also supports Sandcone Model and revealed that eventhough quality is not a prime factor they have to maintain (qualifying aspect) it to a desired level togain competitive advantage.

    Overall it can be concluded that Sandcone Model shows the highest importance whenoutsourcing to China. Through the observations from literature and case studies it is obvious thatconcentrating on one factor (Generic Strategies) or focus on Core Competences keeping its valueadding activities in-house might still lead to quality issues in China. This then can not only damagecompanys reputation, but also reduce its prots and decrease or even diminish its competitiveadvantage in the global world.

    value adding

    activities in-

    house

    value-adding

    activities was

    outsourced to

    China

    value added

    activities (R&D,

    engineering,

    design) in house

    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

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    ENGTEC-1382; No. of Pages 19Study ndings reveal that manufacturing companies have to manage their Chinese operationsefciently to avoid potential loss due to quality issues and to enter into the largest market. This is away in which a huge pool of new sales can be generated and potential loss in quality may be offset byMathsobcascfoadth

    thstincoontoCcosopfactor for the multinational companies regardless of quality issues and raising labour costs.

    nagerial implications and limitationsProposition 3The entry into newpotentialmarket throughChinese operations is themaindetermining PBased on the above discussions we have highlighted the survival aspects to encounter qualityissues while outsourcing to China and the corresponding survival approach (see Table 9). Based on thendings of this study, the following propositions are made:

    Proposition 1To be successful in the Chinese operations companies should compete on severaldimensions simultaneously and maintain quality standards.roposition 2Outsourcing to China because of cost savings has no negative effect on quality.

    Table 9Sustainable competitive advantage framework.

    Survival aspects Survival approach

    Competitive strategy

    Sand-cone theory:

    focus on ve

    dimensions

    Quality, dependability, exibility, 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 dened 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) xxxxxx16e prots (Deloitte, 2012). Furthermore, managers should realise that by producing abroad, a morephisticatedmanagement needs to be established, since themanufacturing and delivery of the goodseyond international boarders require advanced knowledge and precise planning. Furthermore, as wen see from Company A that long distance supply chains are much more vulnerable and exacthedule of the delivery is not always possible to set. This has to be taken into consideration especiallyr those companies, which production is very seasonal. Being close to companys market addditional advantage. Furthermore, It has to be well accounted with the costs advantage consideringe risk of missing the time line when the sales has to be done.Another important implication for those managers aims to achieve competitive advantagerough quality differentiation strategy has to produce with high automated technology and useandardised approach. However, if they prefer to produce goods manually then they have to providetensive customised training. Other factors such as absence of employer protection, cut-cornerncept, corruption and communication problems have to be taken into consideration whenutsourcing or keeping production in China. Managers should expect the staff to leave the jobwithoutotice and as result raise additional costs for the company in terms of hiring and training new staff. Onp of that, as Company B case study shows, even long-term relationships can be abused due tohinese strategy of cutting-corners in order to offset the constantly raising raw material and laboursts. Finally, due to the political system and high corruption, it is very hard to nd the ends whenmething goes wrong. Besides quality criticism, most of the rms outsourced to China or has itsresence in China are successful.

    Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it stilla sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

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    ENGTEC-1382; No. of Pages 19Qualitative research has some limitations and they are personal disposition of researcher, hisbeliefs, reactions, cultural and religious background will, indeed, effect the interpretation andinvestigation of the data (Russell, 2005). Furthermore, verbal and linguistic discrepancies can affectthe study since qualitative research is collected through one-to-one interviews rather thanstandardised 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 orhave their presence in China. Other issues and benets regarding nancial performance, research anddevelopment, information technology and other inuencing factors were not taken into considerationwhen analysing companys success and competitive advantage. Furthermore, in this study the qualityissues are analysed at an organisational level, i.e. risks were tied to the organisation. The focus was onboth European/American companies who had outsourced at least part of their production to Chinaeither by contracting or by establishing subsidiaries (FDI).

    In qualitative method there are subjective and perceptive interpretations of the information. Theyare mainly from few interviews and public available sources such as academic literature and mediareports. Since the population interviewed for each case study is rather low, these results cannot berepresentative for the whole population. Furthermore, the interviewees might have had only limitedamount of information and theymight not disclosed some particular issues regarding their productionquality or did interpreted the issues in their own understanding, thus, the trustworthiness of theempirical data should not be interpreted as exact and thus, is expected to be different if theinterviewees were asked the same questions after 1 year time frame.

    Furthermore, due to limited amount of case studies the ndings give only a broad picture of theproblem, however, in order to prove or reject the quality issues detailed survey based study needs tobe undertaken with bigger sample size.

    Concluding remarks

    This study proposed a sustainable competitive advantage framework for multinational rms toadapt and prosper in China. The study listed the major causes of quality and how to overcome them inorder to prosper. Four competitive strategy theories (Generic Strategies, Sandcone, CoreCompetences and Value-Chain Analysis) were used to interpret the Chinese operations and todevelop a sustainable competitive framework. As per the proposed framework, to gain competencerms have to focus on ve dimensions viz. quality, cost, dependability, exibility and innovation. Thedominant quality issues that need attention are human resource, management and control and legalaspects.

    Furthermore, it is very hard to make a judgement of the cause of the quality issues on such broad-spectrumof business operations. This is due to the fact that each industrywithinmanufacturing sectorhas unique issues which can cause quality fade and cannot be combined and generalised for overallmanufacturing industry. Therefore, detailed empirical survey based study is essential to verify theproposed propositions in different manufacturing sectors. It is also suggested to extend the study toservice industries which gains prominence in China. It would also be interesting to carry out furtherresearch on what causes the quality issues, when European companies outsource their production toEast or Middle East Europe. Then it would be interesting to compare and see how the quality issuesaffect companys competitive advantage.

    Acknowledgements

    The authors wish to thank the three anonymous reviewers for their excellent and insightfulcomments. We are sure that the readability of our paper has improved considerably after carrying outthese modications. We thank the special issue editors for their encouragement.

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    Quality issues in outsourcing to China: Is it still a sustainable competitive advantage?IntroductionBackground for the researchHuman resource failureMachinery failureMaterial inadequacyManagement and control issuesLegal issuesCommunication issues

    Competitive advantage theoretical perspectiveFocus on single objective-Generic StrategiesSatisfy all five dimensions - SandconeConcentrate on core competences - Core CompetencesOutsource non-value adding activities Value-Chain Analysis

    Research methodologyResearch design and settingData collection and analysis

    ResultsObservations in case Company AObservation in case Company BObservations in case Company CObservation in case Company D

    Sustainable competitive advantage frameworkOverall insights to deal with quality issuesOverall insights based on competitive strategies

    Managerial implications and limitationsConcluding remarksAcknowledgementsReferences