KEY POINTS

The more difficult it is to understand the root cause of defects, assess process quality, or evaluate finished-product quality, the lower the likelihood that a product can be successfully outsourced.

However, in a case where measuring quality is difficult, it’s still possible to limit the damage:

  • Emphasize quality over cost and delivery when selecting a contract manufacturer.
  • Make sure your contractor sees you as a cooperative partner.
  • Use more than one contract manufacturer for a single product.
  • Include your contractor in the product design.
     


Brand-owning companies outsource more and more of their manufacturing to contract manufacturers. This can reduce costs and complexity, but it also introduces new risks, particularly when the quality of the product is not easy to measure.

Drug manufacturing is one such setting, as experts say it is impossible to design a test for every possible substance that might end up in a drug, and also impossible to test every unit produced.

Over the years, scholars and practitioners have learned a lot about how to ensure high-quality production from their contract partners. Most of this advice is now very familiar: Make sure the supplier is committed to you; hire one contractor and work very closely with that firm; build a partnership that encompasses a wide range of joint activities, including product development; show potential suppliers that your choice will be based mostly on the quality of their performance.

But is this the best advice when the quality of the product is hard to measure? Yes and no, according to our review of the literature on this issue and our survey of both sides of 106 buyer-contract manufacturer relationships in the food, drug, and medical device industries. Our research suggests that in cases where the quality of the outsourced product is difficult to measure, the buyer is better off following a strategy that varies in certain respects from the conventional management playbook. We found that:

General agreeableness and a cooperative spirit on the part of the buyer matter more than fostering a strong commitment. Surprisingly, the contractor’s stated level of commitment didn’t seem to have much bearing on quality. Specific behaviors by the buyer tended to matter more than a “feeling” of commitment to the relationship – or even the contractor’s perception that the buyer is trustworthy. Why would the buyer’s ability to behave cooperatively matter more than what they say? One reason may be that behaving cooperatively demands a more tangible and consistent set of actions than inspiring commitment.

If you face a quality measurement challenge, relying on a single contractor isn’t helpful, and can even hurt. The traditional quality literature has suggested that a key way to raise quality levels is to focus on a single supplier. However, in the case of a difficult-to-measure product, our research suggests that the outsourcer tends to be better off with multiple suppliers. This goes against the conventional wisdom of quality experts but fits in with what economists believe about the positive relationship between competition and quality.

Firms that emphasize quality in the selection of prospective contractors tend to get better quality. When quality is going to be hard to assess during production, emphasizing quality to prospective contractors tends to mitigate quality challenges later on. One reason may be that emphasizing quality leads the contractor’s team to spend more time discussing the company’s infrastructure, capabilities, and focus, giving the buyer more opportunity to vet the contractor’s mentality in advance. Viewed from the other side of the bargaining table, the focus on quality in the initial selection also sends two important messages to the potential contractor: first, that the client is going to be fussy about quality, and second, that delivering high quality will be a crucial factor in extending the contract.

Including the contractor in the product design seems to mitigate two key causes of quality measurement difficulty. Joint product development appears to mitigate low testability and low root cause assignability, two of the three most common sources of quality measurement difficulty. Although this adds cost as it demands more manager involvement, it can be a worthwhile investment, as more involvement gives buyers greater insight into the overall production process and appears to help contractors better understand the shortcomings of their processes. And, it can result in a more robust design.

CONCLUSION
As an ever-increasing share of production is sent to contract manufacturers, the challenge of maintaining quality is likely to grow. This will be especially true for products about which quality is hard to assess. In such circumstances, the hard-won gains of the quality movement could easily leak away. Buyers must learn how to manage their relationship with contractors so as to effectively ensure quality even when it is difficult to verify. Signaling the right priorities to the contractor early in vendor selection and taking the other steps outlined above can help avoid more serious problems later when products begin rolling off the line.

John Gray is an associate professor of operations at the Fisher College of Business. He joined Fisher after receiving his PhD from the Kenan-Flagler Business School at the University of North Carolina-Chapel Hill. Students voted him “Outstanding Full-time MBA Core Faculty” for his Data Analysis class in 2015. His papers have received numerous awards. His co-author, Sean Handley, is an associate professor of management at the University of Notre Dame’s Mendoza College of Business

John Gray Professor of Operations, Associate Director, Center for Operational Excellence
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