Elsevier

Business Horizons

Volume 57, Issue 4, July–August 2014, Pages 497-508
Business Horizons

Using social and economic incentives to discourage Chinese suppliers from product adulteration

https://doi.org/10.1016/j.bushor.2014.03.009Get rights and content

Abstract

The American public raised serious concerns about product safety in 2007, when the number of product recalls broke a new record. Following a temporary drop in 2008, both the number and retail value of recalled units have been increasing, despite various efforts exerted by government agencies and private companies to combat this trend. Currently, many countries—including China itself—are expressing serious concern over adulterated or unsafe food made or sold in China. What are the underlying reasons for some Chinese suppliers to adulterate product? When law enforcement is still weak in China, what can western manufacturers do to reduce the risk of product adulteration? To develop effective deterrence mechanisms, we first identify four underlying factors that create incentives for some Chinese suppliers to produce unsafe products. Then we propose ideas to discourage Chinese suppliers from producing adulterated products based on two underlying strategies: (1) creating economic incentives through contingent payments, and (2) creating a social incentive by threatening public exposure through the power of the Internet and social networking sites.

Section snippets

Unsafe products and food items made in China

As more western firms outsource their production to foreign suppliers, price competition intensifies and suppliers are under tremendous pressure to cut cost. Unfortunately, in response to this pressure, many foreign suppliers have reduced cost by lowering product quality. Some have even produced adulterated products (i.e., products that do not meet specification) that can cause physical harm. Product adulteration has become a common cause of many recent product recalls. In 2007, public concern

Underlying causes for product adulteration in China

Given the public outcry regarding unsafe products made in China, there is obviously global concern about Chinese suppliers and their unethical business practices. We ask the seemingly simple question: Why don’t Chinese firms produce safe products? However, the answer is far from simple, and approaches to improve the safety of products from Chinese suppliers are complex.

To explore the underlying reasons why Chinese suppliers produce unsafe products, let us dispel the myth that Chinese suppliers

What to do?

We now discuss the gamut of plausible actions that western manufacturers can take to reduce product adulteration risks. Some solutions are traditional and are known to managers already; others are less so. Traditional approaches include sourcing elsewhere (e.g., reshoring), requiring supplier certification, conducting product inspections, obtaining insurance, contracting with supplier warranties, making suppliers liable, and deferring payments. Non-traditional approaches include threatening

More effective approaches for deterring product adulteration

Recognizing that abandoning sourcing from China is not an attractive option and that requiring supplier certification, conducting more inspections, and forcing suppliers to assume liabilities are not foolproof tactics, it is more constructive to think of ideas to discourage Chinese suppliers from product adulteration. Specifically, by considering the four key factors that create incentives for Chinese suppliers to adulterate—severe price pressure, short-term opportunism, asymmetric information,

Conclusion

By using a combination of threats (e.g., public exposure, contingent payments, contract laws) and rewards (e.g., increased orders, higher prices, better payments, more capability), manufacturers can establish a mechanism to counteract factors enticing Chinese suppliers to adulterate. However, manufacturers should be aware that such a mechanism can reduce the risk of product adulteration, but not completely eliminate it: some Chinese suppliers are risk-prone, regardless. It is therefore critical

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    The original draft of this article was completed when Christopher S. Tang visited the Hong Kong Polytechnic University.

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