"Made in China" can kill. in 2007, it killed Zhang Shuhong. Zhang's company was Lee Der Industrial.

"Lee Der had been an important vendor for Mattel. ... Everything began to unravel, however, after Mattel discovered lead on toys based on Dora, Elmo and other beloved characters." Secrets of the Money Lab, Chapter 6.

When Dora & Elmo were transformed from cuddly to toxic, both Mattel and Lee Der were in deep trouble.Zhang was betrayed by his supply chain - when someone added lead to the paint. The paint on those toys for American children.

At the height of the scandal, "Made in China" toys threatened 300,000 children with lead poisoning. Mattel paid over $30 million for the product recall. Zhang paid with his life, he hung himself.

Lee Der had its export license revoked - a corporate death. And the brand "Made in China" suffered badly.

Yet, Zhang was an experienced vendor, who had worked with Mattel for over 15 years.

But, as the supply chain got longer and more fragmented both Zhang and Mattel lost control over quality.

Mattel was perplexed: "They [Lee Der] understand our regulations, they understand our program, and something went wrong."

Contrast Mattel's compliance program to what Kroc, McDonald's and their meat suppliers did in the late 50's with hamburger.

Mystery Meat

In the late 50's, hamburger was mystery meat. At times, unsafe, contaminated and poisonous. "Nitrates were used to keep the meet pink, even when it had turned"

At other times, soy protein was added. Soy protein was cheaper and because the soy absorbed water, there was less shrinkage in cooking.

The only regulation in place was that anything designated as "hamburger" could not have more than 30% fat. So, meat suppliers added extra blood to meet this requirement.

Finally, beef offal could be ground up and added to the "hamburger" mix.

The Standard or Recipe

The recipe for "hamburger" was created with the help of Golden States Food Corporation, GFS.

(GFS went on to be a major supplier with McDonald's. It is now the third largest beef supplier, with revenues over $6 billion. Not a bad payday for helping create and maintain a standard.)

The Strategic Problem

The negotiating strategy of the meat suppliers at the time was this:

Agree on a price with a drive-in, independent or chain, but then lower the quality to make the deal "work economically".

Since there were no standards or recipes for hamburger, the meat purchasers always had to bargain hard on price - quality could not be bargained for.

Remember that the regulations only required that anything called "hamburger" didn't have a fat content higher than 30%.

Suppliers could not credibly commit -in advance- to delivering standard hamburger.

This hurt consumers. It hurt the drive-ins and chains. Battling over pennies left no room for paying for the costs of monitoring and controlling quality.

It was the classic chicken and egg problem. If the drive-ins could expect high quality, they could pay more because the individual monitoring costs would be less, and they could charge consumers a bit more.

But, suppliers knew that they couldn't deliver high quality hamburger because some drive-in's would adulterate it and also sell it for the higher price.

The market for quality unravelled, before it got even started.

The Solution: High Standards and Tough Compliance

To solve this strategic problem, Ed Turner and others first decided that the McDonald's standards would hold fat content to between "17 and 22.5%".

And that "hamburger" had to be "83% lean chuck "shoulder" from grass-fed cattle and 17 percent choice plates (lower rib cage) from grain-feed cattle."

Some suppliers thought they could cheat McDonald's. Since the supply chain was fragmented and local, these supplier thought McDonald's would not and could not police their standards.

"They had not counted on the intensity of McDonald's commitment to its meat standards.

Rather than leave the inspection of meat to visual inspections -the method used by the McDonald brothers and most other drive-in operators - Turner and Karos advised franchisees to have the meat routinely analyzed in labs."

Finally, McDonald's provided other simple tests for its franchisees to use, conducted surprise inspections, and kicked out suppliers who failed the standards.

They also quit "hard bargaining" on price - giving up a few pennies on the pound to the meat suppliers.

It is this type of dedication to creating and enforcing standards, in collaboration with its franchise operators and meat suppliers that made McDonald's the force it is today.

It is a good reminder of the value of franchising: the creation and maintenance of standards as a result of collaboration between buyers and sellers & without relying upon the penalties provided by government regulation.

Sources:

Secrets of the Moneylab: How Behavioral Economics Can Improve Your Business Chapter 6- In Whom We Trust.

McDonald's: Behind The Arches Chapter 6 - Making Hamburger.

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