Monday, August 24, 2015

"Made in ___" vs. Country of Origin

In the latest post to the ASQ CEO Blog, A View from the Q, guest blogger and ASQ Managing Director Laurel Nelson-Rowe asks, "What does Made in ___" mean to you?" At a recent by invitation-only quality conference in Shenzhen, China, titled “Huawei Big Quality International Seminar", some common words and themes heard were feeling, emotion, patriotism, pride and competitiveness.

Prior to my retirement from a large multinational manufacturing company I served as both the Quality Manager and Country of Origin Coordinator for my business unit. I believe I bring a rather unique perspective to the matter of quality and Made in ___. Here in the United States, the terms Country of Origin and Made in USA are often incorrectly used interchangeably. Country of Origin (COO) is determined for purposes of trade; i.e. customs duties. The proper Country of Origin is determined based on where the "substantial transformation" activity occurs. For purposes of kits and multi-paks the "essential character" of the products also comes into play. It should be noted that the US Gov't has its own set of rules when purchasing certain commodities, whether for the military or government offices (GSA contracts). Many of these COO determinations are dictated by trade agreement acts (TAA) such as NAFTA, or by law (Buy American Act, Berry Amendment, etc.).

"Made in USA" on the other hand is a product marking regulated by the Federal Trade Commission (FTC). The FTC has defined criteria that must be met in order for a manufacturer to claim "Made in USA" and also incorporate the image of a USA flag on the product packaging. The "Made in USA" claim requires that the total manufactured cost of the item must be "all or virtually all" United States content. This cost includes raw materials, components, sub-assemblies, packaging, equipment burden rates and labor. A product whose USA costs are assuredly less than nearly 100% USA (for example, product that is produced or assembled in the USA but with components sourced from outside the US) might not qualify for "Made in USA" labeling. In such instances the manufacturer should state that such product is "Made in the USA with globally sourced materials" (or similar language). Unfortunately, it is my experience that not every company applies the same reasonable basis / interpretation to the "virtually all" cost content requirement. Does "virtually all" mean 99%, 95%, 90%, 75%, anything greater than 50%? The State of California has an even tougher requirement for "Made in USA"... 100% (with few exceptions). This plurality of "Made in USA" definitions imposes significant supply chain administrative processes and cost to the manufacturer.

It is quite possible for a given product to have multiple Countries of Origin depending upon the rule being followed; for example, one determination for Normal Trade Relations (i.e. Customs) and another COO for Gov't purchases (i.e. Trade Agreements and specific commodities). It is also possible for a product to have COO = United States (based on substantial transformation location), but not qualify for "Made in USA" (based on cost).

Aside from the producer's technical aspects of properly determining Country of Origin and Made in ___ product  markings, there is the consumer's emotional element as referenced in the opening paragraph. Both perspectives are very real and very important to commerce. There is much debate on the value of free trade agreements, which I shall not delve into here, except to briefly present the economic theory of Comparative Advantage.  This theory, supported by empirical data, suggests that "where two countries capable of producing two commodities engage in the free market, then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries" (source: Wikipedia). Over the long term, comparative advantage drives specialization and nurtures innovation. Arguments against the theory of comparative advantage cite the dangers of diminishing returns (i.e. productivity), and the pros & cons of diversification vs specialization.

From a quality perspective, today's consumer is very technically savvy and is able to shop via the internet to find the product they want at a price they are willing to pay. Word of Mouth advertising such as online ratings & reviews empower the savvy consumer to find the best overall experience regardless of the product's country of origin. If "Made in ___" is an important value proposition to you please be aware of the different interpretations of the minimum content requirement.