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Taking Risks
By: Cassandra Johnson
Issue: 2008may
I’m a bit envious of risk-takers. You know—those people who live life on the edge and face consequences head on. I’m more conservative. Rather than taking a risk, I forecast what I have to lose, and then I usually talk myself out of the risk. You won’t find me gambling four figures on the Trifecta, jumping off the bridge on a bungee cord or investing in what’s sure to be a hot stock. I’m more of the steady, mutual-fund kind of gal. Why? Because I have less to lose and more to control.
Are you a risk-taker? Do you make bold moves when it comes to business? If you are a supplier or promotional consultant in the promotional products industry, chances are you’re living life as a risk-taker right now. What’s the risk, you ask? It’s the risk of playing in a global marketplace without fully understanding the rules, risks, responsibilities and rewards.
Headlines have dominated the media in the past 12 months with a spotlight on lead-laden toys, exploding air pumps and overheating massage recliners. In fact, 2007 was deemed by Economic Research Associates as the “Year of China Recalls.” Why? Because imports from China were recalled twice as often as products made everywhere else in the world, according to the U.S. Consumer Product Safety Commission.
The good news? While there have been a few individual cases, promotional products have not been widely mentioned in these headlines. The bad news? As an industry, we could be at risk due to a lack of knowledge and sense of urgency.
Gene Geiger, MAS, president of Lewiston, Maine-based distributor Geiger (UPIC: geiger), observes, “There are enormous issues with implications of financial risk for unsafe products. With the softened economy, we, as an industry, risk having customers not buying our form of advertising. Instead, they could put their limited marketing and advertising dollars into other media such as online advertising that’s less risky than, say, unsafe promotional products.”
The issue of product safety in the promotional products industry breached the horizon when the California Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65, was passed. This law gives individuals the right to sue a business if a California resident is exposed to a harmful chemical without proper warning. Under Prop 65, every member of the supply chain—even those situated outside California—can be held financially liable for products that ship to California and expose individuals to harmful chemicals without prior warning.
In today’s environment, Prop 65 appears to be just a trial run for what the industry must now embrace. “The issues today are much more complex and uncertain than people know,” says Geiger. “It is much more than mugs being sold in California. The issue of product safety touches nearly every product category, every supplier and every distributor.”
To face risk head on—or stay ahead of the curve in product safety—Promotional Products Association International (PPAI) decided to form a think tank—the PPAI Global Strategy Council (GSC). And its thought leaders? The best and brightest minds from the industry’s largest suppliers and distributors, experts in overseas manufacturing issues, testing labs and mega end buyers such as Mattel®, Coca-Cola® and Disney®. Formed in June 2007, these industry leaders agreed to volunteer their time and expertise because they feel passionate about protecting the future of the promotional products industry.
Since its formation, the GSC has met in person and by teleconference on a regular basis to discuss the evolving issue of product safety and corporate responsibility. The council’s first order of business was to lay the foundation for educating industry suppliers and promotional consultants about the complicated nuances of product safety, environmental and social responsibility standards that should be in place and key steps to take to ensure delivery of safe products to end users.
To tackle this enormous task, PPAI turned to the person who wrote the book on standards—literally. Joan Cassedy, former executive director of the American Council of Independent Laboratories, the association for testing and product certification labs, and PPAI Legal Counsel John Satagaj spearheaded the process of putting together the Guide to Managing Responsibility for Product Safety, Social And Environmental Standards in the Promotional Products Industry. This manual made its debut at The PPAI Expo 2008 in Las Vegas and has been sent to all PPAI members.
“This guidebook is important in that it lays out ‘Product Quality 101,’” says Cassedy. “It sets the tone for everything you should know about product safety and gives the industry many tools and resources to reference for more information on product safety compliance. However, this is just version 101. The landscape is changing, and there is not an end to this process. This manual is the critical first step to give basic information.”
Scott Siegel, MAS, GSC member and president of Chicago, Illinois-based supplier R.S. Owens & Co., Inc. (UPIC: RSOWENS), considers himself an optimist when it comes to product safety. “I think the word is getting out,” says Siegel. “The most important function of the guidebook is to have a document that can be disseminated to member companies. It’s one thing to know about the issues, but it’s another to get the information to other people in your company and increase their knowledge as well.”
REGULATIONS AND THE RISK OF LITIGATION
While there have been a few recalls, the promotional products industry is yet to be hit with a huge claim. “Right now, there isn’t a great deal of litigation or even state or federal imposition of some kind of penalty or recall,” says Satagaj. “The legal risks are still relatively modest. There are only a few specific federal or state laws applicable to the safety of the promotional products. Most of the demand is from our end buyers and their customers, so it’s not as great a legal risk yet.”
But this could possibly change, and quickly. Pending legislation could cause this risk to escalate. For example, a bill is currently being considered in Congress that would severely restrict the amount of lead found in children’s products. While this is a positive move, the standards defined in the bill must be clarified. Also, it is likely the final version of the bill will require independent third-party testing and certification of at least some children’s products. Yet to be decided is the age of a child, which could be as old as 12.
While promotional products are usually not intended for use by children, how products are characterized by law and regulation can have a significant impact on the industry. For example, a promotional product might be intended for an adult but end up in the hands of a child. If the child is injured or harmed by the product, then the promotional products supply chain could still be held accountable.
And Satagaj says the buck doesn’t stop with lead-infused products. The next frontier in product safety legislation addresses phthalates, chemicals used to give plastic its flexibility so it doesn’t shatter. Not all plastics contain phthalates; for example, PET is phthalate-free. However, some phthalates are reproductive toxicants. They can be absorbed easily through the skin and are commonly found in vinyl products, including wallpaper, clothes, glues, adhesives, carpet tiles and vinyl floors. When tested, phthalates have been found in 76 percent of adults and 87 percent of children.
“Already there are folks saying, after lead, phthalates will be the next subject area they’d like to see covered at the federal level,” says Satagaj. “This is why I appreciate how, as a council, we must move quickly and stay ahead of the curve. It’s going to be a challenge.”
ASSUMING RISK: THE ROLE OF PROMOTIONAL CONSULTANT OR SUPPLIER
Indeed, suppliers are already feeling the pressure to move quickly to make sure processes are in place to deliver safe products. Suppliers carry much of the cost burden to ensure products are tested and manufacturing facilities meet social compliance standards.
From a distributor’s viewpoint, Geiger explains, “Buyers must assume that the products they buy from us are safe. When distributors are put in this position, we have no choice but to turn to suppliers. To some extent, it’s pushing the responsibility upstream.”
While suppliers have not geared up collectively for this, some are leading the way into this new territory for the industry. Such is the case with Indianapolis, Indiana-based supplier Norwood Promotional Products (UPIC: NORWOOD). Front and center on the Norwood website is an outline of its product safety program. Norwood also provides FAQs on the website and holds conference calls with its sales force to start the education process on product safety issues, according to Norwood President Paul Lage, MAS. This information gives customers a level of confidence in their buying decisions.
“We really manage how this information gets out from a marketing standpoint in our efforts to deliver safe products. We try to take this education beyond just awareness. This is why we give tools providing free information,” explains Lage. “It’s a huge opportunity from a competitive standpoint. People who take advantage will survive and prosper. Those who don’t address the issue will suffer. Truthfully, as suppliers, none of our products are so unique that distributors can’t get a similar item from someone else. There’s a level of comfort and expertise in being knowledgeable and proactive. This value proposition also serves well for the distributor.”
Promotional consultants are not immune and must also carry a level of responsibility. Because they are out in the front lines, they are the first to field questions about product safety from customers. However, as the council points out, many distributors will not be prompted to take action until they are questioned by their customers.
“Most people know something is going on, but they are too busy getting orders to face it. And they probably won’t face it until a customer won’t buy a product because there is too much risk,” says Geiger. “Promotional consultants probably won’t pay attention until they are asked for proof that a product is safe.”
TESTING—ONE STEP TO ASSESSING AND PREVENTING RISK
The first and most frequent requests from promotional consultants are test results. They want to know how specific products fare in these tests. As the GSC guide points out, testing is a complex topic in itself and states:
“The backbone of any product responsibility program is standards. At all points in the … process from product design and evaluation to production and delivery … to the end buyers, it is likely one or more standards will be considered. And when a standard is involved, two questions almost always accompany it: How do I test a product or process to determine whether to conform to the standard or who does the test?”
The GSC guide defines standards and recommends test methods based on these standards. While not all test types are for every product, the guide makes it clear that an accredited laboratory plays a key role in the testing process.
To the small to mid-size supplier, this might sound like an improbable solution, as testing can be expensive. But once again, this is a calculated risk—a choice a supplier must take. Should testing be part of the cost of business or an additional expense?
Lage says, “Norwood has 35,000 SKUs. To test each SKU is a very expensive process, and we will be testing all of them. For smaller businesses, this might not be an option. But there are other things they can do. Suppliers have a lot of choices in China. It used to be that suppliers would go over there, cast a wide net, meet with a lot of suppliers and work with all the factories that offered the lowest prices.”
Lage suggests choosing suppliers and manufacturers who will agree to social and testing standards, even if it costs more to do business with them. Again, that cost becomes relative compared to the cost of litigation and loss of reputation.
“Being a part of the GSC has given me a better understanding of how our industry is different from retail such as Mattel® that is also represented on the council,” says Lage. “We’re a small-order business, but we put processes in place. We use testing as a verification method. And many suppliers have more opportunity to improve their testing programs.”
Also, as Cassedy says, “It’s a misconception that only the largest companies are global and can manage testing. The testing industry is now becoming global. The ACIL, for example, provides a free search engine to locate where to test products. And, like other business needs, the process to set up a testing lab requires an RFP and contract. When you consider the product process, testing needs to be a component, a cost-of-doing-business part of the process.”
Another industry supplier experienced in product testing is Evanston, Illinois-based Dard Products Inc. (Tag-Master Line) (UPIC: Tagmastr). Working closely with four Chinese factories, Dard tests all of its products at the manufacturing facilities before they are shipped to the U.S. This includes raw materials, components and ready-to-ship products.
“Many suppliers are still shopping for manufacturers based on price point,” says Bonni Sandy, Dard president. “And some compare tests with products they ship to the U.S. But why would you pay to ship a product to the U.S. to have it tested and perhaps fail?”
Dard tests all its products prior to shipping to avoid this added cost, and the outcome is not always what it hoped. “We had a product that we tested three times. It never passed, so we had to drop it,” says Sandy.
SOCIAL COMPLIANCE AS A RISK PREVENTOR
Dard, which has manufactured and sourced in Asia for many years, has actually formulated specific social standards it expects of its factories. These standards are varied—from not hiring underage workers to proper manufacturing and testing of products.
In some cases, it costs these factories to upgrade their facilities to meet these standards, and some just aren’t willing to put in the time or money. Nor do they feel the pressure to do so, as another U.S.-based supplier will come along.
Dard had two factories in northern China that took on this attitude, so it moved this business to factories in southern China even though it meant spending money to retool the manufacturing facilities. “Sure it cost us to retool these factories. We require our factories to sign contracts that they can’t job out components to other factories,” says Sandy. “But the cost to do so is far less than the cost we could have encountered had there been a problem with a product.”
Sandy points out that all of Dard’s Asian manufacturers will pass its strict social audit by the end of this year, but none passed the audit during the first go-around. It’s a process to get to the point of compliance.
“The GSC manual outlines the important guidelines we must follow. Companies that refuse to make changes are operating in the dark,” says Sandy. “The issue of product safety is not going away.”
CODE OF CONDUCT: PROVING PRODUCT SAFETY
Perhaps as an industry, we’re too dependent on testing or legislation to be the dictators of how we tackle this enormous elephant known as product safety. Cassedy suggests that rather than waiting on legislation, we should be more emphatic about a corporate code of conduct.
A corporate code of conduct is a public statement or presentation that declares what you, as a company, are doing to meet end buyers’ expectations for product safety, social and environmental assurances. As the guidebook states, “It is a statement of principles that a supplier provides a distributor, who provides it to an end buyer.”
The GSC’s guidebook delivers an example and list of components that should be included in a code of conduct, including a product safety statement, no abuse of labor or child labor, freedom of association, no discrimination and more.
Cassedy says, “This is going to be very important in the future for every company. Using the guidebook as well as pending standards for corporate responsibility that will soon be announced by the International Standards Organization in Geneva, every company is going to need to adhere to these components.”
And, sharing a code of conduct with customers can be a competitive advantage, according to Siegel. “This will be a selling point,” he says. “More distributors will want to work with suppliers that have this.”
FUTURE OF THE INDUSTRY AND THE GLOBAL STRATEGY COUNCIL
While the GSC’s guidebook lays the foundation for product safety standards, the key is implementing them. And, again, the amount of effort a supplier puts into this is a calculated risk.
Many suppliers and promotional consultants are just now trying to figure out what level of effort and expense they can afford. But, as these GSC members ask, how can the industry not afford to address this? It’s the new cost of doing business.
“As a whole industry, we must look at issues such as social responsibility,” says Sandy, who admits that her phone is already ringing from other suppliers, large and small, with questions about which factories to work with in China. “I am more than happy to help out. If someone calls me, I share information because it’s for the good of the industry to come together on this issue. It’s a different time now. There’s more of what I call ‘friendly competition’ where suppliers are helping each other out.”
Beyond a willingness to share information, Lage sees another possible shift in the industry. “The promotional products industry is broader than most industries. We manufacture thousands of products in many categories. In the future, product safety regulations and processes could force the industry to go from offering a broad range of products to a more specific product line focus.”
Most SGC members admit that the Guide to Managing Responsibility For Product Safety, Social and Environmental Standards In The Promotional Products Industry is not only a strong first step but also a strong first leap for the industry, and it puts the promotional products industry ahead of other industries facing similar issues. In fact, few industries have put together such a comprehensive tool defining standards and providing a step-by-step outline and resources, according to Cassedy.
With this said, the Global Strategy Council members are looking into the future to continue sharing information within the industry. “I think a future role of the council and the industry is to come up with resources that can help suppliers and distributors with their own customized programs,” says Lage. “This could be templates to follow and resources of people to help put programs in place.”
No matter what support and future resources are coming from PPAI and the Global Strategy Council, one thing is certain. As Geiger says, “We must keep product safety on the list of important issues, and discuss and educate on a daily basis. It can’t be something we think about once a month. It must be part of daily conversations and daily routines. It needs to be as elemental as checking credit risk. The issue is real. It touches everyone in the supply chain. It is going to be one of the two to three most critical issues our industry leaders face for a long time.”
It all comes down to assessing and managing the level of risk. Siegel says, “Companies must assess the level of risk their products hold for them by doing a cost-benefit analysis and being very realistic about the level of risk. It could add five percent to the cost of the product to have it tested. However, this cost could be miniscule when compared to defending your company in a costly lawsuit.”
Now, back to the first question—do you want to be a risk-taker? PPB
Cassandra Johnson is a marketing communications consultant for PPAI’s Regional Affiliates, delivering more than 15 years of expertise in areas such as public relations, direct marketing and e-marketing. She is also a freelance writer, supporting clients in a variety of industries, including hospitality, financial services and technology.
Get Guidance
To download a copy of the Guide to Managing Responsibility for Product Safety, Social And Environmental Standards in the Promotional Products Industry, visit www.ppai.org and click on Members. Under the Business Management tab, click on PPAI Product Safety. The Product Responsibility Guide is available as a PDF.
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