The spate of product recalls over the past year has brought scrutiny to product safety, product quality and environmental standards in emerging markets, according to the new Innovation in Emerging Markets study by Deloitte's Global Manufacturing Industry Group.

Of 650+ global executives — from both developed-market and emerging-market companies — roughly two-thirds or more said that over the last 12 months these issues had become more important when global companies choose emerging-market suppliers, the latest annual report, released last week, found.

Roughly three-quarters of the developed-market executives surveyed said they had increased their use of emerging market suppliers over the last three years, with almost half saying they had increased it significantly. In terms of where they look for suppliers of components and parts, 66 percent cited China, while 36 percent named Mexico and Central America. Meanwhile, Central/Eastern Europe, India and Southeast Asia each were cited by one-quarter or less.

In its executive summary, the 2008 report determined:

Global manufacturers have long been focused on product safety and quality, but recent events have transformed these into high-profile issues for consumers, investors and regulators as well. Consumers have heard one news report after another highlighting the issue, with headlines about lead in children's toys, contaminated dog food and tainted toothpaste. Such problems have clearly commanded the attention of manufacturers.

"Manufacturers are feeling the heat — especially with all the negative publicity related to issues of sourcing from emerging markets," Hans Roehm, global managing partner of the Deloitte Global Manufacturing Industry Group, said in a statement.

Of course, emerging-market companies more often than not have more on the line than do their manufacturing customers located in developed markets. For one, they are typically smaller and therefore less resilient in the face of recalls and shutdowns.

"But the more successful companies are not avoiding the risks inherent in sourcing from emerging markets," Roehm continued. "Instead, they are intently focused on understanding and managing these risks in order to continue to reap the benefits that emerging market sourcing provides."

In fact, just over one-third of the developed-market executives surveyed felt that their companies had been very successful in sourcing from emerging markets. These companies appeared to be more attuned to the risks involved. Their boards of directors and senior management are more involved in product safety and quality issues, and their companies work closely with their suppliers to inspect supplier facilities more often.

"Deloitte's research found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency," Craig Giffi, Deloitte's vice chairman and U.S. Consumer & Industrial Products industry leader, said in the announcement of the report. "In addition to upgrading standards and testing, many viewed the need to provide customers with more sourcing information to allay fears about safety, quality and environmental standards."

In response to these concerns, companies are taking steps in several areas. The Deloitte study indicates that successful manufacturers have been engaged, or will likely engage, more rigorously in such activities as these:

• Rigorous vendor selection, sourcing more from emerging markets that have stricter standards;

• Produce more from company-owned facilities in these locations;

• Visit suppliers' facilities more frequently;

• Willingly address managerial skills and working conditions during visits;

• Expect that testing levels will increase significantly;

• Detail contract requirements to call for more facility visits and for the approval of subcontractors; and

• Provide more information to customers.

In so doing, manufacturers are likely to incur higher operating costs.

Forty-one percent of developed market executives surveyed believed cost increases were very likely, as companies respond to the demand for more stringent standards. Emerging market executives were even more likely to anticipate higher operating costs, with 59 percent believing these were very likely.

Yet Giffi emphasizes, "When choosing emerging market suppliers, successful manufacturers are going beyond the basics of quality, cost and reliability to place much more emphasis on the overall reputation of the supplier."

Product safety, product quality and environmental issues in manufacturing have come under increased scrutiny of late, and these challenges will continue to evolve. The companies that are quick and smart to perpetuate higher standards throughout the supply chain are likely to derive new benefits.

"By taking the lead on these issues, and even providing certifications and guarantees that their products meet the strictest standards," Deloitte notes, "companies may be able to differentiate themselves in the eyes of consumers — and build brand equity."