Factory audit is a common process used to verify a supplier capability and compliance with some working standard, quality management system, ethical labor practice or even health and safety manners.
The topic of this article is related to when and how often should you audit your suppliers ? Should you audit your manufacturer once at the beginning then bye bye ? Or should you audit them on a periodic base ?
I will answer to those question point by point.
# Auditing during sourcing phase
Most of importers use supplier audit services to verify their manufacturers capability and to make sure the vendor is genuine (not spam) before placing their first order. Quite often, an importer after having performed some online search on a global trade platform such as Alibaba, Global Sources or Made in China will enter in contact with the vendor and start communicating about a potential order.
Then, when the times come from discussion with vendor about payment terms and conditions, and especially which amount should be deposited to the vendor account to start the order, the question of the reliability, technical capability, social responsibility, financial health and genuineness of the company start to run into the buyer brain. Indeed, with a deposit amount required usually to be between 30 to 50% of the purchase order, considering mass production big number effect, the deposit amount may not be so small. How to protect this deposit and how to minimize risk related to payment is considered at the time when the payment has to be made.
The supplier audit service is then the best tool to minimize risk by verifying the background of your vendor: production process, assets such as equipment and machine, employees, organization, management, quality assurance implementation, warehouse storage management, sample management, documentation, versioning, training of new comers, hr management, etc… All of those elements can be verified during a supplier audit before placing an order to a vendor and it helps you to assess the risk of failure to get your order delayed, your products non compliant. In some circumstances, even some financial credit check can be verified to evaluate the financial health of your vendor.
Several audit types can be implemented depending on the need and the area the international buyer want to focus on. Those area can be quality management such as an ISO 9001 audit type, corporate social responsibility with standard such as SA 8000, Sedex / Smeta, WRAP or BSCI, Environmental such as with ISO 14000, health and safety with OHS 18000, or even ISO 27001 to make sure your supplier is capable to manage confidential informations properly.
For specific industries some specific quality management audit standard may fit better than ISO 9001. For medical, ISO 13485 standard and guidelines will mostly be used, for automotive it will be ISO TS 16949, while for aerospace it would rather be AS 9100.
Out of those ISO standard, if an importer is willing to sell products to international retailers, then some specific standard to each retailer might be used. So Disney audit, Walmart audit, Costco audit, Nike audit, Target audit are mostly used when you want to sell your products imported from Asia and sold to those big retailers.
# Audit periodically to check the profile of your vendor didn’t change
If you are an experienced buyer frequently purchasing in Asia you will probably know the business manufacturing landscape can change quickly here. Hence, auditing frequently your vendor can be strategically smart in order to be kept updated about your supply chain.
An example I had in the past was the case of one manufacturer of consumer electronic I worked with for manufacturing a special type of consumer electronic product:
During the sourcing phase, I audited the manufacturer and noticed they had a SMT line with pick and place machines and reflow oven. At the audit time the machines were in use to solder SMD components on PCB. The manufacturer was capable to internalize the manufacturing process of the PCBA (assembly of components on blank PCB), hence controlling which component was soldered on the PCB and how soldering was done, hence having a decent supply chain control on the electronic part of the process. So, this manufacturer was short listed as a potential candidate and it indeed became one of our supplier.
A year and half later after placing several orders, I decided to audit again this supplier to see how the company was doing now. I was surprised when I audited because I discovered that the SMT line was not in used anymore (while machine were still present at the facility). Machines were off and the level of dust on the machines indicated that the manufacturer didn’t use the SMT line for a while whereas the manufacturer was still assembling parts to become products. In short, they had decided to sub-contract the SMT process to someone one else which they didn’t inspect regularly during product, hence partly loosing control on the supply chain. When I asked why they sub-contracted whereas they had the equipment to process SMT, they told me it was cheaper to process component soldering outside their company.
A few weeks later I actually discovered the manufacturer sub-contracted because they had decided to wipe off their engineering team to sub-contract the electronic engineering to a design company and that the design company didn’t sell the IP to the manufacturer but just the PCBA where they put their margin on the top of the BOM.
Auditing a bit every year some suppliers which are strategic in your supply chain can be a good idea to verify the evolution of their capability.
# Monitor your Ip with periodic audit
When you are already working with a supplier and placing order to them you may think that everything goes smooth. Yet sometimes it doesn’t and you don’t know it. I got an example of one client who had designed and patented a design for a very special kind of bike. The client appointed a big manufacturer of bike product to mass produce his special bike. Everything was going fine until two years later after placing order when he asked me to go visiting and auditing the supplier, process which he didn’t do before placing order.
Arriving on site, I conducted my audit like always I due. When I visited the production line, the client products where currently in production on one line. A few hundred meter away of this line, a bit isolated, was another line. I was curious so I went to have a look at what the manufacturer was doing there. I was surprised when I discovered the exact same product was manufactured but under another brand name which was the factory brand name. I quickly reported to the client to know if it was normal his product was manufactured under another name. He was also amazed and told me the manufacturer didn’t let him know about it…
In short, the manufacturer was producing for the client, but was also producing for the manufacturer brand without paying royalties and infringing patent and licensing from its own client.
If the client would not have asked me to lead an audit at the supplier facility, he would have never known his manufacturing « partner » was becoming his competitor….
# Conclusion
Supplier audit can be very useful to verify your supplier capability, social responsibility, health & safety, environmental responsibility implementation, quality management system and even financial health. On the top of it, it can help you to verify your supplier capability evolution over the time to make sure it doesn’t deteriorate. Finally, auditing your supplier on a regular basis can help you to keep an eye on your supplier to make sure your product is not copied by them.
If your supplier is strategic in your supply chain or in your procurement turn over, then I would recommend you to audit your supplier once a year ideally.
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