Riot at the Rosita knitwear factory in Bangladesh The Institute for Global Labour and Human Rights
Riot at the Rosita knitwear factory in Bangladesh The Institute for Global Labour and Human Rights

How to spot a fake factory

posted by Nick Martindale
19 February 2016

No complaints from workers.

That’s what the auditor’s report said of this Bangladesh factory (pictured). Ten months later, employees wrecked the plant, protesting they’d been jeered at by managers and beaten by guards. If you don’t inspect suppliers properly, can you be confident that a riot isn’t brewing in your supply chain?

The Rosita knitwear factory provides a salutary warning. After the uproar in 2012, the owners ordered a new audit by another company, Verité of Massachusetts. This revealed “harsh treatment” of the labour force by management, including abuse for requesting leave, dismissal for missing work because of a death in the family, and forcing those who turned up late to stand for “many hours without rest”. Monitors also found errors in wages, chemicals labelled only in English, and staff disciplined or fired if they failed to meet onerous production targets. Protesting workers had been beaten by security guards.

It emerged that the previous inspection – when the factory was awarded top grades in 12 categories including compensation, management practices and health and safety – had been a one-day visit, with workers interviewed on the premises, and mostly yes-no questions.

Elsewhere a series of fires – including an explosive one in 2011 at the Foxconn factory in the Chinese city of Zhengzhou where many of Apple’s iPhones are assembled – and other safety issues have struck production facilities in many emerging economies.

Fake payroll records
Safety concerns are not the only concern. Other cases have involved excessive working hours, staff having documents or passports confiscated so they are unable to leave, and instances of child labour. One Chinese company even advertises software to create fake factory accounts by altering payroll records for inspection.

The big brands that use such factories are quick to reassure consumers of the checks they make to ensure safe, fair working conditions, but despite genuine attempts to monitor and improve standards, all may not be as it seems.

Factory owners, who can make – or lose – millions of pounds on the strength of an audit, will go to extraordinary lengths to deceive auditors and secure a favourable report.

Bribes may be offered. On being warned of an inspection they will order managers to unlock fire doors and clear blocked stairways. Machinery will be moved into lorries parked outside the factory, so it does not appear overcrowded. Child workers will quietly leave by the back door when a certain piece of music is played over the PA. Charts setting out health and safety requirements may well be moved from one factory to the next to keep one step ahead of inspectors.

More tea, inspector?
Managers will be coached on what to say about wages, benefits and working hours. They will also be keen to spend as much social time as possible with monitors – drinking tea, savouring meals at restaurants and taking circuitous scenic routes – to diminish the time they spend at the factory premises.

“Quite often you get suppliers who will say they’ll take you to their factory, but in production they could be using a completely different one,” says Amanda Lockley, head of CSR at product-sourcing business Matrix APA, which makes regular site visits to all its suppliers. “It’s quite easy, especially if there’s no name or if it’s a Chinese name outside, to say: ‘This is the factory’ – but it could be just a show factory.”

Lockley’s advice is to make sure any such trips include someone who speaks the local language and can talk to workers to verify any information suppliers have provided.

Whether your chosen auditor can read Chinese signs – or even tell one factory from another – is only part of the monitoring problem.

How big is the factory to be visited? How long does a reliable audit take? One day? Three? How many inspectors should there be? One? A team? What exactly are they to examine? As the Rosita case shows, many of the issues can be complex and require more than an hour or two to assess. What kind of training and experience of investigation does your auditor have?

Poor or fake audits – sometimes involving the use of unvetted sub-contractors, where finished goods are simply sent over to the approved factory’s packing area for the inspection and then returned to the subcontractor for shipping – are a growing problem.

“In Turkey, which produces short-turnaround, ready-made garments for European high streets, this is a massive issue,” says Wiebke Flach, head of member services at the Ethical Trading Initiative. “First-tier suppliers will often ignore agreements with brands and outsource to sweatshops in the informal economy, which are beset by poor labour standards, unregulated working arrangements and inadequate union representation.”

Some businesses are still failing to put in place adequate checks on suppliers in the first place. According to a global survey of 450 procurement professionals carried out by IFF Research on behalf of Achilles, 37% fail to check suppliers are acting in accordance with financial reports when they visit sites, with 24% omitting to verify environmental policies and 19% not even checking up on health and safety.

Organisations need to take a risk-based approach to audits, argues Courtney Foster, supply chain solutions manager at BSI. “They should identify the high-risk countries where they have suppliers, and then look at the criticality of those suppliers to their business – those with the highest annual spend, supply-critical commodities or where they are a 

single-source supplier,” she says. She identifies five ‘pillars’ against which suppliers could be assessed: business continuity, supply chain security, ethics, environment and quality.

Quality is an area that risks being overlooked in the pressure around safety and working conditions, believes Ian Truesdale, managing director, supply chain, at Accenture Strategy. “There was a case in China where a manufacturer of baby milk was putting in another kind of powder to bulk up the volume,” he warns. “You may think you’re getting what you have specified, but if a supplier is being unscrupulous they may look for a cheaper specification which is very difficult to identify.”

There’s also the issue of how far down the supply chain to go when auditing. “Very often suppliers further down the chain are not known and tier-one suppliers are reluctant to provide that information,” says Robert Kromoser, vice president, EMEA, at AT Kearney’s procurement practice. “It is already quite a burden to do 50-100 audits, and going further down the supply chain adds hundreds more.”

The trouble with audits
Some organisations may decide that such activities are best outsourced to third parties, which have the benefit of knowledge and experience gained from auditing suppliers and factories for other customers. This, though, has its own risks. “When selecting an audit supplier, ask to go on an audit with them to understand what they look out for and how detailed they are,” suggests Laura Magee, senior consultant at Crimson & Co. “Do they simply carry out desktop research or do they physically audit? If they are auditing working conditions, do they use their staff or rely on third parties in the relevant country? You need to have confidence in your audit supplier: if something goes wrong it will be your reputation on the line, not theirs.”

Some question the very concept of audits. Ian Schollar, head of corporate delivery at CIPS, says: “Even though audit organisations may offer an unbiased view for supply chain auditing, they are by the very nature of their contracted relationship, working to their clients’ agenda. This results in an inconsistency as to what and how audits are conducted and what indicators may be noticed during the audit that may point towards poor practice.”

One solution is for procurement heads to share audits and information, either across industries or in non-competitive sectors. John Thompson, head of human rights for Verisk Maplecroft, says this will exert pressure on suppliers and audit companies to up their game, and avoid what Lockley describes as “audit fatigue” among suppliers asked for multiple inspections by different clients. “We need industry-wide pressure on the audit companies,” he says. “There are definitely some flawed processes within auditing.”

There are signs this collaboration is beginning to happen. “We are seeing an increase in buyers’ willingness to collaborate with non-competitive elements,” says Neil Willings, global head of audit at Achilles, “because buyers are listening to feedback and looking to take cost out of their supply chain, and to do that they need to reduce the effort. Collaboration is absolutely on the agenda.”

Audits, however, will only ever be part of the solution. They cannot be a substitute for effective due diligence when selecting suppliers or taking appropriate action when issues are uncovered. “Audits are a tool that will help you understand if your processes for buying in goods and services are working, but that’s all,” says Gary Plant, managing director of supply chain assessment and compliance company Altius. “If your freezer is keeping food at +10°C, you don’t rush out and buy a better thermometer.”

Further reading: Checklist on carrying out a successful factory audit

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