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Sourcing >> How
to avoid working with factories that close unexpectedly

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How to avoid working with factories that close
unexpectedly

Posted: October 28, 2016

By Stacy Bruce

You’ve
been watching the calendar, anxiously awaiting that first shipment of leather
handbags that’ll mean the beginning of your online business. You’ve already
received orders, and it’s looking like your bags will be a sell-out
success.

But
you haven’t heard from your factory contact in a few days, and you’re feeling a
little nervous. You’ve tried calling and emailing, but to no avail.

Then
two days before your shipping date you suddenly lose contact with your supplier.
They don’t respond to your emails or answer your phone calls. Soon you learn the
factory is no longer in operation. And your order might’ve been forgotten, or
worse, sold to someone else.

Factories
that close unexpectedly can leave importers in a serious situation. Not only are
they likely to lose the deposit on their order, but they also face a huge
setback in finding a new supplier. They basically need to start again from
scratch.

Let’s
look at the ways importers can avoid working with factories that close
unexpectedly, as well as what you can do if you find yourself in a situation
like that above.

Auditing
a supplier’s factory to determine risk

You
wouldn’t start a long-distance sailing trip without first checking the weather
forecast along your projected path. Similarly with a factory, you need to
understand what its present and potential future conditions look like so that
your business doesn’t suffer. Conducting an audit of the facility is one the
best ways to assess your level of risk working with a factory.

Conducting
a supplier review

Auditing a factory’s
quality management systems is often considered the final step in the sourcing
process. It’s generally best to perform this kind of audit, sometimes called
a supplier review, well before placing an order with a supplier. This type of
audit, typically based on ISO 9001 standards, focuses on the factory’s quality
management systems.

But
the supplier review can also quickly confirm or eliminate any doubts you have
about a potential supplier. An auditor or trusted agent can often report on any
glaring issues or signs that the factory may be in financial trouble or at risk
of closing (related: 3 Telltale Signs of a Bankrupt Factory).

Some
key areas that a supplier review or similar audit covers include:

• Factory layout and
capacity;

• Certification and
licensing (e.g. import license, business license);

• Engineering &
design capabilities;

• The status of the
factory’s business development and administration; and

• Any quality controls
in place (e.g. where are QC staff present, what checks are performed)

The
result of this kind of audit helps you make a decision about whether to work
with a particular supplier or avoid a risky one (related: 5 Key Findings of a Supplier Review).

Performing
a social compliance audit

The
issues that cause a factory to close are sometimes the same issues that make the
facility hazardous. Earlier this month, a Bangladesh factory fire killed at least 23 people. And this
isn’t an isolated incident. The BBC reported back in 2013 that 40 percent of factories in Bangladesh have “major safety
issues”.

Factories
that fail to meet safety standards and other requirements set by retailers, such
as Walmart and Target, risk losing customers, or worse, closing down due to
issues like the one above. One of the best ways to see if the factory you’re
working with is vulnerable to safety or other compliance issues is to conduct a
social compliance audit. Such as audit typically follows a general standard,
such as SA
8000 or a brand-specific framework (related: How to Use Retailer Standards for Social
Compliance).

A
factory might seem stable. But if it fails this audit with serious violations,
then you may have a major problem on your hands. The reason could be anything
from working hour violations to not paying insurance to structural problems with
the building. Not only might your supplier’s factory be in danger of closing,
but your retailer might refuse to stock your product.

Social
compliance audits help you avoid working with factories that close unexpectedly
in the future. As an added benefit, you can ensure your customers and
distributors know that your products are ethically sourced.

Tracking
order status with product inspection

Audits
are helpful in providing a detailed look at a factory and alerting you of any
problems. They also provide insight into product quality, capacity and
management. But another recommended step is to inspect the order before
shipping. You can inspect on your own. But it’s generally better to hire a
professional inspector or third-party QC company to help.

Product inspection
allows you to see a timely and detailed report of the goods. In addition to
finding any quality defects or other product problems, inspection shows the
status of an order in the factory. If the factory making your leather bags is
supposed to ship them next week, for example, an inspection report would show
you whether the order is on track to meet that deadline. Likewise, if the
factory hasn’t even started production, it will be clear to you from looking at
the report.

Production
monitoring for more routine reporting

Those
importers that need regular updates of order status often rely on production
monitoring. Production monitoring is inspection performed routinely, often daily
or less frequently. By visiting the factory routinely to check the product,
importers can track their order throughout production. This gives them assurance
that their order isn’t falling behind schedule. And if the factory is keeping up
with production, you can be confident the owner isn’t preparing to close it
(related: 3 Reasons to Conduct Production Monitoring).

The
importance of clear communication with the supplier

When
working with suppliers overseas, there are often language barriers that make
communicating your questions and requirements more difficult. That’s one reason
that importers should assess quality of communication as part of the sourcing
process when looking for the right supplier.

But
better communication can also help you to avoid working with factories that
close unexpectedly. There are certain best practices recommended for
communicating with suppliers to keep them from being caught off
guard.

Getting
suppliers on the phone

It’s
common to communicate via email so that everything is written down, which allows
for easier translations. But communication via a phone or Skype call is also an
important way to establish rapport with your supplier contact. Even if there are
communication barriers, a simple call and your effort to
communicate often help personalize the relationship.

That’s
why a vital step to protecting yourself against being out of the loop is
obtaining the phone numbers of important decision makers as soon as you choose a
factory to work with. You don’t need every single phone number – just the ones
you deem vital to your operations.

What
to do if your supplier is unresponsive

You
find that your supplier contact is unwilling to speak over the phone or isn’t
very responsive to your emails. This could be a sign of problems. It may just be
that it’s a busy time for them. Maybe a natural disaster or some other disruption has occurred. But the supplier could be
avoiding communicating because of more serious problems they’d rather you not
know.

If
you receive an email saying the factory is no longer in operation, follow up
immediately with a phone call. You might find out more information over the
phone about the state of the factory and your products than what the factory or
supplier contact is willing to put into an email.

Calling
or visiting the factory

If
you normally communicate through a trading company or vendor and that contact
isn’t answering your calls, it may be time to directly contact or visit the
factory to verify that it’s still operational. You may not know the location or
contact details of the actual factory. But if you’ve hired someone to audit or
inspect at the facility before, they should be able to visit the factory again
on your behalf.

Taking
legal action against a fraudulent supplier

Importers
typically consider pursuing legal action against a supplier a last resort. In
most cases, it’s costly and time consuming. You’d also need to find a lawyer in
the country where your factory is located. Although there’s no guarantee of
success using a lawyer to act against the supplier, you may be able to recoup
some or all of the payment you made to the supplier. But due to the difficulty
involved in many countries, generally only very large multinational companies
will bother taking their suppliers to court.

Conclusion

It's
not ideal for your factory to shut its doors unexpectedly. It’s a nightmare
situation for many importers and can lead to headaches, dissatisfied customers
and financial losses.

Thankfully,
checks like audits and product inspections can help determine if a factory is
headed for trouble. And by employing people on the ground to help with follow up
phone calls and factory visits, you’ll have local support in the event that the
factory becomes unresponsive. You’ll have resources available to guarantee your
goods don’t suddenly become inaccessible.

Want
to learn more sourcing best practices?

Join the Global
Sources Summit that combines conferences and networking, co-located with our
Hong Kong trade shows. The event will be held October 17-19, 2016, and is geared
toward online and Amazon sellers.

Stacy
Bruce is a Client Manager at InTouch
Manufacturing Services, a QC firm that performs product inspections and
factory audits in Asia for clients in the US, EU and
Australia.

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