Key Compliance Considerations for Brands Sourcing from Small Factories in China

Presented by Charles Coletta, Fourstar Group SVP Quality and Compliance

Based on 15 years of experience of directly working with over 1,000 Chinese factories, Charles Coletta, SVP QA & Compliance for a major trading company Fourstar Group, provided an overview of the key challenges a brand or buyer may face when sourcing from small factories in China, and strategies to overcome them.

Highlights:

• Advantages and disadvantages of sourcing from a small factory in China

• Compliance challenges involved in working with a small factory

• Practical solutions and best practices to ensure compliance in your supply chain

While environmental compliance in manufacturing is a universal challenge and sourcing destinations in Asia are particularly vulnerable to environmental compliance risks, small factories in China have a set of unique challenges, owing to the business and manufacturing models generally accepted in the country.

A small factory in China is defined as facility with less than 100 workers. Currently, there are over 10,000 such factories in China, and they are part of the supply chains of every major retailer in the US and the EU, whether supplying directly, through brokers or trading companies, as tier two subcontractors, or as a subcontractor of finished goods (the latter often happens without the buyer’s knowledge). Essentially, if a brand or retailer sources from China, the presence of such small factories in its supply chain is practically a guarantee.

There are a number of advantages to working with small factories directly:

• Production flexibility and openness to new ideas or processes allows the buyer to experiment and amend orders on the fly

• A large share of manual work allows for cost saving

• High production speed through reliance on a network of "

  sister factories

  "

• Factory location may be particularly expedient for the buyer’s logistics

Compliance challenges inherent to small factories in China

Despite all the above advantages, working with small factories also comes with a host of compliance challenges.

Price/cost considerations

In small factories, profitability is based on very small margins and rapid production – while adherence to foreign compliance regulations is viewed only as a reduction in profit.

Documentation

Smaller factories are well known for their lack of documentation and paper trail. Documents are often kept by hand, which makes processing and translation more difficult. Additionally, small factories may keep two sets of records, one for official reporting and one reflecting the real situation.

Lack of technical knowledge/personnel

In most cases, a smaller factory is not going to have a compliance person or department. In fact, most of the time the factory manager and ownership will have very little knowledge or understanding about environmental compliance. When sourcing from a small factory in China, the buyer must be prepared to educate the supplier on all matters related to environmental and chemical compliance.

"Under the radar"

Even though the Chinese government is cracking down on certain environmental regulations, small factories are often times not checked. A lot of the time, corruption at the local level also allows these factories to fly under the radar.

Subcontracting

Small factories are able to remain flexible in production because they maintain a “network” of sister factories that can assist in production. Oftentimes this will not be apparent to the buyer, or be a violation of the buyer’s requirements.

Spot purchasing

It can be difficult to maintain control of raw materials purchases and certifications because smaller factories often times purchase materials on the spot market.

Best practices to achieve compliance when sourcing from small factories in China

• Provide the right incentives:

  to a small factory owner, EU or US regulations will not carry much weight, but the knowledge that compliance will attract business from big buyers will be more effective

• Training:

  this includes both external and internal training, as buying personnel must be prepared to explain the intricacies of compliance to the factory management

• Partnership:

  developing a good relationship with the factory is paramount for building trust. The management is more likely to be open about issues if they can expect cooperation, not punishment from the buyer

• Diligence/oversight:

  the buyer must be prepared to act as a compliance manager for the factories, because they usually lack the necessary knowledge to be compliant. Any auditors dispatched to the factory must be aware of compliance issues specific to the factory type, industry and market, including any red flags for subcontracting.