The French Chamber of Commerce organizes the Made In Asia conference every year. I missed last year’s edition, but I attended this year. The theme was transparency in sourcing.

Here are my notes.

What drives transparency in the supply chains?

A speaker from Puma pointed to these 4 major forces:

• Consumer safety regulations such as REACH.
• Bad press, or the risk of bad press — show the reality to avoid wrong accusations or over-generalizations
• Social media — a different beast from the press, and even faster
• Working closer with suppliers to co-create new styles and gain speed

A speaker from H&M (a pioneer in showing their tier-1 and tier-2 supplier list on their website) insisted that transparency builds trust. He gave three examples I liked.

• A number of large brands & importers have joined the Sustainable Apparel Coalition, which gives factories a grade. This can be shown all the way down to the consumer in a store.
• H&M’s brand Arket shows where each product was made. Example below.

• A Chinese supplier decided to collect real-time data about their water consumption, air emissions, etc. and shows it on a large screen in front of their factory. Wow!

Are some retailers actually driving changes?

In the examples above, the retailers and brands push the manufacturers to “open up” and to comply with international standards and local regulations. And, on the whole, my impression is that it is pretty slow.

There are a few exceptions, though, and Ikea is probably the best illustration. A speaker from Ikea shared 4 ways they help improve the situation:

• They work hard at helping their suppliers reduce scrapped materials and rework. In itself, that ‘saves’ thousands of tons of good material. A big win for the environment.
• They help improve efficiency so that a factory can pay the same amount to workers while ensuring they work fewer hours.
• They try to find ways to make families live together, so that kids don’t need to be sent to the home town to be taken care of by a grand mother. This reduces staff turnover in the factories.
• They request traceability on raw materials and find ways to make those materials’ production more efficient — for example, improve they way to grow cotton.

And what are leading manufacturers doing?

A speaker from Hasbro, the toy company, pointed out that stricter regulations are pushing manufacturers to consolidate in some industries. Larger companies can comply with new standards more easily. “It takes 1 million USD in sales just to pay for compliance, let alone for the fees themselves.”

A speaker from Crystal Int’l Group, which might be the largest apparel manufacturer in the world, with sales of 1.7 billion USD and sites in 5 Asian countries, shared their efforts with compliance.

One of the interesting things they did was focus on engaging with their workforce and avoiding miscommunication.

Some of the approaches are classic: training, birthday celebrations, classes about anything of interest to the staff, meetings with work representatives, suggestion boxes, helping the community, etc.

They did one thing that seems to be working really well. They noticed that nearly all their employees had a smartphone, so they developed a mobile app for them. Here is what it contains:

Is transparency enough?

Obviously, it is not, as a speaker from Liberty Asia noted. “Transparency is not accountability.”

There are about 25 million slave laborers in Asia. How many of them are involved, at one level or another, in products that end up in stores in Western Europe or in North America? Probably many.

Regulations are getting tougher across the globe and are pushing for more transparency in global supply chains. The toughest regulation is in France.

Consumers are also pushing for more transparency, as they suspect brands of not telling the truth about the conditions in which their garments, shoes, etc. were made.

Importers are often stuck between a rock and a hard place. They are asked by customers or by regulators to comply with very tough (and sometimes unrealistic) standards, and at the same time they need to ensure business continuity — keep selling similar products and make a margin.

This is quite common when a retailer sets very tough standards for social compliance. For example, Walmart writes that they will terminate any business relationship if they find out production was subcontracted to an unauthorized factory. They know it is extremely common in their supply chain, and yet they adopt a hard line.

This is also at play when a country wants all batches within a certain product category to comply with a safety standard. I don’t want to mention the exact case a client brought up to my attention recently, but make up an imaginary example that will drive my point just as well.

Let’s say Australia wants no metal product to rust when it comes to certain applications, and yet many products are still made with metals that can’t be treated not to rust. (Again, I am making stuff up here.) Everybody keeps selling and hoping they don’t get caught.

In these cases, what is the very worst thing that can happen? Having a bad case noticed by the customer/regulator, and being blamed for negligence after an investigation.

And what is a good way of not avoiding it? It is a three-step process:

1. Planning — what exactly are the requirements, and what are the risks in the current operations? Break down the risk in different categories.
2. Mitigating risks — do something for the highest risks, and (if possible) set some targets for improvement in the future.
3. Documenting and communicating — make sure there is a paper trail that can be audited, and (if appropriate) be proactive in communicating about your plan with the customer/regulator.

Let’s look into a couple of examples.

Example 1: unauthorized subcontracting

The 3 steps could look like this:

• Planning: collect data about each factory’s capacity per week; communicate to the customer how many weeks each production batch will take; get a written letter from each factory that they understand the requirement.
• Mitigating risks: hold pre-production meetings at the factory before each production run and do basic maths to confirm capacity will be sufficient; send inspectors to the factory during production to confirm they work on the right product and to check production status.
• Documenting and communicating: keep written traces of the PP meetings, the inspections, etc.

Example 2: tough safety standard — “metal products that never rust”

In this case, we could have:

• Planning: place your current metal products in 3 buckets (red, orange, green)
• Mitigating risks: get all your suppliers to sign a letter that confirms their awareness of this requirement; plan for testing 5% of “green” batches and 30% of “orange” batches; add a label for users of the red products that metal might show signs of rust.
• Documenting and communicating: get all your test reports archived and sum them up in an Excel table. Show trends on a few KPIs.

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Obviously, there are many possible approaches to this issue. These are just examples, but the overall idea (setting up a program that analyzes and addresses risks in an intelligent manner) worked well for a number of importers.

I left out the work with suppliers. Often, they have to make changes to the way they work, to the materials they purchase, and so on. This can also be a serious challenge.

Have you had similar experiences? Have you found another approach that works well?

I took part in an interesting event organized by the European Chamber of Commerce in China, with the participation of 3 members of EY’s Fraud Investigation & Dispute Services department.

Are you worried about shady practices taking place inside your company, or in some of your suppliers’ factories? This article is for you.

Here are common ways fraudsters can get money out of a manufacturing operation:

• In the factory construction phase: using grade B concrete instead of grade A concrete, etc.;
• Diversion of business to a company owner by a decision maker;
• Inflated price of tooling, or investment for new tooling that is actually never made (old tooling still in use);
• Abusing the warranty and declaring products as defective (but keep using them, maybe in another facility);
• Inflating the costs of some materials purchased and then getting a kickback — in China this is a question of “how much”, nearly never of “whether this is the case”;
• Inflating the cost of the canteen (usually a cash-based opertation) and then getting a kickback.

Chances are, your supply chain includes several of these issues… The notes I took (coming from EY’s presentation) are reproduced below. I hope it’s useful.

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1. The three types of fraud, and a few examples

Asset misappropriation

• Inventory theft
• Cash theft
• Conflicts of interest – for example giving business to a supplier owned by a decision-maked in the company at a markup, or conversely selling at a discount to a related company

Corruption

• Bribery
• Kickbacks – a purchaser gets a supplier to give a kickback
• Illegal gratuities – pretty close to kickbacks
• Economic extortion – harming a vendor if they don’t accept to do what is listed above

Fraudulent statements

• Financial – recognizing certain transactions as revenue in order to hit revenue goals
• Non-financial

2. How to prevent fraud & bribery

Limit the opportunity to commit fraud

• Bidding process for vendor process — insist on it, even if the Customs of PSB officials recommend one vendor
• Limit access to information inside the company
• Job rotation

Identify the pressures some employees are feeling

• Whistleblower policy, and proper assurance that this process will protect the whistleblower — it is much better than seeing people go straight to the police
• Counselling – have an open door for discussing issues
• Making sure compensation and bonuses are perceived as fair

Make fraud an undesirable act

• Code of conduct
• Related terms in the employment contract

3. How to detect fraud & bribery

Look out for warning signs

• Sole suppliers
• Abnormally high prices paid to suppliers
• Long outstanding receivables
• Do regular stock counts and analyze discrepancies
• Visible change in the lifestyle of some employees

Get some data from your IT system

• Reports on amendments of base data
• Reports on deleted transactions
• Reports on credit notes
• Reports on user logons

4. What do do if you find something?

An in-depth investigation might not find hard evidence. And the process to do this legally and effectively may be quite heavy (notarizing the evidence, imaging the computer in order to keep the files unchanged, turning the computer to see some info in web-based QQ/Wechat accounts, etc.).

There are other ways to minimize fraud, such as rotating employees among different functions.

A friend working in Beijing wrote this a few days ago:

With less than 1 meter visibility, my dog was disappearing from the haze when I took it for a walk. It seems like I was only holding the leash in the air. Now I stay indoor all day long. Last month, the government issued a prevention and control guideline about reducing haze in the community; they suggest avoiding pan-frying or deep-frying during serious haze pollution. Does it really help??

It is a severe public health issue. Berkeley Earth, a non-profit climate research organization, estimates that air pollution in China causes the death of about 4,400 people per day in China.

By now it is pretty clear that air pollution is a serious concern for residents of Beijing, Shanghai, and many other Chinese cities. The central government is going after the main sources of haze — car exhaust, industrial emissions, construction dust, garbage incineration, etc.

One approach is the cap-and-trade program on carbon. It was introduced in 2013 in the form of a pilot program. I remember Shenzhen city, and Guangdong in general, was among the first to apply it.

There are now quotas (and market prices) for the amount of pollution that companies can emit. Companies can buy and sell the right to consume power and fossil fuels. This type of program was set up in Europe for a while. It is not a bad first step. But it won’t solve the problem by itself.

One serious issue is the unwillingness of local governments, who have an incentive to grow their industrial base, to enforce Beijing’s regulations.

Another issue is the lack of technical support for businesses that want to be more eco-friendly. Many things can be done to “go green” without heavy investments, but Chinese manufacturers just aren’t aware of them.

Some companies, naturally, are pursuing this trend as a business opportunity. For example, the world’s largest dust screening network will be built in Hebei this year, for a total length of 17 km and height of up to 23 meters.

And this is nothing new. A NHK documentary shot in 2010 described the “Green Business War” between Korean and Japanese companies on the Chinese market.

As always, Chinese factories will look for technologies that help them solve their issues. That can work great, but they tend to ignore all the little things they can do, by changing their processes and their habits, to reduce their environmental impact.

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If you are interested in the topic of air pollution, I’d suggest reading this white paper written by Collective Responsibility.

In a previous article (The Horrendous Safety Record of China’s Manufacturing Sector), I noted that safety-related audits were not really effective.

A more effective approach is to work with the manufacturers on a risk assessment approach.

I thought it would be nice to show an example related to a common operation, arc welding.

A risk assessment form might look like this:

(For those familiar with FMEA analyses, you will notice there are many parallels here.)

To understand this table, first you need to grasp the 2 dimensions of risk:

1. Severity of consequence(s)

• 1 = Insignificant (e.g. Eye hurt during slag removal)
• 2 = Minor (e.g. Welding fumes with Inhalation problem)
• 3 = Moderate (e.g. Extremely bright flash)
• 4 = Major (e.g. Contact with hot welded pieces)
• 5 = Catastrophic (e.g. Electrocution)

2. Likelihood of occurence

• A = Almost certain (e.g. Fire and electrical shock)
• B = Likely (e.g. Skin burn injury )
• C = Moderate (e.g. Radiation)
• D = Unlikely (e.g. Inhalation)
• E = Rare (e.g. Arc-eye and eye hurt by slag)

Who should conduct this assessment? Ideally, a group of people who know the process and have an understanding of safety risks. Not just one consultant or auditor on his own.

The best is to start from a process flow chart and from past data about safety issues… but also to walk on the shop floor and observe the process.

Once the main hazards are identified… it is time to work on improvements and then re-evaluate the risks (see the columns on the right of the table above).

If you own the factory, you probably have some leverage — for example, include safety among the KPIs that impact people’s pay, and provide eye-opening training sessions.

If you are trying to push your suppliers to improve, you have to find other ways. You can play with carrots and sticks too, and include a KPI about safety in your supplier management system.

You will also need to provide them with awareness training. Managers know about the severe accidents that happened recently in their factory, but only a small minority of safety issues are reported. There are probably very serious hazards in their operations but they never think about them.

You can’t expect a 200-people factory in China to follow ISO31000:2009 (risk management system). But they CAN make progress. And they need help…