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Factory Audit Selection Tips

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Let’s discuss factory audit selection, covering the ins and outs of different audits and how to select the best one for your needs.

You’ll learn about initial factory evaluations, quality system audits, social compliance audits, and environmental system audits; including what each audit entails, why they are important, and how to choose the most appropriate audit for your situation.

Whether you are sourcing a new supplier or ensuring compliance with existing partners, there will be tips to help you make informed decisions and manage risks effectively.

 

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What are factory audits?

Simply, an auditor goes to a production facility to check on certain things and reports back to you.

The focus can be on whether the supplier has the proper quality systems, whether they do a good job with social compliance, or their R&D and NPI capabilities, process engineering for bringing a new product into production with low risk, environmental impact, etc. The auditor has a checklist and they are trying to evaluate how far the factory is from being great, having very mature systems and processes, etc. However, they can be done very differently by different auditing companies. So you need to know how the auditor is going to approach that topic. (03:14 )

 

Approaches to Environmental Audits.

For example, for an Environmental Audit, they might check emissions to the ground, air, and water. There’s a standard for how to set up a good management system for the environment (ISO 14001) and their checklist can follow it quite rigidly as a (mostly) document-based audit. The auditor can check on points such as:

  • Compliance requirements that apply to this facility with regard to the environment
  • Environmental aspects of the facility and what the impacts are on the environment.
  • How impacts are measured.
  • Environmental objectives.

The goal is to ascertain if this factory is a relatively good steward of the environment and will not be shut down for infractions, therefore being a supply chain risk.

One drawback is that some auditors don’t need to understand the industry to produce a report and may not have any technical understanding, as they’re merely following a checklist and “making it up as they go”. Ideally, you will get an auditor who can go into a facility and use their industry experience to see if they’re good or are very high risk starting from the tangible evidence of looking at the manufacturing processes, the waste, etc. (05:30)

 

When are factory audits commonly done?

SMEs go through the factory audit selection process in particular during the new supplier sourcing process. However, audits aren’t usually the first step. Generally, we suggest making a shortlist of promising suppliers and doing some background checks, such as legal records checks which will show you the capital invested, and the authorised scope of the company, product types they’ve made, IP like patents and trademarks, court cases, etc. Any red flags and the supplier may have to be disregarded.

Then you may choose to do a relatively simple kind of audit on the remaining suppliers on your shortlist. Depending on your priorities, that audit would commonly focus on the quality side, checking if they have the systems in place to do a good job assuming it’s a product they already make or very similar to those they already make. (11:21)

 

Social compliance audits for companies concerned about their image.

If businesses are worried that a supplier could be a risk to their image and want to cover themselves, they may do social compliance audits. This is more common for brands and retailers.

Usually, auditors will look for issues like child and slave labor, forced labor, overtime, basic compliance with the law (minimum wage being paid, days of rest provided, etc). Sometimes environmental topics like the potential pollution of the soil, air, and water, or the supplier being a large consumer of electricity or water, also come into this kind of audit. Brands want to distance themselves from social and environmental problems that will give them bad press, so these are popular audits. (16:06)

 

Initial Factory Evaluation vs. Quality System Audit

At my company Sofeast we provide these core audits (among others) and we’ll focus on the difference between an Initial Factory Evaluation and Quality System Audit here:

  1. Initial factory evaluation (IFE) – a relatively simple and inexpensive look at a factory during sourcing, checking systems, processes, etc, and giving a snapshot.
  2. Quality system audit (QSA) – more in-depth than the IFE, focus on the factory’s ability to produce to your standards and if they have the capacity to handle your orders.
  3. Environmental system audit
  4. Social compliance audit

Large suppliers might be capable, but they’re unlikely to be as flexible or care about your order as much as a smaller factory, so importers need to select carefully. For SMEs, an IFE may be enough for small-ish suppliers as you don’t want to scare them away with an extremely detailed QSA. (21:32)

 

Dealing with Factories that Restrict Access

This can be an issue when the factory believes they have some kind of ‘secret sauce’ in their manufacturing processes and don’t want to risk auditors leaking photos or videos of it. It may be that they can be persuaded to accept an audit where no photos or videos are taken (although this is less helpful for the customer), or we can negotiate to take footage only in non-sensitive areas.

During Covid, many Chinese factories wouldn’t allow outsiders to enter. In these cases, we provided remote audits / E-audits based on a quick tour of the factory done by phone and then scrutinisation of documents. This is still an audit option if factories won’t allow access, but it is not as good as an on-site audit as certain suppliers could ‘hide’ things they don’t want us to see more easily. (27:38)

 

Factory audits as part of the new product development toolkit

For audits on suppliers, you will no doubt want to know what the main risks are — quality (can they do a good job) and social compliance + environmental.

But if you need the supplier to work on a new kind of product relatively different from anything they’ve done before, then you need to check if there are systems and processes for the development and industrialization of a new product. This involves checking the quality system, R&D capabilities, and if they have some validations and milestones or will just try and go into production ASAP.

But, when you develop a new product, factory audits alone are not sufficient.

Once you’ve selected the supplier, you still need to accompany them through the process and at least have oversight if a lot is delegated to them (such as DFM, creating quality checklists, fabricating tooling, etc). If you do not approve each milestone, you are not in control and the risks of bad outcomes increase.

Basically, they should be following a structured NPI process with you checking each stage and agreeing that prototypes are now validated, that the pilot run is acceptable, etc, before finally allowing them to go into mass production. A successful factory audit alone in this case will not reduce the many risks associated with not following such an NPI process. (30:08)

 

Factory Audit Selection: Summary.

When you’re planning to work with a new supplier, you should evaluate the risks. You should do due diligence not just on on-site facilities. In the simplest of cases, you need to buy one of their existing products and check it comes up to your standards if you have relatively low quality requirements. When it comes to factory audit selection, an IFE audit to give a supplier snapshot will be helpful along with a legal records check.

At the other end of the spectrum, if you have an innovative product which the factory has never made before or you’re in a regulated industry, like medical, aerospace, mining, etc, you will need to select a more thorough factory audit, and be a lot more hands-on with them when they start working. (35:08)

 

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