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Is there a Relationship between Factory Audits and Better Quality Products? [Real Data Analysis]

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Prof. Neale O’Connor, a China business and accounting expert and international keynote speaker, recently analyzed some of our own factory audit data and other third-party data about customer complaints and came up with some really interesting findings that will help you to source better suppliers in Asia, specifically ones who are going to provide you with better quality products and/or be less likely to scam you.

Is there a Relationship between Factory Audits and Better Quality Products? [Real Data Analysis]

If you’re wondering if performing factory audits has a tangible relationship with receiving better-quality products, keep reading for the answer..!

 

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🎧 Factory Audits = Better Suppliers = Better Quality Products. Real Data Analysis!

 

Why Neale examined hundreds of our factory audits performed pre-covid to find the main patterns.

He analysed the data from hundreds of Sofeast factory audits before covid to determine whether a more successful factory audit resulted in a better product audit later (in theory we felt that it does, but does the data confirm this?). The ratio of companies that did product inspections were far higher than those that did a factory audit, too. Buyers don’t necessarily perform as many factory audits which are usually done at the start of the relationship to assess the supplier’s capabilities, structure, quality system, etc, as a one-off job (and isn’t usually repeated, unlike product inspections, hence the difference in numbers performed). (02:10)

 

Why product inspections are different to factory audits.

In inspections we only look at the products themselves, examining the percentage of defective units in the sample compared with AQL limits. Also, do the products and packaging meet the specification sheet requirements? If not, this is also a defect/failure. But factory audits focus on general organization, working environment, maintenance of production, quality system overview, etc, and produce a score out of 100. (06:05)

 

What does the data say about the incidents of pass/fail/hold in product inspections?

After the product inspection, the result will be pass/fail/hold. Out of 368 inspections mainly in China, the overall pass rate was around 3%, 60% were held pending the buyer’s decision, and 38% failed. This is fairly typical for South and East Asia. The customer needs to be aware of the tolerance limits set as the decision to fail is connected tightly to this. (08:47)

 

What did the data tell us about factory audits?

Out of the same number of factory audits matched with the product inspections discussed before, mostly in China, the scores ranged from <35/100 to 90/100 with the mean being about 69, so any factory scoring lower could be considered below par. So, with this in mind, did factories that performed better with a score of 69+ in their factory audit also have more likelihood of a good product inspection outcome, too?

For factories with a factory audit result of 69+, he found that 30% failed a subsequent product inspection, but interestingly, for factories that scored lower in the factory audit, 47% failed the product inspection. Similarly, good factory grades only had 8% major defects, while poorer ones had 22%, and for minor defects, good factories has 17% while poorer ones has 34% over tolerance.

This would suggest that spending money on factory audits is a worthwhile expenditure if you’re able to select manufacturers who will statistically provide better quality products from their results. (14:11)

 

Is it possible to reduce the number of factory audits you need to do if you only plan to work with one supplier?

They looked at the data to indicate if there would be a way to reduce the number of factory audits that would need to be done to find a reliable supplier. To be clear, this would mean that instead of doing three audits on three potential suppliers, would there be a way to identify a candidate likely to have a high factory audit score beforehand?

The key factor connecting suppliers to good factory audit scores was if they already had a major relationship with an export customer in Europe or the USA. So sourcing a supplier like this is directly related to them having a good audit score and subsequently providing good quality products. (19:21)

 

What does the data tell us about complex products?

The relationship between good factory audit scores and positive product inspection outcomes is weaker when complex products (like some electronics, medical devices, industrial products, etc) are being produced. This may be because more things can go wrong during assembly that wouldn’t be picked up by the initial factory audit, or it could be that for these types of products the buyer has stricter requirements that result in a greater likelihood of failed inspections. (21:23)

 

Key takeaways from the Sofeast data analysis.

There are 2 pieces of data that can help the buyer foresee the quality of production:

  1. The overall score in the factory audit (a better-organized factory with proper quality systems will tend to produce better products).
  2. Whether that factory is already working for customers from developed markets (such as most Western countries). (23:47)

 

Is there anything we can do to avoid being scammed by Asian suppliers?

If defects are found in products it’s not ideal, but at least they can be dealt with before products are shipped. A scam would be where trash or the wrong thing is shipped to you after you’ve paid for the shipment.

Neale gained access to over 3,000 complaints by buyers with suppliers all over Asia from Global Sources data and examined it to find out if there was a relationship between steps that a buyer could take when sourcing suppliers and a reduction in the risk of being scammed. Out of the complaints, the most severe are scams where the supplier takes payment and ships nothing. Lower-severity issues are where the buyer received poor-quality products or the shipment was delayed.

He found that there are 4 factors that reduce the severity of a scam:

  1. The buyer verifies the supplier’s business (background check, etc)
  2. The buyer has a contract with the supplier
  3. The buyer visits the factory beforehand (use a third party like Sofeast if you are unable to travel there, such as in China a lot of the time)
  4. If the buyer uses FOB incoterms (leaving arranging the freight forwarding to the supplier allows them a lot of leeway to play tricks if they’re so inclined)

This shows that the onus on protecting yourself when dealing with Asian suppliers is on you, the buyer, as they will quickly identify inexperienced buyers who may be easier to scam. (24:48)

 

P.S. Related content to sourcing the right supplier…