Many foreign investors diversifying their supply chains are choosing Vietnam to manufacture and export their products. However, these supply chain shifts can bring new challenges to a business, including labor problems, poor factory conditions, and product quality issues.
This is especially true for brands that manufacture in Vietnam and export their products using unreliable suppliers or factories. It is imperative for businesses to evaluate suppliers to prevent any supply chain issues that may affect business as usual.
With a significant amount of manufacturing and supply chains shifting to Vietnam, it is easy to get caught in an oversight that results in significant losses. This is particularly true for countries like Vietnam, where laws are still catching up with the mature supply chains of the United States and Europe.
Many auditors do not have a physical presence in Vietnam and hire third parties that subcontract audits. This can impact the quality of the audit, particularly when local auditors are not familiar with best international practices or when foreign companies are not familiar with common local business practices.
When Auditors Let Down Manufacturers
Between 2001 and 2010, Nike contracted with Korean factory operator Hansae Co Ltd, which operated several factories in Vietnam. The Korean firm sent 93% of its goods to the United States from its factories in China, Guatemala, Indonesia, Nicaragua, Saipan, and Vietnam.
The Fair Labor Association (FLA) was granted access to Hansae’s factory making Nike goods in June 2016. The FLA and the Workers Right Consortium were allowed a second access in October 2016, following pressure from U.S. consumers on allegations of poor factory conditions such as labor abuse as well as health and safety violations in Vietnam.
The audits discovered several issues, including unsafe working conditions, forced overtime, verbal abuse, and health and safety issues—this despite Nike conducting audits at Hansae’s factory premises. The reason Nike failed the audits was because it had used third-party auditors for its internal factory audits without thoroughly checking on whether reports were factual or inaccurate.
In July 2019, a French court charged Samsung with making false claims on respecting worker rights at its Asian factories, including Vietnam. Samsung has been accused of exposing workers to chemicals and forcing workers to work overtime.
The French court is expected to launch a full investigation to acquire documents, including a recent report of labor abuse at Samsung’s two factories in northern Vietnam—this despite audits by third parties as well as the country’s labor ministry.
Factory Audits Help Mitigate Supply Chain Issues
Foreign investors looking to manufacture in Vietnam should carry out a thorough audit of their suppliers to ensure their network is protected from risks and quality issues.
A factory audit typically takes place after a group of potential suppliers has been screened to make way for the final few candidates. This audit is usually the last step in a sourcing process and is used to verify where goods are actually made as well as factory production capacity and capability.
Factory audits are onsite inspections that can be done by the potential investor or a third party at a factory. Beyond this, however, there is significant variance in what a factory audit covers and how businesses can approach the process.
The most common types of audits are social compliance audits, quality system audits, goods manufacturing audits, and environmental audits. In addition to these, there are several sub-audits, such as the SA8000 and the SMETA audits, which are a form of social compliance audits.
Investors can use several other types of factory audits, such as quality control audits, security audits, and the Customs Trade Partnership Against Terrorism (C-TPAT) audit to verify their suppliers depending on their requirements. Some security audits such as C-TPAT, the Transported Asset Protection Association (TAPA), and ISO 28000 are even required by some brands for import to countries like the United States and U.K.
While conducting a factory audit is a good practice before selecting a supplier, businesses should also conduct regular audits on their suppliers to help limit the potential for supply chain problems and improve productivity. This will also help ensure compliance with local laws and regulations.
The sourcing process can be a long one. However, due diligence on sourcing partners will ensure investors are able to improve their planning and limit the potential for risk. Businesses should seek to identify independent advisors with an in-country presence to audit suppliers in Vietnam.
This article was first published by Vietnam Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.
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