Supplier audits remain essential

AsiaInspection (AI), a global provider of quality control services for businesses importing from the Pacific Rim, maintains that logistics managers should pay more attention to risk—irrespective of region.

The report surfaced just after Apple’s Far East supply chain came under increased pressure due to an incident involving the mishandling of liquid nitrogen at one of its dynamic random-access memory (DRAM) chip suppliers. The event could not have come at a worse time because the production of iPhone handsets was just ramping up.

Mishandling liquid nitrogen can present a number of serious hazards, ranging from suffocation to severe burns from its super-cooled gas. However, it’s just one of many risks that can be mitigated with thorough audits, say AI analysts.

The Hong Kong-based consultancy has just released its “2017 Q3 Barometer,” a quarterly synopsis on outsourced manufacturing and quality control measures, indicating that supply chain transparency is far from adequate nearly everywhere in the Pacific Rim’s emerging markets matrix.

“Major differentiating factors between emerging nations can be the reliability of the infrastructure, safety and political stability, all of which can result in unpredictable delays and factory shut downs,” says Sebastien Breteau, AI’s founder and CEO.

Halfway through 2017, AI’s onsite inspection and supplier audit statistics paint a picture of the ongoing struggle between old-school sourcing giants and their up-and-coming competition.

By contrast, in South Asia—where countries continue to see reduced economic growth in 2017—inspection and audit demand remained more sluggish, with the exception of Pakistan, which achieved 6.6% year-over-year growth this quarter after a rough start last winter.According to AI, China is still keeping ahead of its projected economic growth of 6.5% in 2017, with inspections and audit volumes rising by more than 15% compared to this time last year. Its competitors in Southeast Asia are not far behind. Indeed, inspection demand in Vietnam and Cambodia in the second quarter of 2017 rose by 10.4% and 25.4% respectively, in line with recent projections for the region’s robust economic growth in the medium term.

“From the data our auditors collect on the ground every day over the course of thousands of audits, it’s obvious that significant progress of ethical compliance in global supply chains is still uneven and won’t happen overnight,” observes Breteau. “It’s a long-term game of incremental improvement.”

Breteau adds that regular onsite follow-ups and close supervision are required if real lasting impact on working conditions in factories is the goal.

However, AI data from the second quarter of 2017 shows that manufacturers must remain vigilant regarding ethical compliance across many industries and sourcing destinations.

During the past quarter, up to 32.5% of factories were scored “red” for critical non-compliance (vs. an average of 27% in 2016). The percentage of fully compliant “green” factories dropped several percentage points to 27.5%, while 40% of factories received an “amber” ranking, indicating that they still required improvement.

It’s also interesting to learn that regional disparity of ethical scores was less pronounced this quarter. In China, factories appear to be on a downward trend, as average ethical scores decreased by 3.8% in 2017 year-to-date compared to 2016, to an average of 7.6.

Apple comes out shining in a separate AI study that posits the rhetorical question: Are supply chains truly ready to go beyond audits?

Here, researchers note that Apple uncovered bonded labor in their supply chain during 2016, with subcontractors among the main offenders. First-tier suppliers are also sometimes guilty of labor violations, but Apple reports that virtually all serious violations occur during a first assessment, and repeat violations are very rare. The company paid a total of $2.6 million to over 1,000 supplier employees to cover cases of bonded labor.

Apple’s example shows that even after working toward sustainability for years, brands can still find themselves lacking accurate supply chain information. Despite cutting-edge technologies available to brands today, “boots on the ground” often remains the only way to investigate and map the reality of complex, multi-tiered structures that represent today’s global supply chains.