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Factory Audit in China ĘC What You Need to Know

Looking for a new factory to work with in China can be daunting.  With price pressures on the rise, and labor throughout China unstable, more and more China-based manufacturers are closing shop everyday.
For these reasons I think it’s an opportune time to review the key aspects and goals of performing a factory audit in China, either in regard to current suppliers that are under-performing, or as you are identifying new potential suppliers.

1. Pre-Audit (Supplier Identification):
Prior to a factory audit you will most likely be going through the process of supplier identification.  This process can include several aspects, including contacting with factories by phone/email, having factories complete self questionnaires, and reviewing samples that have been manufactured by a factory and sent to you.  It is a good idea to have any data you have collected during this pre-audit process organized and available during the time of the audit.

2. Audit Objectives:
Make sure you know exactly what your objectives are before starting the audit.  In general, the objectives of any supplier identification process (which often includes factory audit) are to identify a suitable manufacturing partner in China.  If there are additional objectives based on your particular action plan ensure they are documented and well understood by your team or 3rd party auditors.
A: What is a “suitable manufacturing partner”?
There are a lot of mega-size and relatively professional factories in China these days.  Keep in mind that just because a factory has the most modern facilities and staff that speak great English doesn’t mean that they are the right fit for you.  The key to finding a suitable manufacturing partner is identifying people who you feel comfortable with, and whose facility is a good fit for your needs.

3. Key Parts of the Audit:
A: Management Interview - Any factory audit in China should include a chance for you and/or your company’s representatives to sit down face to face with the factory management.  Not only will this allow you to collect data in regard to the below mentioned more technical requirements of the audit, but it will allow both you and the factory to introduce each others businesses at the highest level, and “feel” each other out.
B: Technical Review - This is the “guts” of the audit, where most of the factory data is collected.  It’s important that you have a well organized reporting format so that the data you get stays organized, and is presentable within your organization.  Below I will take you through some of the key areas of the technical review:
i. Business Registration, Ownership and Organizational Structure - In this section you should identify the ownership breakdown of the organization, ensure business and manufacturing licenses held are current and appropriate and identify current and previous customers and countries of export.  It’s also benificial to note the factory’s approximate sales volumes for the past and current year (both domestic sales and export sales).  You may also want to review and/or photocopy the organizational chart of the factory.
ii. Office Departments and Admin – Take note of the office staff present at the factory.  Determine if the location you are visiting is simply a manufacturing location, or also includes some administrative/management function.  Review the logistical capabilities with factory management, and review the appropiate paperwork.
iii. Infrastructure, Facilities, Cleanliness and Security - Inquire about power outages at the facility and check for documentation.  Check to see if the factory has its own power generation capabilities, and if so, at what level.  Note the general infrastructure of the buildings and equipment, and also the surrounding infrastructure such as roads, ports and the local community.  In regard to security, check the security guard areas and records.  If required, check for other security measures such as video and automatic alarm systems.
iv. Production, Equipment and Capacity – This section can be completed is high detail (measuring the output and capacity of each manufacturing step), as a general overview, or anywhere in between.  The level of detail gathered should be sufficient for you to make future decisions about working with this factory.  It’s key that when you’re evaluating capacity you are doing it in regard to the item that you are expecting to produce.  In this section you should also take note of the factory’s production record keeping and organization.
v. Quality Control, Testing, and Product Standards Awareness – Check for clear separation between QC and production departments and documentation to support it.  Check records and documentation in regard to IQC, IPQC, and FQC.  Evaluate the factory’s own testing facilities with regard to your product category.  Determine if the factory is knowledgeable and confident in regard to the product and safety standards of your country.
vi. Environmental controls and Impact - This is another section which can either be completed as a basic overview, or with detailed gathering and analysis of data.  There are various 3rd party agencies that specialize in such audits.  Points to note include: equipment energy efficiency, building energy efficiency, disposal of waste and waste water, air pollution and knowledge local environmental standards and adherence to them.
vii. Material Supply Chain – Take note of the main material suppliers for this factory.  Evaluate the factory’s ability to deal with change in their supply chain.  Check for documented systems for evaluating suppliers on a regular basis.
viii. Supplementary Sections – Keep a section of your audit free for questions and issues that may be specific to your business or project.
C. Other Points to Note – In addition to the above sections which should be covered in any factory audit, here are some other factors to keep in mind in regard to the supplier evaluation and audit process:
i. Social Compliance – Working with a socially compliant factory is just as (if not more than) important as working with one that can support your manufacturing needs.  Social compliance audits should be part of your supplier selection process.  These audits are best kept separate from your standard factory audit.
ii. Factory Acknowledgment of the Audit – It’s important that upon completion of the audit the factory is provided an opportunity to include their own comments for inclusion in the audit report.  A factory representative should also sign off acknowledging the findings of the audit.
iii. Grading – If your audit report provides a grading system, make sure you understand exactly how grades are calculated and how they can be applied to your analysis.
iv. Photos - Ensure the entire audit is photo documented every step of the way, from photographing of example records kept by the factory, to photos of the manufacturing areas and production (with factory approval of course).
That basically lays out the important parts of performing a factory audit in China.  When evaluating a facility in China it’s important to keep in mind your needs and exactly how you intend to work with the facility in the future.  As mentioned above, the biggest and best factories are not always the ones that are a good fit for your operations.

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