May 29, 2018 Dealing with Unauthorized Subcontracting

Don’t let unauthorized subcontracting by manufacturers hurt the CSR progress your company has made.

by Sébastien Breteau, CEO, AsiaInspection

Shirts sewn by unpaid detainees of drug detention centers in Vietnam. Shoes made by a 13-year old Syrian refugee in Turkey. These are neither horror stories from the early days of globalization, nor even excerpts from the late 20th century sweatshop scandals – but a small sample of sourcing incidents made public in the past few years.

Over the past decade, brands and retailers have made great strides in ensuring safe and ethical working conditions among direct vendors and suppliers. However, indirect suppliers of components and raw materials tend to be under less scrutiny. While this is changing as more companies map out  supply chains, dangerous unauthorized subcontracting in order to meet consumer demands is a growing challenge brands are facing.

These subcontractors are formally not a part of the buyer’s supply chain and therefore not audited. These facilities are often unregistered, with conditions ranging from substandard to unsafe, abusive and illegal.

How can you prevent unauthorized subcontracting in your supply chain?

1. Due diligence
   Accurate data about the real state of your supply chain is imperative for any business that wants to make improvements or maintain compliance in their sourcing. To prevent unauthorized subcontracting, the due diligence process should encompass:
   • Human rights. To abide by the UN Guiding Principles on Business and Human Rights, brands must proactively and continuously identify, prevent and mitigate human rights risks and negative impacts in supply chains. Good due diligence requires a thorough understanding of every supplier tier and transparency of every production stage. Frequent visits to factories by compliance experts and professional social auditors help ensure continuous monitoring.
   • Production capacities. It is now industry standard for businesses to conduct production audits of suppliers’ facilities before hiring. While the data collected in such an audit shows the buyer whether the factory has the technology, know-how and quality management systems to meet standards, it also shows the factory’s realistic output. Armed with those numbers, a buyer can easily identify instances of subcontracting: if a factory with a maximum capacity of 10,000 pieces per day commits to deliver an order of 100,000 pieces in less than a week, subcontracting is almost a certainty.
   • Factory location. When a business partners with a professional 3rd party QC and compliance provider, they can correlate the data collected during product inspections and factory audits. Product inspectors serve as the buyer’s eyes on the ground: while checking quality, they record the GPS coordinates of the products’ physical location. These coordinates can be checked against the list of approved and audited suppliers to ensure the production and inspection took place at the correct factory.
2. Moving away from “comply or die”
   While the above checks are instrumental in providing accurate data on your supply chain, it is also important to avoid creating a hostile environment for your suppliers. During the early CSR efforts of many brands, manufacturers suffered harsh penalties for non-compliance, including loss of their buyer’s business. Unfortunately, this “compliance policing” only served to contribute to more skilled deception by many suppliers. True transparency is impossible without a degree of trust – and suppliers are much more likely to be open about production bottlenecks and the need for subcontracting if they know their buyer is willing to discuss these issues and cooperate towards solutions.
3. Sustainable business relationships
   Treating suppliers as easily replaceable may net you more favorable contract terms, but at the cost of potentially exacerbating supply chain issues, including unauthorized subcontracting. Buyers that build long-term partnerships with manufacturers send a clear message that they are willing to invest in them. Suppliers, in turn, are more willing to get on board with continuous improvement efforts.
4. Effective communication and collaborative planning
   While this may seem daunting, including the supplier at the production planning stage is one of the best ways to avoid the need for subcontracting and regulate any necessary outsourcing. A brand in an established relationship with their supplier can encourage the latter to share detailed dates of their production process and plan their sourcing accordingly.
5. Clear standards and supplier education
   Having a supplier code of conduct is an important first step towards more ethical and transparent supply chains but even if your suppliers formally agree with your requirements it’s important to ensure they fully understand them. In many cases, factory managers may be willing to improve conditions but are unaware of local laws dealing with such issues as minimum wage and paid leave. Supplier workshops are a great tool for two-way communication with your manufacturer, allowing you to present your standards and giving them the opportunity to ask any questions.

By implementing the above best practices and understanding the combination of micro and macro factors that lead to this dangerous practice, brands can work to building more ethical supply chains.

About the Author:
Sebastien Breteau is the founder and CEO of AsiaInspection, a quality control and compliance service provider that partners with brands, retailers and importers to secure and manage their global supply chain. He has more than 17 years of experience in supply chain management, founding his first sourcing company in 1997.

Founded in 2005, AsiaInspection has become a leading player in Asia and has expanded its operations globally to 20 offices, 2,300 employees and operating in 85 countries. AsiaInspection received the Best SME award from Christine Lagarde for the development of its proprietary quality control online platform.

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