February 2014

7 China Factory Audit Mistakes That Make You Look Inexperienced

Carrying out a China factory audit is an essential part of sourcing safely from China, but it can be easy to waste the opportunities they offer by making some common blunders. A factory visit, audit or inspection is your chance as a buyer to gain much deeper insight into a potential supplier, so it’s important not to waste it.

It’s quite likely you’ll be employing a third-party inspector to conduct a China factory audit for you, in which case this will be less applicable. If you are visiting the factory yourself though (which can often be very useful), watch out for these 7 common mistakes.

1. Taking Documents at Face Value

Documentation is a wonderful concept for backing up claims made by suppliers, but it tends to lead many buyers astray by creating a false sense of security.

“In today’s world where you can buy a competent color printer for less than $200, it’s hard to understand why investors place so much faith in bank statements, invoices, and contracts.”

— Muddy Waters Research

The bits of paper you are provided on a China factory audit are worthless on their own. To be meaningful, they need to be backed up with evidence and / or verification with the certifying authority. Official registration and validation documents can be verified.

For documentation of other data about the factory, ask questions to get at the data behind the documentation. Always probe deeper, and ask to be shown real evidence that can’t be put together with Photoshop and an inkjet.

2. Forgetting About the Warehouse

Many staff on a China factory audit focus all of their efforts on the production areas and the factory offices. This seems to make sense because that way you’re covering the all-important production process and the management and audit systems in place to ensure quality.

However, checking out a factory’s warehouse can also provide valuable insight. Looking at the warehouse has the following advantages:

  • The factory staff may not have expected you to go there, so there’s some chance you’ll get to see ‘real’ conditions.
  • The state of the warehouse can reveal a lot about the factory’s organization and process management.
  • You can often get a rough idea of what other orders and customers the factory currently has on its books.
  • You may be able to assess the volume of production based on what’s stored in the warehouse.
  • You get to see how your products and the materials for your order are treated before production and shipping.

Don’t be surprised if the tour of the premises that the factory staff have organized for you does not include their warehouse. That’s no reason not to go there, though; the factory should not offer resistance to legitimate requests from potential customers or their representatives.

3. Focusing on Quality Over Quantity

The obvious metric to be assessed on a China factory audit is quality. The processes are called QA, QC and QI, after all. However, it’s also important to confirm that a factory is really capable of the output volume it claims to have.

If the factory tells you they produce one million units a month, but you see during your visit that a unit comes off the production line only once a minute, you’ve just made the factory visit worthwhile.

4. Assuming You’re Actually at the Right Factory

Believe it or not, there’s quite a high possibility of being shown round a completely different factory to the one that will produce your order. A company might show you a different, better-looking factory that they own, or even use a factory that has nothing to do with them. Signage can easily be changed just for your visit (or they may assume that you can’t read Chinese signage anyway).

See this and this for examples of this practice in China.

This would of course make any assessment you make during the China factory audit totally irrelevant. In the article linked to above, Renaud Anjoran gives some good advice for protecting yourself against this kind of behavior:

  • Have someone who speaks Chinese arrive at the location beforehand and ask the (hopefully unassuming) security guard what company is there.
  • Compare names and logos from management at the site with what you have seen previously.
  • Get a background check done and assess if the company could really own the premises.

This is part of the wider point about taking things at face value and not applying a high enough level of skepticism to what you are shown. Asking yourself how you would fake what you are being shown can be a good starting point.

5. Spending Too Long Drinking Tea

If you haven’t made a China factory audit before, this may sound bizarre, but it’s a reference to the sort of thing that commonly occurs during such visits in China. Management staff may be very keen to spend social time with you, which often means drinking tea (or giving tea as a gift) and nearly always involves a meal at a restaurant.

The wider point is that many business people who come to China have heard about ‘guanxi‘ and believe that participating in all these activities is the most important part of their deal. It isn’t. You don’t need guanxi, you need a professional business relationship with clearly set out requirements and expectations from both sides.

6. Only Looking at What You’re Shown

We’ve alluded to this point throughout this article, because it’s worth repeating. There is very likely to be a plan for your China factory audit made by the factory’s staff, that will carefully steer you around the premises showing you what they can achieve with advanced notice and time to prepare. The same applies to documentation, samples, materials, staff, etc.

To really get value from your audit, you must go off this pre-planned course and try to find the weak spots and missing links in what the factory has prepared for you. This doesn’t mean that all staff should be rudely interrogated, but you too should have your own plan that doesn’t conform with that of the factory.

7. Spending All Day on the Road

And finally, a practical note about planning your China factory audit.

It can be easy to arrange accommodation and transport without being aware of just how vast China is. What seems close by name or on a map may actually be several hours drive from the factory. You should also be wary of addresses and claims from the factory that they are ‘in’ a particular location. They could still be very far away.

This is of course simply avoided by using maps more carefully, but be careful with Google Maps as it can be unreliable in China. Here are some useful China map options make sure you’re getting the right results.

What did we miss? What other common blunders should be avoided on a China factory audit?

See Also

(A previous version of this China Checkup article was published with permission in issue 6 of Hong Kong-based magazine "Jumpstart")

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