In defense of third party inspection companies

Third-party quality control (3PQC, or 3PQA) has gotten a bad name in some circles. It might be deserved in part. But I feel there is a lot of misunderstanding. I am going to explain the basics of our job, so that non-experts can make their opinion.

What are 3PQC firms blamed for?

Yesterday the SRI blog posted a guest article entitled Third Party Contracts. It focuses on some aspects of Chinese law, but here
are the sentences about inspection companies:

The contracts and disclaimers from sourcing agents, 3PQA or Testing Labs are so explicit in what they exclude that you can question if you’re actually paying for anything at all.

So, who is to blame when things go wrong? What happens when […] a line of products that were inspected results in a massive recall?

And I read, in an earlier post on the same blog, another interesting comment about third-party inspectors. Many of them would be “day-wage hirelings that will just visit the factory to check the job off their list”

There is a part of truth in these accusations. But I don’t think they are fair. Let’s analyze the situation for 5 minutes.

First, what is a third party in international trade?

A supplier (the first party) sells goods to an importer (the second party). But many support activities are performed by other companies. For example, the buyer usually doesn’t pay in cash, so payments go through third parties called banks.

Sometimes the buyer is not sure the products will be up to his specifications and quality standard, and he has no staff on the ground to check it, so he needs an independent inspection company. That’s another third party.

Without third party service providers, international trade would only be possible between a few large companies.

Third party inspection agencies are hardly responsible for the factory’s job

The terms and conditions of 3PQCs always place a limit on their liability, and it has no relationship with the cost of inspected goods. Why?

An importer wants to receive good products in the right quantity and at the right time. He would be ready to pay some fees to a firm that would guarantee it to him. What would it take a 3PQC firm to do that?

1. Find and select factories, or at least eliminate some candidates.
2. Check if every specification can be respected in bulk production. It means doing tests in the actual workshop under real conditions. For many categories, a technician with deep product experience would be required.
3. Check the materials to be used in production.
4. Make sure that 100% of the goods are made in the approved factory.
5. Do a pre-shipment inspection on a randomly-drawn sample. And again if the goods were not acceptable and are reworked.
6. Supervise the loading of the goods, and then the unloading if possible.

If a company really does all that, it can (relatively) safely promise that good products will be shipped out. But what kind of business is it in? I call it a contract manufacturer, or a sourcing project management firm. In any case, it is a kind of trading company (but transparent about the factories used, and very engaged and responsible in its job) that will buy and sell the goods. Not a third party!

The fact is, the quality of the goods is tied with many factors that cannot be controlled by an inspection firm:

• The supplier has to behave honestly (use the audited factory, buy acceptable components…).
• The buyer’s requirements have to be in line with what the factory can deliver on a large scale.
• The factory’s quality system and workmanship precision have to be up to a certain standard.
• Even after a final inspection, a factory can switch a few cartons, or take half the pieces out, etc.

So, how can a 3PQC firm guarantee good quality, if so many other factors are not under its control? Actually, there is a way.

Yes, quality control firms can guarantee the quality 

There is a way to do it, and it comes at the very end of production:

1. Inspecting 100% of the pieces of a shipment,
2. Putting aside defective goods, waiting for the factory to repair them, and re-checking them,
3. Packing everything, and then overseeing the shipment.

In this case, the only guarantee is that the goods are acceptable if the report says so. Sometimes the whole batch is not conform, and sometimes half the pieces have defects: the inspection firm will only guarantee that some of them are good.

But there are three problems. 

• The high number of days of work might be prohibitively expensive. 
  
• The buyer does not necessarily get all the good products he needs (and the rest, if not accepted, will be sold by the supplier to someone else).
• If no action is taken when the goods are in process, quality issues might not be noticed by the supplier and might ruin an entire shipment.

To sum up, I would say that quality approvals are better kept totally separate from the core sourcing activities (selecting suppliers, negotiating prices, assigning penalties for delays, etc.). For two reasons.

• First, Asian suppliers often use the buyer’s quality requirements as reasons for increasing prices… Even once production has been launched. Having an independent agency enforce previously-agreed-on specifications can be convenient.
• Second, if you pay a service provider to select a factory and then to validate its product quality, what’s to prevent it from asking for 5% of the orders amount? It will be in a perfect position for that, with total control over the situation.

What exactly is the job of an inspection company?

Without going into the details, an inspector generally checks some random products for conformity with the buyer’s specifications. Checking all the pieces of a shipment would often be long and expensive, so 99% of inspections are carried out on a sample. The size of the sample is determined by following industry-specific statistical rules.

At the end of each inspection, a report is issued. It lists all the inspector’s findings. If there are serious discrepancies with the buyer’s requirements, it is failed. Then the importer can take his own decision, based on the report information.

The fees are based on the amount of work, nothing else. The job is getting information by following a standard procedure, not making decisions. There is no incentive to hide any piece of information.

In contrast, how does a trading company deal with quality issues?

Trading companies are responsible for everything, since they are the supplier. Do they check quality? Some of them do. Do they tell the buyer about quality issues? Probably less than 10% of the time. That’s the key problem. Precisely because they selected the factory, and they have to sell the stuff.

What would happen if a trader told his buyer the goods have quality issues? The buyer would ask for more information, and might appoint a 3PQC to check the situation. In any case, the trader is held responsible and might have to offer a discount. A trading company also wants to ship early (to get paid faster), instead of waiting for the factory to re-work the products. That’s a conflict of interest.

Once again, the decisions regarding product quality have to be kept separate from the sourcing job. With a trading company, the
incentives are just not right. I know that a few traders take a long-term view and are reliable, but in China we are talking about maybe 5% of them.

Now, to respond to the accusations

Can a 3PQC firm be held responsible for the quality of the goods? No, except if they check 100% of the goods in a warehouse, and very few buyers are willing to pay for that! They are only information collectors, which ensures that they remain independent.

What to do if massive quality problems are discovered by the importer in his country? Use common sense. As I wrote above, the inspector has to follow a standard procedure. Was it the case, from the report? Is it possible that the supplier has purposefully hidden some issues during inspection? Were there remarks about this type of risk in the inspection report? What does the 3PQC say about it?

An example: I remember a final inspection where the factory only presented a few pieces to us, and the client told us to proceed with inspection. The few pieces they gave us were acceptable, but we wrote that our findings were unreliable in the report (in red on the second page). The buyer was in a hurry and agreed to ship. But the goods were rejected by the retailer.

Are 3PQCs just “day-wage hirelings” who don’t care about the big picture? Yes! And it’s better this way. No unhealthy incentives, less risks.

Of course, small inspection firms often provide some services for free to their good clients, and try to make the whole sourcing experience more pleasant. But the incentive system of our industry is the most appropriate when it comes to approving quality.