Using Foreign Manufacturers? Here’s How To Reduce Your Risks
Australia’s skills shortage and high manufacturing costs mean importing products and parts from overseas can make good business sense.
This article is your risk management update on sourcing from foreign manufacturers.
Risks of imported products/components
Using overseas manufacturers to source parts and products raises these issues:
Poor product safety. This can result in costly recalls for your business
Low product quality. Where the manufacturer cuts corners or uses substitutes to source their raw materials to make your items
Intellectual property. A manufacturer uses your product design to make and sell the products themselves
Decreasing value of the Australian dollar and higher interest rates – these are believed to have led to a 12% drop in capital goods imported in August compared with July
Insurance. Overseas manufacturers are unlikely to have a certificate of insurance to cover Australia, and if they do, it won’t have adequate limits, which thwarts your legal options. (The importer or Australian-based manufacturer may be liable to the injured person in the first instance, then be left with the bill to recover from the overseas manufacturer which can be very costly.)
Global risks. If you rely on an overseas manufacturer/supply, you are more vulnerable to a wider range of issues (geopolitical tensions, natural disasters, unreliable energy, epidemics, etc) that could disrupt the supply chain than if you used a domestic one.
If there’s any issue with the overseas-made product, you must manage it yourself. Your aggrieved customers will claim against you, not the manufacturer.
Implementing quality control
Boosting quality control could mean using a third-party product inspection company or, with caution, relying on the manufacturer’s home country’s regulations. For example, about half of China’s food and drug products exported don’t meet that country’s robust export rules. Here’s what you can do:
Check the supplier has their country’s licence to make and export the product/parts for you
Verify those items passed that country’s government’s export inspection (be sure to double check what your supplier claims)
Source samples of products to check their quality before you sign a deal
Follow up on any problems you may have with a manufacturer – know your limits so you replace problem manufacturers early,
Keep detailed records of issues
Get your contract right – see below in the checklist.
Conduct a product liability audit
At least annually, self-audit your company’s processes and policies with product liability in mind. Document your due diligence on would-be suppliers, checking their ownership, manufacturing capabilities, finances, lawsuits, and third-party testimonials. Schedule regular rechecks of your suppliers and maintain records.
As for contracts, as well as using the checklist below, engage a lawyer with expertise in overseas suppliers to review the wording. Ask them to check the contract is legally binding for suppliers and complies with relevant laws and regulations. Gain insights into customs and quarantine rules for imports to Australia, too.
Get your marketing and labelling spot on. Check your marketing claims for accuracy, including the product’s country of origin. Fully disclose risks in using the product.
And do another self-audit when you sign up a new supplier or launch a new product.
Your importer checklist
As an importer, ensure the following are part of your product liability risk management:
Vet your overseas supplier(s) by visiting their plant on-site and sourcing references (Alibaba can recommend Chinese manufacturers/suppliers, for example), ensuring they meet your minimum ethical standards
Seek legal advice about contracts, patents, and intellectual property for the manufacturer’s country
Use only written contracts to protect you for indemnity, intellectual property, dispute arbitration, etc, particularly for contract non-compliance, and costs involved in recalling unsafe or defective products.
Set down clear details for quality, specifications, minimum orders, exclusivity to ensure quality and compliance with Australian laws and regulations
Investigate and negotiate insurance cover from the manufacturer with a reputable insurer, that has appropriate limits and indemnity terms
Conduct another on-site check of the supplier’s facility before you sign your deal and verify set-up and unit costs as well as cost per unit
Ensure the manufacturer notifies you early and seeks approval to change materials, specifications, production processes, and subcontractors
Have a trustworthy third party inspect samples of the products on site and audit for quality and safety, and repeats these checks at the ports of entry before you distribute the products, if practicable
Keep tabs on international currency fluctuations and talk to your bank to get the best rates on international transactions
Monitor products you’ve sold by tracking customer trends and complaints
Create a robust product recall and crisis communications plan to protect your brand.
Your next step
Importing can be a complex yet cost-effective move that suits your business. Be aware that Australian laws hold importers of products that are defective or unsafe ultimately responsible. That’s where product liability insurance can help protect your business. Talk to us to check your policy covers all your product lines.