Walmart, Nike, Other Chains Struggle With Factory Inspection Fraud

Walmart (NYSE:WMT), Gap (NYSE:GPS) and other major chains are emphasizing that they are doing factory inspections to improve safety in the wake of a Bangladesh factory collapse in April that killed 1,129 workers. But now it turns out that many of the inspections are flawed, and inspectors are overworked and easily tricked, the New York Times reported on Monday (Sept. 2).

A Times investigation found that in many cases inspections are done for $1,000, using checklist inspection forms and inspectors who often cover one factory a day or more. Meanwhile, factory managers are given cheat sheets to handle questions like "Are there injury records?" (correct answer: "Have not heard of any work-related injuries") and equipment is moved around before scheduled inspections to hide overcrowded conditions.

Many inspections are outsourced to large multinational inspection companies, including SGS, Intertek and Bureau Veritas. An SGS representative defended a policy of not doing aggressive inspections, telling the Times, "You don't want to start the whole approach with a lack of trust, that they are trying to fool you, that they are behaving unethically. It can sour an entire relationship."

Some suppliers use an easy workaround when they have subcontracted to factories that can't pass inspections: They set up deals in which other factories that have passed inspection agree to put their names on shipments from substandard factories. The Times tracked a shipment of dog clothing sent to Walmart by Quaker Pet Group which used the inspection workaround. Walmart eventually received a tip and investigated. Quaker Pet Group no longer uses unauthorized subcontractors but remains a Walmart supplier.

Making the inspections more thorough would require replacing $1,000 one-day, check-box audits with $5,000 five-day inspections. But that would raise the cost for a retailer that uses 1,000 factories from $1 million to $5 million for annual inspections.

But retailers are trying. In one case, Nike (NYSE:NKE) took the unusual step of ordering its main Pakistani contractor, Silver Star, to consolidate production in one big factory and set up a system of elected worker representatives who would be charged with speaking up about safety, wage and other issues. "We've learned that monitoring alone isn't enough," said Nike spokesman Greg Rossiter.

For more:

- See this New York Times story

Related stories:

Walmart Lends $50 Million For Bangladesh Factory Safety Improvements
Uniqlo Joins Bangladesh Accord, But Workers From Collapsed Factory Still Aren't Getting Help
Bangladesh Factory Owners Aren't Held Accountable Because They Control The Law, Activists Say