The Dangers of Subcontracting in the Toy Industry: How to Handle Hidden Risks

Áine McCarthy, Assistant Manager, Marketing and Communications, ICTI Ethical Toy ProgramSubcontracting at the factory level can pose major risks for any company that manages a global toy supply chain. It hinders transparency, which makes it difficult to map and monitor the supply chain. This means there is a higher risk of non-compliances at subcontracted sites, and it is at hidden and subcontracted suppliers where many of the severe supply chain risks exist.ICTI Ethical Toy Program works with toy brands and retailers to tackle key risks in the supply chain and to drive continuous improvement at toy factories. We run a monthly webinar series tackling responsible sourcing issues in the toy industry. Recently, we covered the topic of subcontracting in the toy industry joined by a guest speaker from CCR CSR, the Centre for Child Rights and Corporate Social Responsibility. The webinar provided practical guidance and key insight from ICTI Ethical Toy Program and CCR CSR experts working on the ground to tackle this problem.ICTI Ethical Toy Program exists to promote ethical and sustainable working conditions for all toy industry workers at every tier of the supply chain. When unauthorized suppliers are involved in your supply chain, risk level can increase in a number of critical areas including the risk of product recalls, child labor, forced labor, and the use of unsafe and potentially hazardous materials. Hidden factories not only damage the reputation of brands and retailers, but they endanger workers and undermine the work of all the compliant factories that maintain ethical practices.Look for the hidden signsThe terms “subcontracting” and “hidden factory” are often used together, but their meanings differ. While official subcontracting is an acceptable practice where an audited factory may outsource to another audited factory to increase capacity during peak season, unofficial outsourcing to hidden factories is unregulated. Outsourcing to hidden factories is not acceptable within ICTI Ethical Toy Program. Hidden factories often present themselves as demo factory, which are presented at audit to fulfill certification requirements whilst the actual production takes place elsewhere in an uncertified facility.ICTI Ethical Toy Program accredited auditors are trained to spot the signs of this type of outsourcing. They look for inconsistencies with the machinery on site and the production record, as well as abnormal ratios between production capacity and the finished products. If such evidence is found during an audit, further investigation is required. Auditors will request permission to visit the subcontractor, but this visit will not be an audit. During the visit, the auditor will tour the second production site and perform simple checks on records in order to verify whether or not it is a potential hidden factory.Potential hidden factories need to meet a range of criteria in order to be identified as an unaffiliated factory and thereby not be factored into the scope of the original audit. Primarily, the site needs to be legally identifiable. Additionally, the second site must not share production facilities, dormitories, or canteens with the first audited factory. The two factories cannot be under common ownership, nor can they share any staff. The products produced must also be identified as sufficiently different from that of the first audited factory. If any of these criteria are not met, then the second site must be included in the audit scope and an audit must be conducted using ICTI Ethical Toy Program checklist and requirements. The first factory will be accountable for any non-compliances found at the second site. If the second site denies access to the audit team, then the first factory will face termination from ICTI Ethical Toy Program. Utilizing ICTI Ethical Toy Program's Connect PlatformICTI Ethical Toy Program has systems in place for auditors to conduct when they suspect improper conduct that includes an online responsible toy sourcing platform where users of Connect Platform (formerly known as ICPS) can monitor their suppliers. Users receive notifications of subcontractor violations as soon as they are discovered. The platform makes it possible to view the declared subcontractor processes of toy suppliers in one place. Toy manufacturers and retailers may sign up for this service by joining our membership.Unauthorized sub-contracting and fake factories are a real issue for the toy industry. This summer CCR CSR found three children between the ages of 13 and 15 working at an unauthorized, non-certified subcontracted toy factory in Guangdong. It is crucial that toy buyers do all they can avoid falling into the trap of unauthorized hidden factories.Before placing orders, we advise toy brands and retailers to verify the capacity of the supplier. They should look to see if the factory has the capacity to produce the order within the required time frame or if the factory has the necessary machines or production processes required. After an order is placed, we advise brands to look for suspicious documentation and production records and any abnormal situations, such as an unusual number of products suddenly appearing in the warehouse, which can be signs of unauthorized subcontracting taking place.With ICTI Ethical Toy Program, toy companies can increase transparency and reduce the risk of unauthorized subcontracting in their supply chains. Get started today by becoming our member. This article first appeared in The Toy Book February 2017