Supplier verification and qualification and ensuring product quality from startup to volume production Vietnam has become an attractive alternative to China for production. The rising cost of labor in China is an ongoing factor driving this shift. Companies are also closely watching for escalations of trade conflicts between the United States and China. The countless obstacles caused by the covid-19 pandemic inject additional uncertainty into the weighing of suppliers in China versus Vietnam. Although Vietnam has been presented as a great alternative for many companies, it is important to note that the relocation process is not easy. Transitioning production from China to Vietnam requires considerable logistical and quality control support. If you are part of an organization looking for suppliers or factories in Vietnam, Pro QC’s factory audit and supplier audit services will help you make this process much easier and more reliable. Why relocate production to Vietnam? Vietnam has emerged as an unexpected winner amid shifting economic, political, and commercial trends over recent years. Thanks to its inexpensive workforce (almost a third of the cost of labor in China), its proximity to China, and its focus on the production of consumer goods, Vietnam has become the most attractive alternative for companies from the United States and Europe seeking to migrate their production from China to another country. In addition to its lower cost, Vietnam’s labor force is also highly specialized. Thanks to a long history as a manufacturing country, the workforce in Vietnam has specialized in industries that, for the moment, have been deemphasized in China, as the Chinese government seeks to dominate more advanced industries such as aerospace. Some of the industries that have benefited the most from migration to Vietnam have been furniture, textiles, and footwear. In fact, Vietnam has grown to become the second-biggest supplier of footwear and apparel to the United States after China. Of course, not everything is ideal in modern Vietnam. Although some strengths make Vietnamese industry competitive against China, one must recognize that China has a great advantage in technology. For example, China has for now outclassed and advanced far ahead of Vietnam in producing smartphones and household appliances. This clear stratification in quality between the production of China and Vietnam has led some companies to divide production between the two countries. This is sometimes called a “China-plus” strategy. It is also important to recognize that although the labor force in Vietnam is cheaper, it is on a smaller scale than in China. Some US media have reported that, faced with demand from this transition of production from China to Vietnam, the labor supply has become scarce. Vietnamese transportation and shipping infrastructure has also faced bottlenecks due to increased manufacturing. A company considering relocating production to Vietnam must find a way to meet these challenges. On top of these concerns, factory closures due to covid-19 have left some large manufacturers in 100% lockdown. Although the country got through the first wave of covid relatively unscathed, it is now dealing with widespread quarantines and factory shutdowns due to the spread of the delta variant. With more than 100,000 graduates in engineering and manufacturing in 2015, Vietnam is 10th in global rankings. The main specializations of engineers in Vietnam are electronics, electrical, and mechanical. Foreign investments have transformedVietnam into an important manufacturing hub for the textile and electronicsindustries. Indeed, many foreign companies have built factories in Vietnam orhave established joint ventures with localcompanies to diversify their productionlocations and to de-concentrate it from China. Despite lower wages for most workers, good engineers in Vietnam command a premium as they are so sought after. The increase in companies moving to the country and setting up factories has driven up demand for these workers. Many companies struggle to find the right people and anecdotal feedback points at skillsets being lower than in China in general. How to look for suppliers in Vietnam Supplier verification and selection in Vietnam 1) What are the industries by region? Vietnamese industry is divided into three distinct clusters. A buyer must know where the relevant suppliers are located, and how each region differs in terms of labor pools, industrial mix, and infrastructure. Below are Vietnam’s main regions and their industries: Vietnam’s northern provinces (The Northern Key Economic Zone) are weighted toward heavy manufacturing, oil and gas, and higher-tech manufacturing such as automobile manufacturing. Two manufacturing hotspots are the provinces of Hanoi and Bac Ninh. Electronics manufacturing is clustered in the north, especially in the Red River Delta area. Vietnam’s central provinces (The Central Key Economic Zone) are weighted toward the marine economy and agriculture. In the near future, rapid promotion and expansion of oil and gas, shipbuilding, and high-tech industries is expected. Food, beverage and feed processing is more clustered in these central provinces than in the north and south. Vietnam’s southern provinces (The Southern Key Economic Zone) have a wider range of manufacturing than the north and more services. Major industries include electronics, mechanical engineering, chemicals and pharmaceuticals. Garments and textiles are clustered in the south. In fact, Nike and Adidas both manufacture more of their core products in Vietnam than in China. Most investment inflows into the country go to the northern and southern provinces. 2) What buyers should know when communicating with a Vietnamese supplier Communicating with Vietnamese suppliers is more challenging than in China. Because of smaller export volumes and international exposure, a typical Vietnamese factory will have a smaller account management team. Sometimes there are none and direct communication with management will be needed. Less English language proficiency could be a barrier. Communication takes longer. Quotes take longer. Another complication is that many factories are foreign-owned (Taiwanese, Chinese, Japanese, Korean, etc.). This means communications may need to flow to head offices and owners, adding complexity and delay. Some factories are just production units for their mother companies and will not entertain inquiries directly. 3) Supplier Verification & Qualification in Vietnam Conducting on-site factory and supplier audits in Vietnam is particularly important. They allow a firm to qualify suppliers by verifying their reliability, capacity, QMS and ensuring they can comply with the buyer’s requirements. The factory audit will vary according to the industry and project. Supplier Quality Audits in Vietnam When selecting a new supplier in Vietnam and before passing the first order, a company must conduct due diligence up front. Misrepresentation and fraud are real risks in any foreign country, including Vietnam. Performing a Supplier Quality Audit provides purchasing managers and quality personnel with enhanced data and transparency on the best practices at each factory or supplier. This audit is rapid and comprehensive. Within one day, Pro QC auditors perform an on-site survey of the factory. The resulting report details the factory’s general operations, quality procedures, operator qualification, and overall capability. The report can then be used to inform the final decision on whether to confirm the purchase order. Quality Management System Audits in Vietnam The quality management system (QMS) is a foundational framework that guides an organization to achieve operational and quality excellence through documenting company policies, processes, procedures, and responsibilities. ISO 9001:2015 is the most widely followed QMS standard and can be applied to any industry, including the rapidly growing low-and middle-tech industries of Vietnam. Other QMS standards for medical devices and auto manufacturing are extremely important in their industries in reducing risk and establishing continuous improvement. These standards govern critical production factors such as traceability, handling of defects, and part/lot numbering. A gap in these systems could result in release of defective product, absence or loss of records, or deflection of responsibility. Thus, verifying compliance through a QMS audit in Vietnam is critical when assessing a vendor there. An ISO 9001 audit in Vietnam will assess the factory’s quality system against a globally recognized quality management system standard. This standard is applicable to any manufacturer and is the basis for other more specialized standards such as those relating to the automotive and medical devices industries. When auditors inspect a vendor against ISO 9001, they are assessing the vendor’s ability to consistently provide products and services that meet customer and regulatory requirements. An IATF 16949 audit in Vietnam will verify the quality management system of an automotive supplier. Specifically, this audit will assess whether a framework is in place for achieving quality and efficiency in automotive design, development, manufacturing, installation, and service. Its main emphasis is on continuous improvement. It unites and harmonizes the various assessment and certification systems in the global supply chain. An ISO 13485 audit in Vietnam will assess the quality management system of a medical device manufacturer. The exacting standards of this industry call for a QMS that promotes continuous improvement, prevention of defects, thorough documentation, clearly defined responsibilities, and total lifecycle traceability. An audit of a medical device maker in Vietnam will verify whether a device maker can consistently meet customer and applicable regulatory requirements. These audits are important in Vietnam because medical devices are increasingly filled with electronic components. Depending on the involvement of the component supplier, buyers may require them to be certified against ISO 13485. As electronics manufacturers in Vietnam become more and more involved in supporting the medical device industry, ISO 13485 audits will apply to a wider range of suppliers. Corrective Action and Preventive Action verification (CAPA) CAPA is an essential quality subsystem that should be in place in a manufacturer of any size in any industry. In essence, CAPA means examining an issue systematically using a risk-based approach, implementing a fix to the immediate problem, and then implementing a permanent fix to prevent the problem from recurring. Both ISO 9001 and ISO 13485 set forth requirements for a CAPA system. To comply with these standards, a manufacturer must have written procedures describing how management and team leaders are actively involved in identifying, documenting, eliminating or mitigating risk. Control Plan Audit A control plan is a written procedure describing each manufacturing control in place, along with the steps in the manufacturing process it applies to. A good control plan will focus on critical (high risk) steps of production, define process inputs and outputs, establish the control method, establish an appropriate sampling plan, define an escalation process, and allow for continual review and modification. An audit of a supplier’s control plan will verify they have put in place the measurements, inspections, and checks to control production parts and processes. Ensuring Quality When Starting Production in Vietnam Starting production in Vietnam Some types of production will require the approval of Vietnamese government authorities beforehand. If so, always account for the application processing times. Next, all 100% foreign-owned investment projects must submit an Investment Registration Certificate. This will include an application with the details of the project, a proposal, and financial statements. Next is an Enterprise Registration Certificate. This will set up tax information and the project’s legal structure. This may be processed concurrently with the Investment Registration Certificate. Additional post licensing procedures are needed before starting operations. Taxes in Vietnam are collected at the national level only and will generally include a business license tax, a corporate income tax, a value-added tax, a special consumption tax, a foreign contractor tax, and customs duties. Moreover, a manufacturer will want to site their project based on regional characteristics of labor availability and specialization and industrial infrastructure. Risks of new production and how to mitigate these risks Vietnam’s attractiveness for production comes with risks. For example, a cheaper labor force may be that way because of a generally lower quality talent pool and training. As the country rapidly expands its manufacturing, it runs the risk of taking on too much outdated equipment from China. With rapid change comes the risk of a shortage of skilled labor, a lack of supporting industries, bottlenecks in the supply chain, and resultant higher production costs. Pro QC will mitigate risks with a suite of factory and supplier audits: A manufacturing process audit will provide a report and scoring that reflects the supplier’s ability to meet all the requirements of the audit, plus any specific requirements of the client. The client may provide their own checklist of requirements. The auditor will focus on the manufacturing process and its related supporting functions. Pro QC will audit against several standards that call for root cause investigation, PFMEA, cause and effect diagrams, design of experiments, etc. The audit will establish whether the Vietnam-based supplier is using state of the art problem investigation and resolution tools in accordance with industry standards. Pro QC conducts first-article inspections prior to volume production. This inspection for quality verifies that product specifications are being met and avoids unnecessary reengineering work later. How to relocate production in Vietnam without an anchored presence on the ground Relocating production in Vietnam without people on the ground can lead to difficulties related to local regulations, language, culture, and quality, which can lead to delays or failure of the project. Several options can help companies in their project like setting up a team, using expats or hiring a quality control company in Vietnam. Pro QC supports companies in relocating their production to Vietnam with quality assurance services such as factory audits, QMS audits, supplier management and third-party quality inspections. Pro QC’s quality control activities are managed from our HCMC office, while our team is stationed across the country in or close to various manufacturing hubs. We will be happy to give you more information about our quality solutions. Visit our quality control services in Vietnam page and inquire for information and a quote.