NEED TO KNOW: Legal and Procedural Strategies to Safeguard Toy Supply

As described in my article about safety and the toy industry, the continued flow of recalls throughout 2008 should convince anyone still requiring convincing, that the problems with toy production in China are equally problems for everyone involved with the toy industry, particularly licensors, licensees and buyers.
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So what legal and procedural strategies might help?

As a first step, all pipeline-orders for toys should be tested or re-tested without delay to flush out any residual problems where long lead-in times mean that problem-stocks of product still exist. Whilst further recalls will inevitably cause further bad publicity, far better to stage-manage voluntary recalls now and present this exercise as the final flushing out of a historic problem, rather than delaying action and waiting for further recalls to be imposed in the full glare of a public scare and media campaign.

The next step sensibly should be to carry out a comprehensive evaluation of all supply contracts or licences, supplier codes of practice, production inspection procedures and test-auditing procedures and reporting for production.

If contracts don’t already do so, they should impose on producers coherent record keeping obligations and rights of inspection and audit in relation to all aspects and costs of production. An extra stage might be to tailor those provisions so that details of overheads can be demanded in sufficient detail, not just to keep track for royalty-purposes, but also to check that the producer is sourcing its raw materials from reputable suppliers.

Make sure the right to carry out audits and inspections is available not just to your business, but also to your agents and independent experts. Ideally the safety requirements should be imposed as part of a corporate social responsibility production code of practice (CSR). Many of the major toy producers for a long time have imposed their own CSR codes or the right to send in independent auditors to factories to check on production conditions and procedures. These codes tend to cover not only product safety but also issues such as forced labour, child labour, health and safety of workers and products, wages and benefits, working hours, discrimination, harassment and abuse. Trade bodies can provide guidance as to what provisions to include in such a code.

The chances are that if factories aren’t willing or able to agree to this, it’s reasonable to conclude that those factories are unlikely to pay sufficient heed to safety issues in any event and should not be used.

One qualification to this is that factories may well have legitimate, commercial reasons for wanting to avoid giving away unfettered rights of inspection, for example where production takes place for more than one customer at a time and the producer has undertaken to keep the nature of the production confidential.

Additionally, imposing a production code will be a matter of negotiation with producers and you should be aware that trying to impose unnecessarily strict or complex requirements is likely to prevent agreement or at least result in the producer having to increase prices to cover the extra overheads involved.

Where production is more than one stage removed, for example for brand licensors, the advised precautions are of course the same but need to go further by negotiating over-reaching rights of investigation, so that licensors need not be left to guess whether licensees are effectively monitoring their producers or not.

For licensees, a sensible strategy is to make sure the contract with the licensor allows the licensee to take remedial action should the brand be damaged through no fault of that licensee and should the licensee suffer a downturn in business because of guilt-by-association. An innocent licensee would then need to do everything practicable to salvage sales of its own, unaffected, ‘safe’ products. This will probably include making customer-announcements. But as this will highlight the licensor’s problems still further, it’s not something the licensor is likely to look on favourably. So, unless the contract gives the licensee the right to take remedial action, then the licensor is likely to object.

However helpful your contract and CSR code may be in theory, it’s of little worth having these rights unless effectively policed. Indeed, it’s arguably worse to have the rights and not enforce them, than not to have the rights in the first place. Businesses can expect little public understanding after making a deal about the importance of safety, if they then fail to enforce supervision rights and a safety problem goes undetected until the product reaches the market.

A factory audit is rarely enough in isolation; inspections can only ever realistically provide a snapshot of operations and won’t indicate if the procedures reviewed are inherent or merely ‘put on’ whilst the inspection takes place. Also, during the course of a long production run, it’s more than likely that re-orders of raw materials are needed by the factories, so earlier inspection results may cease to remain reliable.

Importers will usually be required to carry out further inspections and testing required locally as part of the importation process. But, this won’t necessarily provide the extra supervision needed and importers should consider whether to supplement that testing so it can check for compliance with its own, full standards.

In short, all involved in the chain following production have a vested interest in ensuring they have and enforce adequate rights of inspection and audit, both via periodic factory-visits and by recruiting local reliable experts and fully briefing them on the manner, frequency and nature of required inspections and reports.

To read Down's original article, click here.

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