Factory Compliance

REI does not own any manufacturing facilities, and therefore we work with partners in the United States and around the globe to manufacture REI-branded gear and apparel. These products represent approximately 20 percent of the items sold by the co-op.

Our contract factory partners are an extension of our brand and ensuring safe and healthy working environments for their workers is critically important. We seek to develop and maintain trusting relationships with factory owners to help ensure that workplace conditions protect the workers who make our products.

Process for Sourcing Standards Compliance

New factories and new vendors must be prequalified. This requires a vendor to provide a self evaluation of compliance with REI's policy for labor and workplace practices. The factory can provide evidence of compliance by either showing certification to WRAP, SA8000, or FLA, or providing a recent audit from an independent audit firm. If none of these are available, we may schedule a full audit. If violations are found, we require implementation of a corrective program.

In 2007, more than 50 percent of our contract factories, representing 95 percent of the dollar value of REI brand products had undergone a full audit by a third party auditor.

Minor vs. Major Violations (number of violations per audit)

Audit Violations (percentage of total violations)

Violations

Each year our teams audit approximately 20 factories that manufacture REI-branded products. When we find instances of wage and hour or health and safety violations, we work with factories to implement corrective actions and resolve issues.

The graph illustrates that the current model of auditing without addressing root causes fails to yield sustainable improvement. The increased number of audits in factories outside of the apparel sector has resulted in a higher number of violations. We also see an increase in violations in vendors we're auditing a second time.

Challenges

Factories face conflicting demands of shorter lead times and higher margins, and the compliance expectations to limit overtime and pay legally mandated wages. To address this, we have:

• Improved audit practices to discover falsification of records
• Encouraged supplier transparency by assuring them that wage and hour violations will be addressed by developing a long-term plan for continuous improvement, but that record falsification can result in termination
• Engaged suppliers and other brands to better understand the conflicting demands that have created the current problem

Future

After a decade of auditing, we realize the limitations of the current audit model. While some areas have improved (health and safety practices), others remain unchanged (wage and hour violations).

While factory audits continue to be a mainstay of REI's efforts, we are developing new processes and programs to enhance effectiveness. For example, to address record falsification we have engaged an audit company to audit only one factory for one customer — REI — and the brand we're collaborating with. This will encourage the factory to be transparent and not worry that another brand with a zero tolerance policy will come in and put them at risk to lose all of their business.

And in 2008, members of the Outdoor Industry Association Factory Labor Working Group will meet with a group of their major factory suppliers to discuss why factory owners falsify records.