According to its fourth annual stewardship report released last week, Recreational Equipment Incorporated is apparently very encouraged by its participation in the Fair Factories Clearinghouse (FCC), which it joined last year to reduce the cost of auditing its offshore factories’ fair labor and environmental practices.

REI does not own any factories, but conducts full third-party audits of all factories that produce REI branded apparel and gear and its Novara branded bicycles and cycling gear at least once every three years depending on each factory’s compliance record. In 2009, those products accounted for nearly $300 million of the co-op’s $1.46 billion in sales. That purchasing power, and the co-op's status as the largest dealer for many outdoor brands, gives REI tremendous clout in setting factory standards for the industry.

Armed with a letter from the U.S. Department of Justice providing anti-trust clearance, the FFC was created in 2006 to help western hemisphere brands arrest rising compliance costs and address increasingly adversarial relations with their offshore vendors through a database developed by Reebok. By sharing the results from audits, FFC members hope to reduce redundant audits and shift to a more collaborative approach with their factories.

“While simple in concept, implementation of shared auditing and audit results has been difficult to accomplish,” reads REI’s report. “There are a host of challenges in a variety of dimensions – organizational cultures, program administration and legal contracting are just a few. Ultimately, making progress on a collaborative approach requires a high level of trust among all participants.”

In 2009, REI shared the results of six of its factory audits through FFC,   “This effort holds solid promise in reducing factory “audit fatigue” (where numerous audits negatively impact productivity and drive up costs) while improving performance of factories overall,” reads the REI report.

Rampant and uncoordinated auditing by western hemisphere brands has prompted “audit fatigue” among many Chinese factory owners, who have been known to bribe third-party auditors, set up shadow factories and prepare two sets of payroll records to defraud auditors.

This has prompted many western brands and NGOs to look for a new model that replaces the often punitive audit process with “vendor-owned compliance,” in which factories themselves commit to creating progressive work environments for and relationships with employees. This approach has been successful with quality control initiatives, reports REI.  “In 2009, our efforts to engage several of our factories at this more progressive level led to greater candor and responsiveness from factory partners in the form of timely self–disclosure of potential violations in the absence of an audit.”

In 2009, REI had 79 active vendors with a total of 127 active factories. The co-op conducted 15 third–party audits covering contract factories that accounted for 96% of the dollar value of REI-brand products. In addition, REI employees visited more than half of the factories.

In last week’s stewardship report, REI reported significant drops in violations, but said it was reluctant to draw any conclusions about the data. Major violations of wages and benefits standards included non-payment of applicable wages, not providing legally required benefits and manipulation of payroll records. The latter is often used to defraud auditors.

REI began publishing its stewardship reports in 2007 to highlight its social and environment efforts, including everything from corporate donations, to limiting greenhouse gas emissions. The report also provides more visibility into REI’s supply chain, although the co-op has stopped short of listing its contract factories as do Patagonia and Timberland.