Because retailers are unaware of third party subcontractors, the production process becomes obscure and cannot be tracked

Because retailers are unaware of third party subcontractors, the production process becomes obscure and cannot be tracked

Researchers say they have developed a simple model for buyers to predict with more than 80% accuracy when an order is likely to be sent to an unapproved factory.

Unauthorised subcontracting – when suppliers outsource part of their production to a third party without the retailer's consent – has been common practice in the apparel industry and is often tied to non-compliant working conditions. But because retailers are unaware of the third party, the production process becomes obscure and cannot be tracked. 

In a paper published in Management Science, UCLA Anderson's Felipe Caro, UC Irvine's Leonard Lane and Anna Sáez de Tejada Cuenca of Barcelona's University of Navarra study the factors that can lead suppliers to engage in unauthorised subcontracting.

And they conclude that apparel brands could, at the very least, infer when goods are being sent to substandard manufacturers since they already have the information they need to predict when an order is most likely to be farmed out.

An analysis of data provided by a global supply chain manager with over 30,000 orders and more than 220 supplier factories – of which 36% were subcontracted without authorisation – identified three consistent patterns: for some factories, there is no incidence of unauthorised subcontracting; for others, it occurs in 100% of the orders; and, for a third group of factories, it happens occasionally. 

They also note that the degree of unauthorised subcontracting in the past is highly related to the probability of engaging in unauthorised subcontracting in the future. That is, a factory that just delivered an order that was subcontracted without authorisation is more likely to do the same for the next order. 

Indeed, the probability of unauthorised subcontracting increases by 87% – that is, almost doubles – when the previous order at the same factory was also subcontracted without authorisation. 

Other key drivers include price pressure, when the unit price of an order is below the historic baseline for a given category and factory. Specifically, when the price is 25% lower than usual, the likelihood of unauthorised subcontracting increases by 9%.

Buyer reputation and lead time also play a role. When the final buyer is a well-known brand, the probability of unauthorised subcontracting is 22% lower. While orders with longer lead times – which is most common for basic products as opposed to fashion items – are more likely to be subcontracted to unauthorised suppliers. 

The researchers found no evidence that more complex orders are more likely to be subcontracted. 

But they also note their data was collected shortly after the Rana Plaza factory building collapse in Bangladesh, "which increased the worldwide scrutiny on unauthorised subcontracting. Therefore, our estimates are arguably conservative compared to a business-as-usual scenario."

Business analytics

Unauthorised subcontracting was also shown to be predicted correctly for more than 80% of the orders in out-of-sample tests, and for about 70% of suppliers. "This indicates that retailers can use business analytics to predict unauthorised subcontracting and help prevent it," researchers say.

Based on their findings, the authors developed a simple model for buyers to predict with more than 80% accuracy when an order is likely to be sent to an unapproved factory. 

Because the predictions are based on data that buyers already have, the authors say the formula could be plugged into buyers' decision support software to monitor their suppliers' workloads and pending orders, and to track product categories and average prices.

With such a system, they conclude, brands "could detect and flag orders with a high chance of being subcontracted before they are placed to a given factory."

It would also be possible to predict whether or not a supplier with no past subcontracting data will engage in this behaviour in the future. 

The results indicate "that, to a great extent, unauthorised subcontracting is predictable, and therefore can be managed," the researchers write.

Click on the following link to read the research: Can Brands Claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains