The approach to calculating a living wage should look beyond individual product pricing and bridge entire collections

The approach to calculating a living wage should look beyond individual product pricing and bridge entire collections

The provision of a living wage for workers in global garment supply chains is an ongoing issue, and one that seems to throw up as many new questions as answers. The latest research into the subject now suggests that "compounding price escalation" is one of the main obstacles to introducing a living wage.

"Think differently about living wages," is one piece of advice in the latest study from the Netherlands-based Fair Wear Foundation (FWF), which has teamed up with the European Outdoor Group to examine the living wage issue in real-life outdoor clothing supply chains.  

It adds that while most companies think of their living wage commitments as a liability, they should be moving towards accepting payment of a living wage "as a basic manufacturing cost, alongside material costs and factory margins."

The research, carried out at six FWF member brands - Deuter, Haglöfs, Kjus, Mountain Force, Odlo, and Vaude - and one FWF member factory - KTC - looked at the links between outdoor industry brand practices, wages, pricing, and the cost to consumers.

The aim is to try move forward on key questions such as how to measure a living wage, how much would labour costs need to rise, and what are the implications for product costs, both for brands and consumers?

But perhaps the most interesting finding to come out of the research, detailed in the FWF report 'Living Wage Engineering,' is that the dominant sourcing model in the garment industry complicates the simple idea that consumers can pay a bit more to ensure living wages are paid.

Compounding price escalation
The practice of "compounding price escalation" (CPE) is common in the garment industry since it simplifies mark-up calculations along supply chains through which thousands or even millions of products travel daily.

Essentially, what happens is that the price paid at each step in the supply chain - from agents to retailers, brands to shipping companies - is calculated relative to the price quoted at the previous step.

However, it also means that a direct transfer of funds to cover higher wages is more complicated than it might initially seem.

For example, a selling agent's fee may be calculated as 24% of the FOB (freight on board, or the per product price paid to factories). So, if the pre-living wage FOB is $10, then the agent charges $2.40 for services. But if living wages bring the FOB price to $11, it means the agent's fee increases to $2.64.

No matter how big or small, an increase in wages would also spell an increase in agent fees - and, in turn, increases in prices collected at most other touch-points across the supply chain, right through to VAT.

A version of compounding price escalation is also seen at the factory level, when factory gross margins increase simply because wages rise.

When the mark-ups made at each step in the supply chain are calculated, the knock-on effect on retail prices is a hike by as much as 15% - instead of a maximum of 7% for those same products if charges do not increase with wages.

Not only is the practice a major obstacle to living wage implementation, as the FWF calculations show, but it also means that the large majority of the additional funds laid out by consumers in the name of living wages would actually get directed to others in the supply chain.

Living wage impact
The Fair Wear Foundation's research also covered a host of other issues, including the impact of living wages on factory margins and the retail prices paid by consumers.

In broad terms it found that factory wages would need to increase by between 10% and 102% in order to reach the Asia Floor Wage (AFW) benchmark. And that if base wages in a factory rise to a living wage level, then all wages in that factory would also need to go up.

Calculations also suggest the impact of a living wage alone lifted FOB by 2% to 12% - and that brands would incur an additional 1% to 2% above and beyond the cost of wage increases just for trying to uphold their FWF commitments.

This is not a negligible cost for a company, particularly if it is producing hundreds or thousands of units of a product.

However, it is at this point that the effect of 'compounding price escalation' begins to complicate matters evern further.

Real-life outdoor clothing supply chains
Working with the European Outdoor Group has helped the FWF look at the living wage issue in real-life outdoor clothing supply chains - where relationships between brands and their suppliers tend to be more stable, with longer lead times and better planning.

In contrast, those in the fast fashion sphere are driven by ever-changing trends, short lead times, long supplier lists, limited supplier leverage, non-committal buyer-supplier relationships, and severe price competition.

Among the next steps for the researchers is to try to understand pricing across a wider range of product groups and factories, and to develop simple tools to help companies quickly calculate the impact of a living wage and, ultimately, the factories best able to deliver.

It also highlights the need for alternative approaches to compounding price escalation in supply chains. These "will be difficult to address" because they are so entrenched, it says, but key to a implementing a living wage that does not sending retail prices spiralling upward.

The report also recognises that the approach to calculating a living wage should look beyond individual product pricing and bridge entire collections - mirroring the way apparel brands factor different prices and margins into a range.

Click here to view the complete FWF report on 'Living Wage Engineering'.