Better suppliers should be rewarded with more business

Better suppliers should be rewarded with more business

Will efforts to improve fire, building and worker safety in Bangladesh's apparel industry translate into more business - and higher prices? While a major discussion point for ready-made garment exporters at the recent Dhaka Apparel Summit, retailers and brands prefer to focus instead on the business benefits of a compliant supply chain.

The issue of pricing is an emotive one at the best of times, but for Bangladesh's apparel industry it's one that has taken on an added sense of anxiety as factories grapple with the additional costs of complying with new health and safety standards, factory remediation, and environmental issues.

"There is too much pressure on our exporters to reduce price," Commerce Minister Tofil Ahmed told an international audience at last week's Dhaka Apparel Summit. It was a cry that continued to weave its way through the two-day event.

Atiqul Islam, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), added: "The garment industry is leading Bangladesh's development and growth. We are doing our best, day and night, to present you with the most compliant industry. But why are the Accord and the Alliance only in Bangladesh? We only have 5% of the [global apparel] market. It [remediation] increases costs for the factories, and does not give us a level playing field with other low-cost countries."

But for international brands faced with falling retail prices, rising wages and sourcing costs, the reality is that buyers, too, are under increasing pressure to hit their target prices.

Lars Doemer, global sustainability manager for production at Swedish fashion retailer Lindex, believes the message that needs to be conveyed is that suppliers who meet a brand's environmental and social requirements are more likely to win business.

"The most important thing is to promote business with good suppliers," he explains. "We try to help our suppliers become better and then promote them, reward them with business. That, for me, is really the role of business."

He also notes that the use of scorecards on social and environmental criteria means compliant suppliers are "not competing with the whole market, you're only competing with a selected number who can comply with these requirements. You will also see more and more that green production will be a competitive advantage with consumers."

Sustainable growth
Likewise, Shariful Huq, environmental manager at H&M, which sources from 300 factories in Bangladesh, notes that the retailer plans to "grow more in Bangladesh, but that business will grow from those business partners who share the same sustainability mission as us. We believe that if business in Bangladesh is to grow, it has to grow sustainably."

Will these products come at a fair price? "At H&M we believe price includes a lot of variables - quality, sustainability, delivery - and not only the value of your product. We are looking to continue to work with those suppliers who are actually doing the most in terms of reducing water, reducing energy. We also believe that reducing all those inputs will actually add profit because it saves money."

The issue of consumers in western markets demanding greater accountability on where their clothes are made will also have a bearing on where business is placed, according to Dr Ferdinand Weythe, from the Embassy of the Federal Republic of Germany to Bangladesh.

Four ready-made garment companies in Bangladesh have joined the German-led Partnership for Sustainable Textiles, aimed at ensuring clothes destined for the German market comply with social, ethical and environmental standards from raw cotton to the finished product. Germany is the second-largest importer from Bangladesh, "but German consumers will have an eye on how these products are produced," he warned.

But Nate Herman, vice president of international trade at the American Apparel and Footwear Association (AAFA), believes consumer concerns have not translated into increased [retail] prices for garments that are produced in good working conditions. "That's regrettable," he says, adding that "increasing productivity and improving management processes is the real key to increasing profit and increasing benefit for workers...and the real key to the future of the industry in Bangladesh.

Trading up
Noting that the industry is best-known as a low-cost supplier of T-shirts, jeans, socks and underwear, sourcing expert Dhyana van der Pols, who heads Nash International and also represents the World Federation of the Sporting Goods Industry (WFSGI) and the International Apparel Federation (IAF), advises Bangladesh factories to trade up to high-end products.

Not only would this enable Bangladesh to avoid competing on cheap labour and "the continuous discussion on lowering FOB," she says, but moving into better quality, design and categories such as outerwear, technical sportswear, swimwear, lingerie and shapewear would allow suppliers to tap into the 80% of brands who are not signatories to the Accord or the Alliance.

She implores: "We have to bridge this knowledge gap. These smaller brands don't know about your untapped product groups; they only know you're geared to the commodity end of the apparel chain. The products you used to produce when you started this industry were not commodity T-shirts, they were highly embellished products, intarsias, jacquards, all of which are in high demand at the moment.

"With declining retail figures, buyers and retailers have to fight over every penny. They are also forced to trade up and they need new partners because Turkey, Tunisia and China will not cover their needs or demands."

Through projects organised as part of the CBI, the Center for the Promotion of Imports from developing countries, an agency of the Netherlands Ministry of Foreign Affairs, "we aim to have this knowledge transfer and to gear up to higher segments in the market where you can work directly with buyers, also ensuring ethical price levels or at least a dialogue on it," she explains.

New buying and pricing models
There were also calls for new buying and pricing models in the global garment trade, and that "buyers must accept that safe factories cost more."

Gunelie Winum, CEO at Sustainable Trade in Norway, cited results of a survey by ETI (Ethical Trading Initiative) Norway on the impact of buyer purchasing practices on compliance. Shorter lead times and frequent changes in orders are a key cause of overtime, and decreasing prices, she said.

"Buyers don't understand suppliers' cost structure, they want more add-ons after the FOB price is set; and they're not willing to pay a higher price. Price should be based on production cost, but buyers dictate the price based on their target price. They don't have the skills to ask about labour costs, and they are trained to ask for a lower price because they are incentivised through bonuses [based on the margin] between the FOB price and the retail price."

But suppliers, too, "lack sufficient knowledge in how to calculate a FOB price which includes direct and indirect costs of decent working conditions." Direct labour costs include minimum wages, overtime premiums and social premiums, while indirect labour costs include things like training on health & safety, PPE, and training for supervisors.

"Suppliers also said they sold their product at a price far lower than the production cost in fear of losing buyers," she added.

"There is an urgent need for a new budgeting and pricing model in the global garment trade," Winum said, suggesting a budgeting and pricing model based on open book accounting and open book costing. "But this requires a power balance between the two parties which is currently not the situation in global trade. It requires skills upgrading from both suppliers and buyers."

Richard Appelbaum, research professor and MacArthur chair in global and international studies and sociology at the University of California at Santa Barbara, urged joint responsibility between buyers and factories. "Right now, the buyers are independent, the factories are seen as independent; the reality is that the factories are very dependent on their buyers and the buyers should share the responsibility and the liability that goes with it," he said.

"Competition between brands and retailers creates a huge downward pressure on what they'll pay factories; and this makes it difficult for factories to fix problems and pay workers the wages they deserve. If the government seeks to raise the cost of production too much, there's always a danger businesses will go elsewhere. The industry's approach to audit itself has been ineffective. So there has to be a new approach.

"Buyers have a responsibility to partner with their suppliers and make this industry work. I would like to suggest binding, legally enforceable contracts between the brands and the factories, some form of joint liability. There needs to be a change in the way that outsourcing is done to [dispel the myth] that factories are completely responsible for what goes on and that the brands who use those factories are legally independent of those factories."

The sentiment was echoed by associate professor Sharif As-Saber, director of the Master of International Business Programme at RMIT University, Melbourne. "The price issue will never go away. I believe the primary problem is in global governance: there is no coordinated effort globally to make it work. That is what we need. We can pressure Bangladesh, the Bangladesh government, the Bangladesh ready-made garment industry - but was Rana Plaza the act of one company or one country or was it the reflection of the combined mismanagement of the entire sector globally?

"We need a multi-stakeholder view, a multi-stakeholder governance structure. We need a global ready-made garment secretariat with representation from buyers, retailers, brands, garment factories. It should look after all these issues and act as a think-tank and at the same time should come up with some solutions with respect to minimum wages, labour rights."

Click on the following links to look at other issues raised at the Dhaka Apparel Summit: