The lessons learned from the current coronavirus pandemic must lead to a complete overhaul of the global fashion supply chain if the industry is to be sustainable into the future.
In the space of a few short weeks, the global Covid-19 pandemic has shaken the global fashion industry to its very core. Apparel manufacturers and their backward linkage supply chain partners (fabric mills, trim suppliers, chemical and dye-stuff manufacturers, machinery suppliers and shipping partners, to name a few) are struggling for survival as billions of dollars worth of orders are put on hold, cancelled or ‘re-phased’ by our customers – a brand new term that is rather undefined.
Worldwide, brands and retailers are facing a catastrophic downturn in trade, as their customers experience lockdown protocols or avoid stores, resulting in the above-mentioned withdrawal from production contracts and the withholding or rescheduling of payments for finished goods. This situation has been further compounded by the introduction from certain buyers of retroactive discounts applied to goods that are ready for shipment or already delivered.
Due to the current set of purchasing practices that exist in in the apparel industry, garment manufacturers, often already working on very tight margins, find themselves exposed and unable to protect themselves. Their businesses and their workers are facing financial ruin, some just weeks away. These factories employ tens of millions of workers with an average monthly salary of US$100.
The post-Covid-19 era will bring a change in the apparel manufacturing landscape and the lessons learned in the wake of the pandemic are crying out for a complete overhaul of the apparel industry. Below are some suggestions on how, as a collective body, we can establish a system that will ensure a sustainable global fashion supply chain for the future.
#1: True partnership
It is clear from recent events that apparel manufacturers face a competitive disadvantage in the current business structure. There needs to be a reassessment of the relationship between manufacturers and their clients and, in certain cases, the rebuilding of trust between the two.
What needs to be realised and assured in the post-Covid-19 environment is that buyers treat the manufacturing side of the supply chain as partners, instead of forcing them to bear the brunt of a downturn in trading conditions. By working together, apparel manufacturers, brands and retailers are stronger and, through true collaboration, can combat – or at least mitigate – the effects of calamities of this nature.
#2: A fundamental change in payment terms
Over a period of time almost all buyers have ceased working with letters of credit (LCs) which offer the manufacturer a degree of security in securing payment for finished production, albeit often with deferred payment terms.
Instead, the practice of using a Sales Contract (SC) has become normalised or, in some cases, clients work through Purchase Orders (PO). Both of these payment practices offer the manufacturer limited, or no, legal protection.
Conversely, irrevocable LCs are used to guarantee a buyer’s obligations to a manufacturer. Subject to the criteria of the order specified by the customer being met, and the appropriate supporting documents being presented by the manufacturer, payment for production is guaranteed by the buyer’s bank. This offers the manufacturer security in the knowledge that they will receive payment, even if this is deferred for an agreed period.
Changes to the existing payment terms are needed throughout the apparel supply chain. Under the current system, manufacturers are largely financing the orders of their customers – purchasing fabrics and other raw materials, incurring costs in overheads, rates and salaries, all of which are paid in advance of settlement for any production being made. A system that reverts to the LC payment method or one that involves an advance payment to cover raw material costs, with the outstanding balance settled upon shipment, should be considered.
What is important is that whatever payment term system is adopted, the apparel industry needs to recognise that the current system, with its bias in favour of the buyers, is no longer tenable. Apparel manufacturers can no longer be expected to bear any undue financial burden arising from the Covid-19 pandemic, or any other economic catastrophe.
#3: Insurance for unexpected events
International governments could agree that any orders for apparel production include an allowance for insurance that would cover the costs arising from natural disasters. The insurance would cover the cost of raw materials, production overheads and transportation of the finished goods to the buyers’ specified port and would, of course, entail a premium being added to the individual cost of any garment. This would need to be agreed by all parties but, in light of recent events, would be a cost worth considering in order to safeguard the welfare of apparel manufacturers and their workers in the face of any unforeseen catastrophe.
#4: Set up an international register for buyers
Brands and retailers currently conduct their manufacturing and order placement activity under their own company guidelines, with manufacturers being obliged to accept their customer’s terms, conditions and payment rules, with little or no room for negotiation.
There is currently no provision for objecting to a client’s purchasing practices and, more often than not, a single garment manufacturer will balk at the concept of taking any legal action against any of the Western apparel giants should any such recourse be necessary.
Post-Covid-19, manufacturers and their apparel business partners should work with local and international governments to establish a recognised, neutral, singular body that has the agreed authority to oversee the process of purchasing practices and to devise a set of criteria that are acceptable and applied to all, apparel manufacturers and their customers alike, globally.
Just as the Accord and Alliance initiatives – implemented in Bangladesh after the Rana Plaza disaster of 2013 – united manufacturers and their customers in improving working conditions and safety and ethical manufacturing in the country, a recognised third party authority could police purchasing activities within the apparel sector.
Under the body’s remit, buyers would be expected to register for accreditation; and their terms and conditions, supplier agreements and payment terms would have to comply with a pre-determined set of criteria. The body would establish and ensure the adoption of ethical purchasing practices around the globe and restrict any manufacturer from producing any orders that do not respect these terms.
Most importantly, the international body would be responsible for the handling of any legal disputes arising from payment term contraventions.
#5: Establish an association of apparel manufacturing hubs
In an idealistic scenario, apparel manufacturers worldwide should unite to form a trade body that would play a crucial role in the governance of the sector and provide a conduit for the sharing of experience and the introduction of best practices enabling the supply chain to become truly sustainable.
Such a grand scheme would be hard to implement due to the varied locations and differing requirements and objectives globally, but there is no reason why, once the pandemic subsides, manufacturers in geographical regions should not consider the formation of a unified apparel manufacturing body. For example, it would be conceivable that manufacturers in the central Asia region (India, Pakistan, Bangladesh, Myanmar and Cambodia) work collectively to ensure that their best interests are represented and that practices within the region are to the highest possible standard.
Whatever the lie of the land in our post-pandemic tomorrow, changes to the existing apparel manufacturing system are desperately required. I am sure that with collaboration amongst apparel manufacturers, their customers, their peers and their local and international governments a redefined, sustainable business model for the apparel manufacturing industry can be achieved. Together we will be stronger, fitter and better able to combat the next global catastrophe in the future.
An article on just-style last week set out in more detail why Apparel industry payment terms are no longer fit for purpose.
Click on the following link to see just-style’s coverage of How coronavirus is impacting the global clothing industry.