Linking ethical practices and finance stands to deliver major benefits to all parties

Linking ethical practices and finance stands to deliver major benefits to all parties

Ethical performance and supply chain finance are an unlikely partnership – but fusing the two can be a winning combination for the fashion and apparel industry.

In a world where consumers pay increasing attention to the behind-the-scenes activities of fashion and apparel companies, the fusion of ethical and environmental performance and business operations will only accelerate and deepen.

Successful companies realise that their programmes to eliminate waste and to find new ways to reuse materials must extend beyond their own organisations to the entire supply chain, incorporating finance as well as operations.

As an industry, fashion has the potential to see the greatest impact and represent a model from which other industries can learn. Globally, the textile, clothing and footwear industry employs about 60 million people, many of them young women, according to estimates by the International Labour Organization (ILO). Fashion is a provider of formal jobs for low-skilled workers that can make an important contribution to poverty reduction in developing countries.

Some companies have already started to build a track record of developing programmes that fuse ethical and environmental objectives with increased profitability, within a given company.

The Levi Strauss & Co WaterLess jeans project is a good example of this. It cuts water use in production by up to 96% while reducing cost at the same time. In 2015, Levi's also launched an initiative that installed recycling bins across all of its stores. This served the primary objective to encourage recycling, but also increased foot traffic through its brand being associated with values that resonate with its customer base. Again, fusing environmental and business objectives.

But what about extending such thinking further into the supply chain?

Supplier engagement

It is important to recognise that engaging suppliers in responsible production practices is not an easy task. Indeed, Levi's, for example, established its first code of conduct for its suppliers 20 years ago. Developing partnership programmes that benefit everyone – Levi's, its suppliers, factory workers and the environment – has proven a difficult undertaking.

However, adding financial drivers into this mix has been shown to boost the effectiveness of such programmes substantially.

In a world where payment terms get extended out by as far as 90 or 120 days, Levi's looked deeper into the true long-term impact of this practice. Recognising the pain such terms caused on factories, it chose instead to help suppliers get paid faster – to improve performance, remove risk and reduce costs in the supply chain.

Levi's partnered with the IFC, the World Bank's lending arm that serves private companies in emerging regions. Levi's saw a unique opportunity to strengthen its supply chain and improve the health of its suppliers in emerging regions, by working with the IFC on a programme that rewards suppliers who meet labour, safety and environmental standards.

What makes this programme possible and scalable is that it is fully automated and runs in the cloud. That means that there was no expensive hardware or software investments necessary to get the programme off and running across the jeans maker's expansive supply chain network. Levi's, all of its suppliers and the IFC are connected via a cloud-based platform.

Now, at the click of a button, suppliers can request to get paid early – in just days – on invoices to prevent cash flow issues. Instead of paying high interest rates locally, in emerging regions, suppliers can obtain capital from the IFC at rates based on the financial strength of Levi's.

It's a win for both Levi's and the supplier. A healthy supplier with access to cash to fill orders is likely to be more reliable, responsible and cost effective as supplier's cash flow is improved and risks are removed.

Suppliers are scored on specific metrics related to working conditions, environmental responsibility and overall responsible production. Those suppliers who score higher on their sustainability scorecards are rewarded with better rates.

Bottom line benefits

Another fashion brand leading the way in linking ethical practices with the bottom line is Puma. The German sporting goods company has also entered into a partnership with the IFC to provide financing to its suppliers in emerging markets – leveraging the same cloud platform.

Similar to the program at Levi's, Puma is now offering financial incentives for suppliers to improve environmental, health and safety and social standards. In its first phase, the programme will be rolled out in Bangladesh, Cambodia, China, Indonesia, Pakistan and Vietnam.

The IFC will adopt a financing structure with tiered pricing of short-term working capital, offering lower costs for those suppliers that achieve a high score in Puma's supplier rating system. The ratings are assigned based on Puma's monitoring of suppliers' adherence to its social and environmental standards through an auditing process.

The first supplier to join the programme made it clear that linking finance to ethical performance worked for them. "This programme will not only help us improve our cash flow, but will also provide us with a financial incentive to improve our environmental, health and safety and social standards", said Ken Hong, Ball Planet general manager.

While it might seem like an unlikely partnership, linking ethical practices and finance stands to deliver major benefits to all parties. Companies like Levi's and Puma recognise the importance of investing in supplier health by linking finance to ethical performance to create a winning combination.

About the author: Boris Felgendreher is senior director of marketing EMEA at GT Nexus, a cloud-based global trade and supply chain management network that connects all parties and orchestrates the movement of goods, data and money.