A worrying trend is emerging in the garment industry: despite the growing attention to better working conditions, apparel import prices in countries like India and Bangladesh are going down, while the cost of production goes up.
Increasingly, factories are struggling to keep their heads above water. They will only stay afloat if brands are willing to pay more. The garment industry needs fair negotiation processes that help factories and brands reach a fair price.
Covering production costs
Let’s take Bangladesh as an example. In December 2018, a new legal minimum wage went into effect. Good news, most people would argue. However, the rise in the cost of production is exacerbating the difficult situation many factories face. The root cause of their difficulties is multifaceted, but at the heart of it lies the problem that many brands are not amending their prices sufficiently to reflect the wage increases.
The International Labour Organization’s (ILO) ‘Survey on purchasing practices and working conditions in global supply chains” found that only 25% of buyers increased their prices following a minimum wage rise. A notable exception is in Bangladesh, where suppliers reported that only 17% amended prices following the minimum wage increase. In addition, 39% of the surveyed suppliers have accepted orders whereby the price did not cover their production costs. In the textile and clothing industry, this problem is significantly higher, and was reported by no less than 52% of suppliers (in Bangladesh).
What is the consumer willing to pay?
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataEUROSTAT statistics indicate that garment prices in Bangladesh decreased by 3.64% between 2014 and 2018, despite the 30% spike in production costs during this period. This same picture also emerges in research from Penn State University, which makes note of price pressure and the resulting declining prices paid to factories. During Fair Wear Foundation training and factory visits, most factories confirmed that there is ongoing pressure to reduce prices, which is leading to unsustainably low profit margins (as low as 3-4%) and factories often being compelled to sell below cost.
This drop in apparel import prices is also found in other important garment-producing countries. Research shows that European and American import prices from India also decreased in the past years, even though the cost of production also went up there.
So why are brands not paying enough? We are not saying that brands are determined to unscrupulously squeeze their suppliers. It is more about the inherently flawed way the market operates and the prevailing power imbalance between brand and factory. Part of the answer lies in the fact that brands take projected retail values, i.e. how much the consumer is willing to pay, to determine the FOB/CMT price that the brand pays to the factory. This top-down way of negotiating fails to consider the actual cost of production, including paying decent wages, investing in safety, etc. Conversely, bottom-up costing, where actual labour and other production costs determine the FOB/CMT price, is rarely practiced.
Minimising loss
Brands end up with the ideal conditions to ‘shop around’ until they find a factory that is willing to meet their target price. Brands might request quotes from three buying houses and each of these then approach a number of factories within their authorised pool of factories. Factories know that they must push their prices down to the bare minimum to have any chance of winning an order. If a factory only has a few customers, it has even less room to negotiate, as losing an order could mean imminent bankruptcy.
Additionally, many factories are faced with unutilised capacity, which is partly caused by unpredictable production planning by brands. For example, five production lines are reserved for a promised order, but the factory only needs four lines in the end. In such cases, accepting an order below the cost of production is not about making a profit, but rather about minimising the loss. As one factory manager put it, “it’s often a choice between taking the order and losing 30% or not taking the order at all and losing 100%”.
Moreover, in Bangladesh, far too many factories compete with the same staple products, like trousers, jeans, polo-shirts, etc. When craftsmanship and quality are consistently and equally high across the board, price becomes the single most important determinant for brands in awarding orders.
Playing by the rules
Many garment brands’ business practices are not in line with the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector which, among others, requires enterprises to: (i) strengthen their management systems to avoid contributing to harm through their purchasing practices; and (ii) develop pricing models that account for the cost of wages, benefits, and investments in decent work.
It’s remarkable that most brands will accept an increase in prices when fabric costs rise or currency exchange rates fluctuate, but they will start bargaining when the minimum wage goes up. This is partly caused by the fact that labour costs are often hidden in a factory’s CM price, which normally also includes overhead and profit. Not knowing the actual labour component of an FOB price makes it difficult to negotiate the necessary price increase when wages go up. The brand would logically argue, “labour costs have gone up, fine, but why should I now pay US$5 instead of $4?”.
Labour minute calculator
Garment brands play an essential role in creating the necessary conditions that allow a factory to ensure good working conditions. When wages go up, purchasing prices must follow suit. If a brand understands what amount of the price relates to labour, there is a greater chance of fair negotiation. Fair Wear has come up with tools that help factories and brands with this.
Fair Wear’s labour minute and product costing tools offer transparency and precision for determining the labour component in cost-price negotiations. The methodology uses actual wage data of a factory to calculate how much it would cost to cover higher minimum wages or to raise wages to a living wage. It first enables suppliers and buyers to determine the cost of one minute of labour in a factory, considering factory-specific variables such as workforce composition, bonuses and insurance, and actual overtime hours. Next, the price of one minute needs to be multiplied by the number of sewing minutes required to make a garment, taking efficiency into account. The result: the actual labour costs for a certain product. When wages go up due to a minimum wage rise, application of a CBA wage level or a living wage benchmark, the tool allows a factory to calculate the effect such an increase will have on the manufacturing (CMT or FOB) price of garments.
Shared responsibility
This methodology helps factories justify a certain price increase. More responsible brands, and there are many, can use it to show they have paid their share to enable a factory to at least cover the legal minimum wage. Furthermore, more progressive brands are already using it to work towards living wages at their supplier factories. With the tool, they can demonstrate that they are taking responsibility for their share of total production.
Factories need to improve. They need to invest in efficiency and, in order to become less vulnerable, in product and market diversification. But brands also need to improve; they must create the conditions for factories to increase efficiency, invest in long-term business relations, convey their production plans accurately and in a timely manner, and make sure that they pay fair prices based on the actual cost of production, rather than on ‘what the consumer is willing to pay’. Working together towards transparency in costing can diminish the adverse ‘bargaining’ culture. And that is a win-win situation for both brand and factory.
