By Leonie Barrie | 13 December 2018

One relatively under-explored aspect of global supply chains is how buyer purchasing practices can put pressure on suppliers in terms of timeline, prices and delivery – and the knock-on impact on suppliers' capacity to provide decent wages and working conditions.

Anecdotal evidence, of course, suggests there's no doubt that taking a responsible stance on purchasing has long-term business benefits. And, conversely, that tight price negotiations can lead suppliers to pay lower wages to their workers, while insufficient lead times systematically increase the number of overtime hours.

But it's only by putting the right questions to suppliers themselves do the true implications emerge.

Indeed, this was one of the main aims of a joint survey by the International Labour Organization (ILO) and the Ethical Trading Initiatives (ETI) of Denmark, Norway and the UK – the results of which have been compiled into an ILO policy brief and an ETI Guide to Buying Responsibly.

"We and the ILO went straight to the horse's mouth and spoke directly to suppliers, incorporating what they told us in the guide. We asked suppliers to speak up. We wanted to ensure clarity over any contractual constraints they face in ensuring workers get a good deal," explains ETI's executive director Peter McAllister.

"What came over loud and clear is that suppliers are often the best placed to help global brands meet their ethical commitments if they are treated fairly, underpinning sustainable business for all."

While the supplier survey was not specific to the garment industry, it pulls together insight from nearly 1,500 supplier companies employing 1.5m workers across 87 countries.

Its advice shows that more needs to be done to enable suppliers to raise their ethical standards, which will have knock on effects for the resilience of supply chains. "Adopting responsible purchasing practices will allow companies to optimise costs, increase productivity and quality and reduce operational and financial risk," adds McAllister.

Conflicting messages

The research identifies a number of conflicting messages. For example, while many companies require suppliers to respect their codes of conduct (CoC) and monitor suppliers' labour rights performance, their buying practices often sit at odds with these initiatives.

Many buyers will have been trained to negotiate aggressively on price, delivery times and product quality, rather than ethical criteria

Many buyers will have been trained to negotiate aggressively on price, delivery times and product quality, rather than ethical criteria – and, typically, are not incentivised to make ordering decisions based on respect for human rights.

Even the presence of a code of conduct does not always promote better working conditions, as many buyers do not accompany such standards with support and financial assistance, adding further pressure to suppliers' margins.

A low willingness by buyers to incorporate rises in the legal minimum wage into the prices agreed with suppliers may also reduce the possible margins for suppliers, and thus also impact wages and working conditions.

And a 'race to the bottom' on price as suppliers compete for customers' business means they have less to invest in improving factory conditions. In many cases, this can lead to an extended chain of subcontractors and informal work.

Added to this, buyer purchasing practices often include poor forecasting, inaccurate technical specifications, late orders, short lead times and last minute changes – all of which put suppliers under intense pressure and lead directly to increased overtime hours, and low pay for workers.

Other direct impacts include irregular working hours or excessive overtime, use of temporary workers, and to a lesser extent, sub-contracting. And pressure to raise productivity quickly means suppliers' costs rise through payment of overtime, adding to their overheads.

But the burden on suppliers and their workers is only likely to intensify, especially in the apparel industry where the tendency towards increased consumption, driven by fast fashion's multiple seasons and short lead times, has placed a significant strain on garment factories.

Five practices that influence wages and working conditions

The ILO policy brief outlines five key buying practices that influence wages and working conditions: contract clauses, technical specifications, order placement (and lead times), prices and marketing power.

What suppliers say...on contracts

  • 65% of the suppliers surveyed have written contracts with their customers;

  • But in 70-80% of cases, contracts only cover order volume, delivery date and quality thresholds;

  • 30% of the time, price is not part of the written contract;

  • Only 49% of the contracts specify who will be responsible for the costs incurred when there are changes in orders;

  • And 49% of contracts in the textile, clothing, leather and footwear industries specify minimum standards of working conditions.

Results from the survey also suggest that while 35% of suppliers have some unwritten contracts with buyers, this percentage is even higher in suppliers from countries such as Bangladesh (38%).

What suppliers say...on technical specifications

  • 57% of the surveyed suppliers carry out their own product development;

  • More than one-third of companies suggest there is room to improve technical specifications.

Unclear needs and inaccurate specifications from the buyer can lead to excessive sampling and extra costs, as well as quality issues, delivery delays and overtime. The majority of suppliers shoulder the cost of research and development, which limits their ability to invest in supporting workers' rights and pay living wages. One-third of the companies suggest there is room to improve technical specifications – a percentage that is even higher in sectors such as textiles and clothing.

What suppliers say...on lead times

  • 51% of suppliers highlighted that overtime had not decreased over the past two years;

  • 35% of suppliers in the textile and clothing industry face penalties for failing to meet order specifications (compared with a survey average of just 5%);

  • Only 17% of suppliers considered their orders to have enough lead time; the majority reported that more than 30-50% of their orders had insufficient lead times.

Clearly, lead times are getting shorter and suppliers must produce more rapidly, which they increasingly do by resorting to overtime, casual labour or even outsourcing of production in order to meet their deadlines. Sometimes, short lead times are due to a lack of effective communication between suppliers and buyers; for instance, an Indian garment producer reported that sample approval is taken by his buyers as the point at which bulk production can start, while the supplier still needs to clarify other aspects of the product, such as testing, packaging and other details. In other cases, some buyers take production time from order placement, others take it from sample approval. Textile and garment manufacturers were identified as those with the most inadequate (too short) lead times.

What suppliers say...on market power and prices

  • 64% of buyers assess performance primarily on product quality, price and lead times;

  • For 15% of suppliers, price is always the main reason why a buyer terminates the relationship;

  • 52% of suppliers in the textile and clothing industry have accepted orders whose price did not allow them to cover their production costs;

  • Suppliers in low Human Development Index (HDI) countries are more likely to sell below costs;

  • 81% of suppliers in textiles, clothing, leather and footwear said one of the main reasons for selling below cost was to secure future orders;

  • Only 25% of buyers were willing to adjust their prices to incorporate statutory increases in the minimum wages of suppliers' countries; in Bangladesh the figure was just 17%.

These results, the ILO policy brief points out, "appear rather paradoxical in light of the recent pressure from major global brands to encourage the governments of countries such as Bangladesh or Cambodia to increase the level of the minimum wage – and the same buyers' commitment to increase prices to allow this to happen."

What suppliers say...on demands for social standards

  • More than 90% of surveyed suppliers were expected by their buyers to follow a code of conduct;

  • But 49% of these receive no help from their buyers in achieving the demanded social standards;

  • Companies in the textiles, clothing, leather and footwear sectors achieve more help from buyers to meet the demanded social standards (66%), notably in terms of training. However, this may not necessarily mean that garment buyers are more concerned than others – but rather that working conditions in this industry might be worse;

  • 64% of buyers assess performance primarily on product quality, price and lead times;

  • For 15% of suppliers, price is always the main reason why a buyer terminates the relationship; lack of performance on social compliance is the least likely reason.

The way forward

The ETI Guide encourages buyers to adopt responsible practices by supporting suppliers through fairer prices, contracts and lead times to enable them to improve working conditions, thereby increasing productivity and lowering the risk of disruption.

"Wherever possible, dialogue to help improve purchasing practices, and thereby conditions for workers, should involve the whole value chain (buyers, intermediaries, suppliers, workers and their representatives). In particular, we recommend that companies strive for a 'win-win' partnership with suppliers."

It advises that buyers can catalyse widespread positive change in their supply chains by:

  • Sharing responsibility and risk;

  • Building a deeper understanding of production;

  • Forging a constructive, ongoing dialogue with suppliers, through which suppliers are rewarded for better practices;

  • Making labour standards and other ethical criteria a core part of buying negotiations.

Click on the following links to download a copy of the ETI's Guide to buying responsibly and the ILO Global Survey results.

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