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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- Jan. 9, 2013 -

 
Supply Chain News: Deadly Apparel Factory Fires in Pakistan and Bangladesh Once Again Highlight Offshore Sourcing Risks – and Potential Value of Risk Monitoring Services

 

Can Procurement Managers Control Risks Associated with Sub-Contracting? Ethical Sourcing - or the Low Price?

 

SDigest Editorial Staff 

 

The last few months of 2012 were unfortunately marred by two deadly fires at offshore apparel factories used as suppliers by prominent Western companies, tragedies that are likely to spur changes in sourcing practices and regulations - and perhaps further spur corporate interest in obtaining better and more timely supply chain risk-related information.

In early September, a fire erupted at an apparel factory complex in Karachi, Pakistan, killing more than 300 workers there. Many of them died because exit doors from the shop floor were not available, or were padlocked and windows barred, blocking escape routes.

SCDigest Says:

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Some observers say that large US and European retailers know full well their original orders are being outsourced through the middlemen they use, and what drives the deal is overwhelming the ability to deliver the volumes required at the lowest price.

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The story grew even more tragic when information came to light that in August, that factory complex had received the prestigious SA8000 certification from inspectors working for Social Accountability International, a non-profit monitoring group based in New York that obtains much of its financing from corporations and relies on affiliates around the world to do most of its inspections. To receive that certification, facilities must meet international standards in nine areas, including health and safety, child labor and minimum wages.

Western companies will use such certifications as evidence that they are ethically sourcing. Obviously in this case, the inspectors must not have done a very thorough job, with bribes certainly another possibility.

The New York Times said that "The Karachi tragedy is a huge embarrassment to the factory monitoring system," and the event caused many others to question whether corporate-sponsored groups can really well monitor conditions at suppliers. Another example of such groups is the Fair Labor Association, an organization started primarily with funding from the apparel industry, and which gained prominence in early 2012 when it was hired by Apple to audit conditions at some of its contract manufacturing sites.

"We're trying to find out what went wrong," Eileen Kohl Kaufman, executive director of Social Accountability International, said in an interview shortly after the deadly fire.

About the same time, Richard Locke of MIT'S Sloan School of Management, said that "Even after a decade or more of such private monitoring efforts, these programs, no matter how well funded or designed or how well trained their auditors are, simply do not in and of themselves produce sustained and significant improvements in labor standards in most supply chain factories."

Critics also say that factory owners and managers are usually informed of the inspection visits before they happen, giving them time to hide dirty laundry and to coach employees about what answers to give.

Then in November, an eerily similar fire at an apparel factory in Bangladesh, which killed at least 112, a total again dramatically escalated because of a lack of escape routes and locked doors and windows.

This time, a number of prominent customers being supplied by the company were named, and included major retailers as Sears, European chain C&A, and, it turns out, Walmart, among many others. Walmart later stated that the factory was not on its approved list," but the garment work went there anyways after an approved supplier subcontracted the work to the fatal factory. Sears also said it did not know the factory was one of its apparel sources.

Bangladesh has been growing its apparel export business rapidly, using low prices to grab global market share. But that means many manufacturers are cutting any corner they can to turn a profit, with safety being a common area of neglect.

That was certainly the cases at Tazreen Fashions Ltd, where the New York Times says "Fire safety preparations were woefully inadequate. The building itself was under construction — even as sewing work continued inside — and mounds of flammable yarn and fabric were illegally stored on the ground floor near electrical generators." The factory did not have ceiling sprinklers or an outdoor fire escape for upper levels of the facility.

Tarzeen had in fact been faulted for violations during inspections conducted on behalf of Walmart and and the Business Social Compliance Initiative, a European organization similar to the Social Accountability International.

The factory's owner said a team from Walmart's local office conducted a compliance audit last year and cited the factory for excessive overtime, but did not mention of fire safety or other issues.

 

Still, the work kept coming, often through sub-contracting.


(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

 

Some observers say that large US and European retailers know full well their original orders are being outsourced through the middlemen they use, and what drives the deal is overwhelming the ability to deliver the volumes required at the lowest price. Capacity constrains at any one facility lead to rampant outsourcing.

Jahangir Alam, an officer for ethical sourcing at Walmart's office in Dhaka until late last year, told the Wall Street Journal that "with multiple subcontracts going on, it has become almost impossible for buyers to practice ethical sourcing in the true sense."

Warning Signs were There

It appears that there were enough warning signs coming out of Bangladesh that it now appears in retrospect Western companies should have already been on high alert before the tragic fire.

First, the specific Tarzeen factory had had its operating license suspended in late June in part over lack of fire safety concerns, a government official in Bangladesh said.

Another inspection in 2011 by a Walmart supplier that used the factory for sub-contract work had found that that exits and stairwells at the factory were blocked, workers were unaware of evacuation routes and the factory lacked some firefighting equipment. Though Tarzeen promised to make corrections by the end of the year, the first tier supplier, Canada's NTD Apparel, de-listed the factory last March.

But that move would have only impacted NTD. The rest of Walmart's supply chain, let alone other retailers, would be unaware.

There were also clear warning signs for all of Bangladesh's apparel complex.

The brand new SmartWatch risk monitoring service from LexisNexis exclusively provided SCDigest with a list of news stories from the past two years showing these many leading indicators. Headlines for that period include "Factory fire kills eight in Bangladesh," from March 2011.

"Grameen Knitwear Factory Gutted, 10 Hurt," says another from around the same time.

"Gap to Implement Fire Safety Plan in Factories in Bangladesh," says another article posted just prior to the fatal blaze.

All told, SmartWatch found more than 50 stories that in retrospect should have served as warning signs to Western companies that there is a clear risk of a major fire disaster in the country. To users of the service, that insight and more would be delivered via an attractive dashboard interface. The clear message: It's time to take further action, or move sourcing elsewhere – unless price really was the only real driver of sourcing decisions.

The challenge though is that almost all of these stories are from non-US sources, and many of them from obscure (to Westerners) publications such as The Bangladesh Edition of Financial Express, a state run news service, The Times of India and many similar sources.

That is why many companies might want to consider one of these new risk monitoring information services, such as the new LexisNexis SmartWatch that supplied SCDigest with this data. Dow Jones has another one called Supplier and Risk Monitor.

 

Sample of the More than 50 Stories SmartWatch Found in Last Two Years
Indicating Risk of Factory Fires was Growing in Bangladesh

 

 

Source: SmartWatch/LexisNexis

 

In the case of the SmartWatch product, for example, filters could be applied to deliver a wide range of news across numerous local and foreign language (translated) publications in a region and a country such as Bangladesh itself, with embedded intelligence to rate the importance of each piece of news and a period of news over time.

"It certainly appears that using such a capability, warning indicators that fire risk was rising in Bangladesh would certainly have been triggered, letting buyers or others know that mitigation strategies may be appropriate," said SCDigest editor Dan Gilmore. "Whether that would have prevented this specific tragedy is unclear, but I think these types of intelligent tools are certainly going to need to be part of the risk management capabilities portfolio for many companies."

Mikhail Shiper, a secretary in Bangladesh's Ministry of Labor and Employment, said the government there was reviewing labor safety rules following the fire and would make sure that factories that didn't meet labor laws and safety standards would be shut down. "The Tazreen fire is a wake-up call," he said.

It should also be a wake-up call to Western companies to better understand what is really happening in lower tiers of their supply chains, and to get better upfront intelligence about news and trends related to risk across the globe to be more proactive, not reactive.

What are the implications for procurement managers from these sub-contractor issues? Are changes needed? Do companies need better information sooner to take action? Let us know your thoughts at the Feedback button (email( or section (web form) below.





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