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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

- May 14, 2013 -

Supply Chain News: Update! Walmart Announces Own Plan; Bangladesh Tragedy Quickly Results in New Sourcing Rules, as Europe Leads Way While US Retailers Pursue Different Path

 

Agreement Would be Legally Binding, Requiring Investment in Building Improvements; A Game of Hardball for Sure Politically

 

SDigest Editorial Staff 

 

Update Wed. May 15, 2013, 9:00 am.

 

After declining to participate in a mostly European-led legally binding accord relative to worker safety in Bangladesh (see below), Walmart announced today its own program, committing to contracting immediately with a third-party auditing firm to inspect 279 factories the company uses in Bangladesh for fire and structural safety, and publish the results by June 1 of this year.

 

Walmart will force suppliers with deficiencies in their buildings to make repairs or risk being dropped from the company's approved list of suppliers. While unlike the European agreement Walmart will not directly provide any funds for such structural or operational improvements, a company executive said that Walmart will absorb price increases in the cost of the goods it buys if suppliers need that increase to fund its investments.

 

Walmart says it has also just published a list of 250 factories in Bangladesh that the company has already de-certified as potential suppliers for safety related issues.

 

The company is also setting up a hotline for apparel workers in Bangladesh to use to report any unsafe working or building conditions.

 

Original Story

 

Just as with the deadly apparel factory last November in Pakistan, the tragic collapse of a building housing several apparel factories in Bangladesh some three weeks ago, which has now killed more than 1200 in one of the worst industrial accidents in history, has as SCDigest predicted led to what will be changes in apparel sourcing practices, though much faster than we would have imagined.

The fire in Pakistan killed some 112 workers there, and the factory was found to have been making garments for Walmart, Sears and other big name retailers, even after it had been cited for unsafe conditions before the deadly blaze. Both Walmart and Sears said they were unaware production for their stores was being carried out at the facility, as it turns out the orders found their way their through what it has become clear are very murky sub-contract relationships in the Asian apparel industry.

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The agreement does not encompass sourcing from Pakistan, Vietnam, Cambodia, countries in Africa and other low cost sourcing options where conditions can also be dangerous for workers.

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That led Walmart a few months later to change a number of its sourcing rules, including barring any sub-contract work to manufacturers and facilities it has not approved, requiring inspectors for its tier 1 suppliers to be actual employees, not hired agents, and ending a sort of "three strikes and you out" violation policy to one where suppliers can be terminated for a single violation. (See First Shoe Drops After Bangladesh Fire, as Walmart Tightens Rules for Suppliers.)

Now, after the Bangladesh building disaster, in which workers were ordered back into the building after inspectors had ordered it evacuated after seeing cracks in the structure, changes are coming rapidly. Just a few days after the tragedy, Canada’s Loblaw’s chain and Europe’s Primark, which were each having apparel produced within the building, announced they would financially compensate the families of those killed and workers that have been injured. Details of those plans are not yet clear.

This week, a number of European retailers, including H&M, Inditex (parent of Zara), C&A, Carrefour, Marks & Spencer, Primark, PVH and perhaps others have all agreed to sign what is being described as a legally-binding contract that requires retailers to help pay for fire safety and building improvements in the factories they use in Bangladesh. The accord was actually drafted last year, but got near instant momentum after the building collapse.

The six-page agreement, called the "Accord on Fire and Building Safety in Bangladesh," lasts five years, and stipulates that the retailers will not to hire manufacturers whose apparel factories fail to meet safety standards and refuse to make improvements. For those that will make improvements, the signees will be committed to paying for necessary repairs and renovations – and that could certainly be a large expense. The agreement also includes an independent inspection program with public reports of all inspections, specifying, for example, that signees must inspect no fewer than 30% of the facilities of their tier 1 suppliers annually.

PVH said this week that it would contribute $2.5 million to underwrite factory safety improvements as part of the new plan.

How such costs would be split among various retailers and brands using an existing facility is unclear. Also unclear is how this would work in practice, as orders to apparel factories in Bangladesh and elsewhere are episodic and sometimes given for just a specific garment at a specific time.

The pact was negotiated by retailers with global worker-safety advocates, and overlapped with the Bangladeshi government's announcements that it would raise the minimum wage for garment-industry workers and make it easier for workers to unionize. At the equivalent of $37 per month, Bangladesh has among the lowest minimum wage levels in the world at present. Currently, Bangladesh factories must approve union formation at their operations, a rule that obviously means such efforts are usually futile.

The agreement does not encompass sourcing from Pakistan, Vietnam, Cambodia, countries in Africa and other low cost sourcing options where conditions can also be dangerous for workers.
That, apparently, will wait until some tragedy in one of those countries.


(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

 

The irony of course is that these low wages and few regulations are what drove the wave of apparel sourcing to Bangladesh in the first place, sending its level of exports to $18 billion annually, or some 75% of its total exports. Will the new costs that will come from the accord and changed in government rules push retailers and brands to some of these other countries instead?

That is the real unknown in the moves. For almost two decades, the apparel sector has been known for rapidly moving sourcing locations based on labor costs, tariffs and other factors that drive total landed cost per unit.

But, in its statement, H&M at least said it "will accept the price increase that might arise as a consequence of the salary revision."

It does not appear yet that any US brands or retailers have signed on. Walmart has as yet now made any formal comments on the proposal. Gap said it wouldn't sign the agreement in its current form because of language that makes it legally binding in U.S. courts. It has put forward an amendment that calls for retailers to be publicly expelled from the group if they fail to comply with arbitration, according to a person familiar with the matter.

"The litigation landscape is different in the US. than in Europe," said Bill Chandler, Gap's vice president of global corporate affairs. "Gap Inc. is ready to sign on today with a modification to a single area - how disputes are resolved in the courts."

However, Gap has promised $22 million in loans for factory improvements in the country.

There is also reporting saying that US retailers and brands are working with US trade groups to develop their own accord to improve overseas workplace safety, beyond only Bangladesh.

To show how this game works, US retailers are now being singled out for failure to announce they will sign the agreement in some quarters.

"Gap calls itself a leader on social responsibility," said Scott Nova, executive director of the Worker Rights Consortium. "The opposite is the case. Gap and Walmart are laggards."

So, if you don't sign a legally binding agreement within a few weeks of a major tragedy, the full implications of which are unclear, you are criticized by international labor organizations and elswhere.

Some investor groups, such as the public employee pension funds in California and Illinois, have called on US retailers, the stocks of many of which are owned in these state investment portfolios, to improve worker safety in low cost countries as well.

A copy of a recent and believe to be near final version of the agreement can be found here: Accord on Fire and Building Safety in Bangladesh.

According to the agreement, signatories will have 45 days to form a governing board and develop an implementation plan. The board will include three labor representatives, three retailer representatives and a chairman chosen by the U.N. International Labor Organization, meaning labor advocates will have a majority of the seats.

This will be interesting to watch.

 

What do you think of large companies extending payment terms to as much as 100 days? What is the impact on suppliers? Let us know your thoughts at the Feedback button (email) or section (web form) below.




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