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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global Supply Chain & Logistics

From SCDigest's On-Target e-Magazine

- April 24, 2014 -

Global Supply Chain News: Nike's Bangladesh Fork in the Road

Just Before Tragic Building Collapse, Nike Decided to Pull out of Bangladesh Sourcing; Safety or Margins?

SCDigest Editorial Staff

This month marks the one year anniversary of the tragic collapse of a building housing six apparel factories in Bangladesh that killed more than 1100 workers, in one of the worst industrial accidents of all-time.

Since then, competing plans between a group of mostly Euro retailers and brand companies and another led by US firms such as Walmart and GAP stores have been put in place to address safety concerns. Those plans include a better inspection process for factories in Bangladesh, as well as direct subsidies or loans to make improvements in apparel factories in the country, safety training, and other measures.

SCDigest Says:

"Did we pass up on margin because of that [decision]?"Jones says. "Absolutely."

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Engineers hired by the groups have conducted fire and building safety audits on about 700 factories so far, and have are expected to inspect an additional 1,500 by this summer.

But one prominent apparel company that has seen its share of criticism for global labor practices over three decades is largely sitting this one out - Nike. Based on concerns relative to factory safety, the company decided it would not tap the Bangladesh sourcing market in any meaningful way - probably at the expense of its bottom line.

The Nike story is illustrative of just how tough such global sourcing decisions can be, especially in the apparel sector.

That tale was detailed in a piece in the Wall Street Journal this week. The backdrop, of course, is that Nike had the primary corporate target for human rights and other organizations for many years, accusing it of using child labor, factories that operated in sweatshop conditions, and more. Most famously, in 1996 Life magazine published a story titled "Six Cents an Hour," with a photo of a boy sewing Nike soccer balls that caused a global reaction.

In general, Nike for a few years tried to just ride out the storm, saying it couldn't much control how its suppliers operated. But it got ethical sourcing religion before too long, developing a supplier code of conduct, performing factory audits, and otherwise committing to a healthier supply chain. It released names and locations of its supplier factories in the name of transparency, being one of the first to do so.

Though the critiques certainly did not completely go away, the volume of them certainly shrank. Nike gained credit in 2006 when it pulled some $100 million in soccer ball inventory out of the market after it appeared that the supplier in Pakistan had been using child labor.

"It sent a strong signal to our source base and Nike that we were going to put our money where our mouth was," Eric Sprunk, Nike's COO, told the Wall Street Journal.

Inflection Point on Bangladesh

A few years ago, Nike wanted to understand how a competitor could be selling fleece jacket similar to one sold by Nike for $10.00 less. Analysis showed similar material, sewing technique, etc. The answer, it appeared, turned out to be that the competitive jacket was made in Bangladesh.

"Our competitors were moving fast into Bangladesh and the pressure was getting bigger and bigger," Sprunk told the WSJ. "We needed a strong point of view to say, 'Are we going to increase our source base there or not?'"

(Global Supply Chain Article Continued Below)

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Bangladesh's low costs had enabled it to win a growing share of global apparel production, reaching $19 billion in exports by 2012, double the value in 2006.

While Nike had a very small vendor base in the country, its manufacturing team wanted to ramp that up to reduce costs and improve margins. But Hannah Jones, Nike's executive in charge of sustainable business, had concerns. A tool she had developed with outside help ranked Bangladesh very neat the bottom in terms of risk from a list potential sourcing regions.

What to do?

Jones , Sprunk and a few other took a joint trip to look at conditions in the country, starting with a visit to one of its few suppliers there.

What they found was worrisome: Rolls of fabric were strewn across the production floor and some windows were bolted shut, clear hazards in the event of a fire. The building was filled with other businesses whose safety practices were unknown.

While some inside the company though Nike could put the proper controls in place to raise safety levels, in the end Nike decided it would not expand into Bangladesh for sourcing. It also cut ties with the vendor it visited, Lyric Industries.

That decision came just three months before the tragic building collapse elsewhere in the country.

"Bangladesh represents a fork in the road for the industry," says Jones. One path leads toward the lowest costs, while the other toward safer factories. Nike took the latter path.

While the Bangladesh decision certainly isn't the only factor, margins at Nike are falling. Nike's gross margins fell to 43.6% last fiscal year, from 46.4% three years earlier, and remain below those of competitors such as Adidas.

"Did we pass up on margin because of that [decision]?"Jones says. "Absolutely."

What's your take on this Nike sourcing story? Let us know your thoughts at the Feedback button (email) or section (web form) below.

Recent Feedback

In the Procurement class that I am currently enrolled in here at the McCombs School of Business, we have discussed in-depth the concepts of sourcing decisions and supplier evaluations. The balance between labor standards and low labor cost is a delicate one and it's an issue that many top companies deal with. In an increasingly competitive economy, low cost is key cost driver, especially in the apparel industry where margins are minimal.

However, with that said, I have to support Nike's decision to pull out of Bangladesh. Although labor cost in Bangladesh is very cheap, it is critical to factor in risk when calculating the total cost of ownership. One of the important risks to consider is the continuity of supply. If a factory in Bangladesh collapses, what is the likelihood that production would continue? When sourcing to a country with low quality and safety standards like Bangladesh, it is critical for companies to have a steady contingency plan in place. We recently did a case competition in our Procurement class in which we had to develop a sourcing plan for Target socks. In our sensitivity analysis, my team discovered that a slight change in risk greatly impacted the total cost of ownership and subsequently, our sourcing decision. The high risk involved with sourcing to Bangladesh potentially outweighs the cheap labor cost.

Another factor is ethics. Business ethics is a touchy subject and is not as easily quantifiable as other costs. It ultimately comes down to company values, the company's mission and how the company's actions aligns with its values. Where is the company willing to draw the line between company profits and quality standards? Every individual and company will draw this line at a different point, but I stand with Nike on their ethical decision to not support subpar quality standards. There are other viable countries in the South Asia region to source from, including India, Pakistan and others. It's up to companies to evaluate their values and take that into account when making sourcing decisions.

Stephanie Wang
Student
University of Texas at Austin
Apr, 29 2014