In recent years, companies have been facing increased scrutiny regarding how and from where they are sourcing materials and products. Most notably, Apple came under heavy investor and public criticism after the poor working conditions at one of its manufacturers, Foxconn, came to light. Since that time, Apple has expended significant resources to monitor and actively improve the working conditions for its suppliers; however, investors have still expressed concerns about this issue, as evidenced by several shareholder proposals regarding Apple’s human rights impact and policies that were put forth its 2013 annual meeting. Additionally, companies that are using “conflict minerals,” or tin, tantalum, tungsten and gold sourced from the Democratic Republic of Congo will likely soon have to disclose information regarding the sourcing of these materials in official filings submitted to the SEC. Given the increased importance and scrutiny placed on this issue, it is not surprising that executives are beginning to pay attention to how they source materials. A recent Deloitte survey found that 71% of the 600 executives surveyed stated that supply chain risk is an important factor in their strategic decision-making. However, 45% of these executives stated that their supply chain risk management programs are only somewhat effective or not effective at all.
Ineffective supply chain risk management programs could present significant issues for companies, as recent events have exacerbated the issue of supply chain sustainability, particularly for companies sourcing garments from Bangladesh. In November 2012, 112 people were killed in a garment factory fire in Dhaka, Bangladesh. The factory, operated by Tarzeen Fashions has made clothing for Walmart, among other firms. In April 2013, Rana Plaza, another garment factory in Dhaka collapsed, killing more than 1,000 people, making it one of the world’s worst industrial disasters in history. As a result of this collapse, the owners of the building, which made clothing for Loblaw’s Joe Fresh band and for the Associated British Foods’ Primark brand, was arrested and the government closed 18 other factories. However, two weeks later, on May 9, a fire broke out in another garment factory, killing at least eight people. However, according to a top fire official in Bangladesh, the fire was not a result of shoddy construction or disregard for safety regulations, rather the deaths were caused by panic and bad luck.
Bangladesh is uniquely situated as it is one of only a handful of locations that can handle the complexity necessary to produce products for many of the leading clothing manufacturers, thus it has attracted significant investment from companies selling clothing. Currently, the textile industry accounts for 80% of Bangladesh’s total exports and is estimated to employ more than 3 million people in the nation. However, these workers are making very low wages, some earning only 6,800 taka, or $87, with overtime each month. Additionally, these workers are exposed to significant safety risks. According to Iftikhar Khan, who runs a civil engineering and design firm that does work in Dhaka, only about 0.01% of buildings in Bangladesh are well built and conform to the building code. “The government inspections are just a formality and there is no oversight into what really happens on the ground on construction sites.” Additionally, according to the United Nations Office for Disaster Risk Reduction, Dhaka is in a high-risk earthquake zone, leaving the region even more susceptible to disaster. In fact, according to the Comprehensive Disaster Management Programme, at least 72,000 buildings in Dhaka will collapse or suffer significant damage in the event of a magnitude 6 or 7 earthquake.
Given these risks, many companies have moved to take action to mitigate their exposure to the best extent possible. For example, in response to the recent incidents in Bangladesh, at least seven companies, including Europe’s two largest clothing retailers, H&M and Inditex SA, have committed to an agreement to work to improve fire safety in the region and on May 15, Abercrombie and Fitch became the second U.S. company, following PVH Corporation, the parent company of Tommy Hilfiger and Calvin Klein, to join this accord. The agreement would run for five years and would require companies to pay their suppliers higher fees so that more factory owners could afford to make safety upgrades. The plan also calls for a review of existing building regulations and enforcement, the development of a worker compliant process and a mechanism for employees to report risks. However, this may be a costly undertaking. According to the Worker Rights Consortium, the global garment industry would have spend approximately $3 billion over five years in order to bring the safety standards of Bangladesh apparel factories up to Western standards, which would equate to approximately 10 cents per garment.
Despite these costs, there has been a push for more U.S. companies, including Gap and Walmart, to join this agreement. Gap has stated that signing on to the new accord could expose companies to excessive legal liability, by allowing overzealous American lawyers to seize on the agreement to sue American companies on behalf of aggrieved factory workers in Bangladesh. As such, the firm has established a new proposal that it “thought would bring other American retailers into the fold” and that would “be a step forward and would turn it into a much more global agreement.”
Walmart, whose annual meeting will occur in early June, has determined to take a different course of action. The firm, which is still under heavy criticism from bribery allegations and violations of the Foreign Corrupt Practices Act, has denied any knowledge of having production orders at the Rana Plaza building, despite photographs of documents tying Walmart contractors to the factory that were recovered in the building’s rubble. While Walmart stated that it was unwilling to sign the aforementioned accord, it has stated that it will “conduct in-depth safety inspections at 100 percent” of the 279 factories it uses in Bangladesh and that it will provide the details of these inspections on its website. The firm further promised to immediately halt production at factories if urgent safety problems were discovered, but has not agreed to underwrite improvements to safety in those factories.
On May 16, the Interfaith Center on Corporate Responsibility released an investor statement, on behalf of investors and stakeholders repressing over $1 trillion in assets under management. This statement called on industry leaders “to implement systematic reforms that will ensure worker safety and welfare, and to adopt zero tolerance policies on global supply chain abuses.” The same day, another investor statement was released that was signed by investors such as Amalgamated Bank, the AFL-CIO, CalSTRS and the Illinois State Board of Investment. This statement similarly expressed significant concerns regarding companies’ inattention to supply chain risks and encouraged companies to disclose more information regarding their supply chains. The investors stated that they “expect companies in
At the heart of many of these investors concerns is companies’ exposure to reputational risk- something to which consumer goods companies may be particularly vulnerable. According to a recent poll, approximately 70% of Americans stated that they had heard of the building collapse in Bangledash. Moreover, of those that heard of the collapse, 39% stated that they would probably buy fewer products produced in the region. Given that this consumer sentiment could have bottom-line implications for companies, it is important that these companies ensure that they mitigate any potential reputational or supply-chain related risks to the best extent possible, either through active engagement with their suppliers or through withdrawing from the region.
According to Steve Hoch, a marketing professor at the University of Pennsylvania’s Wharton School, “[m]ost brands are smart enough to embrace the issue at hand and signal to the consumers they’re doing something about it. If it does tarnish the brand, it’s going to really cost them in the long run.” Some brands have chosen to take action by not supplying from manufacturers in Bangladesh altogether. For example, in March 2013, Walt Disney removed Bangladesh from a list of countries where its partners can produce clothing and merchandise.
However, other than Bangladesh there are only a few other countries with the ability to handle the complex systems required for producing and shipping large quantities of high-quality garments within several weeks of receiving an order- China, Vietnam, Indonesia and to some extent Cambodia and Pakistan. Thus, finding alternative suppliers that pose less risk than those in Bangladesh may be quite challenging for a number of companies. According to a recent New York Times article, many companies may be turning to Indonesian suppliers, which have an industry code requiring that garment factories may not be more than two stories high. This code could better protect workers by making it easier for them to exit during a fire, or natural disaster such as an earthquake or volcano. However, according to the CFO of a large Jakarta-based manufacturer, “there are definitely customers that are looking for more capacity than we can offer them, because they want to move orders out of Bangladesh and out of China.”
It does not appear that companies will be spared from the risks associated with worker safety by simply moving operations out of Bangladesh. On May 13, the ceiling of a Cambodian factory that made sneakers for Asics collapsed, killing two workers and injuring seven others. While supply chains can be complex and difficult to properly manage, this string of events starkly highlights the necessity of companies to put in place processes of managing and assessing their suppliers and the suppliers of their suppliers, as failure to properly do so can expose companies to significant risks.