The garment and footwear giants can keep down supply chain costs without sacrificing ethical standards

The global financial crisis is taking its toll on retailers. Retail sales dropped in the US in October for the fourth straight month, the longest decline in 16 years, according to the US Department of Commerce. Market researcher Nielsen predicts that sales will remain flat or even decline during the US holiday season, from Thanksgiving in November to January 1. Sales in this period traditionally form the bulk of retailers’ annual figures. In Europe, retail sales fell for the fifth straight month in October and the outlook is grim for the festive season.

Retailers started feeling the pinch many months before the financial markets collapsed. Since late 2007, hit by weakening consumer demand, dozens of retail chains in the US have gone bankrupt and thousands of stores have shut.

Retail woes in the US are reverberating across global supply chains. According to local media reports, hundreds of factories producing clothes, toys, footwear and accessories have either closed or scaled down operations in supplier countries including China, India, Pakistan, Cambodia, Sri Lanka, Vietnam and Bangladesh, as buyers cut orders. Hundreds of thousands of workers have lost their jobs while others are seeing declines in their earnings as factories cut hours.

Apart from the latest fears of global recession, suppliers in these countries have been struggling with rising inflation, increased input costs, higher wages, fluctuating currency and tightening credit availability.

Sources in the clothing supply chain economies say the industry is going through its biggest crisis in years. One garment manufacturer in Dhaka, Bangladesh, says: “Factories are now undercutting each other to grab orders just to keep running.”

Standards drop?

So what happens to social and environmental standards in the supply chain when economic times are tough? How will retailers demand higher ethical standards from suppliers when they are cutting orders and bargaining harder for lower prices and longer credit terms?

In public, brands are sticking to their commitments to responsible sourcing. William Anderson, Asia-Pacific head of social and environment affairs at sportswear giant Adidas, says: “The safeguarding of worker rights and entitlements will remain the necessary focus of our efforts.”

Wal-Mart made headlines in late October when chief executive Lee Scott announced tougher measures to improve social and environmental standards in factories supplying the big-box retailer. “Meeting social and environmental standards is not optional,” Scott told suppliers, Chinese government officials and non-governmental organisations at a sustainability summit in Beijing.

Under the plan, Wal-Mart suppliers will be asked to sign a new sourcing agreement that will require factories to certify compliance with laws and regulations where they operate as well as rigorous social and environmental standards.

Wal-Mart audits will now include a focus on specific environmental criteria – including a factory’s gas emissions, its wastewater discharges, and its management of toxic substances and hazardous waste. The agreement will be phased in, beginning with suppliers in China in January 2009 and expand to suppliers around the world by 2011, according to a company statement.

“[Wal-Mart] made this commitment in the middle of the global financial crisis and that is important. They are making sustainability a huge part of their business model,” says Laura Commike Gitman, director of advisory services at Business for Social Responsibility, a US-based corporate responsibility membership group.

Wal-Mart suppliers will no doubt have to comply with the retailer’s demands. However, surviving the recession is factories’ top concern at this time, which will require them to reduce costs and improve efficiency. Gitman says there are many opportunities in the supply chain to reduce costs, such as by energy-saving and management systems that improve worker productivity and product quality as well as working conditions.

Given the fears of recession, the real effectiveness of Wal-Mart’s new push will depend on how far the retailer can convince its suppliers that better ethical standards will also reduce costs.

Cutting costs

“There are a number of ways to cut costs and maintain good environmental and social standards,” says Sean Ansett, the head of Madrid-based At Stake Advisors and former director of global partnerships at Gap. “It has traditionally been easier for companies to quantify advantages and savings from environmental initiatives. The social side can be more difficult to quantify but worker productivity, supply chain stability, quality and innovation are key factors that can be measured and justify investment.”

Experts say that supervisory skills training for production supervisors and senior managers can positively impact the enterprise bottom line. A similar training initiative by the International Finance Corporation in a pilot project in Cambodia in 2006 was shown to reduce absenteeism by 8% and the rejection rate of products by up to 44%, leading to an overall improvement in productivity and management-worker relationships.

“The findings highlight that companies willing to invest in their social capital can improve their bottomline without compromising social performance and compliance to international standards,” says Eleonore Richardson, IFC’s project manager for its environmental and social sustainability programme in Cambodia, who works with the International Labour Organisation and other donor organisations to improve working conditions in garment factories in Cambodia. IFC is now rolling out the training programme for the rest of factories in Cambodia and plans to extend it to Vietnam.

Ironically, funding for such improvement programmes is coming from donor organisations, rather than brands or factory owners. Retailers are not known for investing in productivity improvement in supplier factories. In retail supply chains, a factory is usually shared by several brands and none of them guarantees business to the factory. Even factories try hard to diversify their customer portfolio to reduce dependency on any one particular brand. And the only way to get an order from any brand is to offer the lowest price, as most brands use competitive bidding to decide orders. Brands therefore see no reason why they should invest in a factory’s productivity, observers say.

Collaborating to increase productivity in the supply chain presents a major opportunity for brands that want to reduce waste and cut costs in supplier factories. Most garment factories in Asia suffer from low productivity as they have not invested in training, technology and systems. “It’s possible to improve labour productivity by 50%-70% in most garment factories in Asia in the medium term,” says Rajesh Bheda, a prominent garment manufacturing consultant and the former chairman of the department of fashion technology at the National Institute of Fashion Technology in India.

He is currently working with the Bangladesh Garment Manufacturers and Exporters Association on a pilot project with a target to improve productivity by at least 20%. Bheda says that implementing production systems that focus on the principle of “making the product right the first time” can also save valuable resources – it is common for factories to waste resources repairing a garment several times to meet the quality standards.

Factories often resort to excessive overtime and other cost overruns because of poor production planning. “Better planning, which helps factories to have realistic production targets, can improve cost efficiency,” says Dionne Harrison, Asia-Pacific director of Impactt, a UK-headquartered consulting firm with a focus on sustainable supply chains. Getting in-house designers to understand how design changes have knock-on effects further down the supply chain is a key aim for corporate responsibility directors in the clothing industry.

Saving on energy and reducing wastage is another area that is likely to come into focus as a cost reduction measure. Adidas’s Anderson says: “For the past five years we have been encouraging suppliers to reduce energy and resource use. We will continue to deliver training on environmental improvement measures, which are closely aligned with our suppliers’ interest in securing cost savings in these challenging times.”

AKG Nair, director of India’s leading school for the garment and retail industry, Pearl Academy of Fashion, says: “There will be pressure on all to optimise all elements of supply chain including reducing wastages, shortening the lead time and better inventory management to stay competitive.”

What do customers want?

Many observers fear that as the recession takes hold, shoppers will care less about ethics and focus more on price. If this proves to be the case, it is feared that brands in turn will focus less on how products are made and more on buying them for the lowest possible price. But what do customers really want?

“Even though social and environmental awareness is at its highest ever, the credit crunch and fear of job losses have taken over ethical concerns. Consumers are now making more value choices. This will discourage the launch of new sustainability products,” says Teresa Fabian, director of sustainability at PricewaterhouseCoopers in the UK.

Some reports have suggested that sales of organic and fair trade products are slowing down while more consumers are showing a preference for cheaper goods. But Peter Lacy, director of sustainability at Accenture in the UK, says: “It is wrong to believe that consumers are not interested in social and environmental aspects any more just because they are not able to pay. They are going to look for both value and ethics.”

As sales decline, companies may prefer to rely on promotions and low prices to retain customers rather than focusing on sustainability. Lacy says companies that combine value with quality and sustainability are going to do well with consumers. He advises retailers to take stock of their sustainability portfolio. “They should invest in high impact sustainability initiatives which can be aligned with high cost reduction, both in short term and long term such as energy and transport,” he says.

Experts warn that squeezing suppliers with lower prices and demanding longer credit periods may not be a good idea, though many brands may be tempted to do so to reduce their own costs. “This is a critical time for brands and factories to come together and take a longer-term view. This is not the time to cut prices. This is a time for transparency and stronger partnership,” says BSR’s Gitman. She adds that brands should be able to show suppliers how they can maintain social and environmental performance during difficult times without hurting business.

Impactt’s Harrison says retailers should reward those suppliers who make overall improvements on efficiency and social and environmental aspects by guaranteeing orders, volumes and by providing better business forecasting.

“Responsible retailers should show supply chain stewardship by closely working with key suppliers, open communication, timely payments, understanding the impact on factories and ongoing relationship management,” Lacy advises.

Retailers who choose to ignore social and environmental performance in difficult times may make the mistake of failing to manage reputational risk. Lacy says: “What you don’t want is a reputational disaster on top of a recession.”

The global recession is going to prove an acid test of how serious companies are about sustainability. Ansett says: “Stakeholders will soon be able to determine if sustainability programmes are truly embedded into corporate organisations, or if companies have been white- and green-washing all along.”

10 ways to cut supply chain costs responsibly

1. Benchmark and continuously improve factory productivity.

2. Improve factory management systems.

3. Upgrade factory manpower skills: training for managers, supervisors and workers.

4. Improve factory planning – production planning and business forecasting.

5. Reduce production waste: introduce industrial engineering and workflow processes.

6. Reduce energy use through basic eco-friendly building design, basic energyefficiency and renewable energy use, and optimising transport costs.

7. Reduce other resource waste such as packaging and water.

8. Introduce key supplier management systems; work closely with key suppliers to improve productivity, reduce waste and optimise costs.

9. Work with local governments to reduce bribes that factories commonly pay for customs clearance of their shipments.

10. Have a transparent system to reward factories for overall improvement in performance: social, environmental and economic.

Note: this is slightly longer than the version that appeared in the print magazine.

Related Event:
Want to hear directly from IKEA, Danone, Airbus on how they’re greening their supply chains despite the tough economic climate? Then have a look at our 2nd Green Supply Chain Summit coming up soon in London.

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