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H&M Doubles Down on Bangladesh, Cambodia: Plans to Tighten Grip on Supply Chain

While many retailers have been plotting an exit strategy from politically precarious Bangladesh and Cambodia, Swedish Hennes & Mauritz (H&M) is digging in its heels. In order to insulate itself from future disasters like the tragic collapse of the Rana Plaza factories in Bangladesh, though, H&M is planning to exert tighter control over its supply chain.

In search of low cost labor and high production capacity to service a high volume business, H&M looked to South Asia for its manufacturing needs. It moved into Bangladesh in 1982 and then Cambodia in 1998, always infamously tight-lipped about the nature of its commitments to these factories.

However, H&M has disclosed the crux of its overall strategy in South Asia: avoid buying the factories and commit to long-term relationships that permit it to control quality standards. Anna Gedda, H&M’s social sustainability manager, said “We see that it has helped strengthen the local industry by giving ownership to local suppliers instead.”

Gedda also explained that exclusivity, contracting to be the only client of a particular factory, increases their effective vigilance over safety standards and labor conditions. “We see these a little like test centers where we can try out different things that we can then push out on a larger scale in the entire supply chain,” said Gedda.

H&M has been closely scrutinized in recent months, partly die to its controversial sourcing to nations, like Bangladesh and Cambodia, that have consistently failed to meet international compliance standards and because of its robust economic performance. The retailer had a massive third quarter, enjoying a net profit of $690 million, a 22 percent increase from last year.

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The company has also been implementing a muscular expansion strategy, with aims to have opened 350 new stores by the conclusion of 2013. This year, H&M opened its 3,000th store.

But the retailer has weathered intense criticism for what some see as its complacency in fighting for better wages and labor conditions in Cambodia. H&M opposed a plan by Better Factories for Cambodia (BFC), an auditing organization sponsored by the UN, to inspect factories and then publish the names of those it deemed in violation of compliance regulation. The BFC estimates that fifteen of the roughly 450 factories it currently oversees would qualify for that level of public disclosure.

H&M was among a band of Western retailers that criticized the BFC initiative, openly expressing concern that the BFC’s new self-assigned role affords it too much power, violates pre-existing trade arrangements with Western brands and could counterproductively makes matters even worse. A group of some of the biggest companies that contract business in Cambodia–the Gap, Nike, Puma, and Levis Strauss among them–have taken to candidly voicing their objections. H&M reported that its policy is to continue to use factories that suffer from compliance issues as long as their is a demonstrated effort to resolves them in the proximate future. Spokesperson Andrea Roos said, “H&M is aware of the challenges the factories in Cambodia face.”

Now, H&M has become a more outspoken advocate of reform in Cambodia. The company is partnering with the International Labor Organization, the Swedish Union IF Metall and the Swedish Embassy in order to push for a less dysfunctional labor market. At least in its preliminary stages, this would translate into pushing the Cambodian government into convening a board to subject the minimum wage to an annual review, overseeing contractual agreements between workers and factory owners and superintending collective bargaining.

The key to minimizing  risk, according to H&M strategists, is to fully control outputs, leaving as little as possible to chance. By micromanaging its supply chain, it believes it can increase quality, exercise greater scrutiny of labor practices, accelerate speed to market and provide itself with greater leverage to push for reform.

Some analysts interpret H&M’s approach as cutting-edge, potentially transforming the the character of sourcing in the apparel industry. Ashma Kunde, analyst at Euromonitor International, speaking to Bloomberg, said, “These factories provide supply chain transparency and greater control over working conditions.”

Some, however, expressed skepticism. Bryan Roberts, a researcher at Kantar Retail, said, “While this is undoubtedly a positive and innovative move, H&M, like many competitors, has a long way to go to achieve the control over, and visibility into, its supply chain.”