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New LF Business Model for Bangladesh Published by Harvard Business School

Not much has changed yet in Bangladesh’s estimated 5,000-plus factories since the recent collapse of the Rana Plaza factory complex that killed more than 1,100 people.

But comprehensive programs to improve health and safety conditions for Bangladesh’s workers have now begun, some of which are joint efforts of government and business, and others which are independent initiatives sponsored by major apparel brands and retailers.

A legally-binding five-year contract has been signed by some international retailing giants, including Inditex and H & M, and the Bangladeshi government to improve working conditions in the country’s factories.

Key elements of the contract include a coordinated system of rigorous factory inspections; fire, safety and health training; mandatory repairs and renovations, public reports, the right of workers to refuse dangerous work, and the financial contributions of the companies which signed the agreement.

Wal-Mart and Gap Inc., among others, declined to sign the contract, and announced safety campaigns of their own.

Now a new approach to Bangladesh’s problems — changing its business model — has been proposed by Hong Kong-based supply chain intermediary Li & Fung Ltd., one of the world’s biggest such companies. Their plan was published by the Harvard Business School.

As a supply chain intermediary, Li & Fung specializes in sourcing of raw materials and manufacturing, product design, quality control, and international distribution and shipping.  The firm is not a manufacturer, retailer or transportation facility.

Under Li & Fung’s plan, Bangladeshi garment costs would be increased by 3.3 percent, with the additional revenue used to pay for the factory improvements.  Based on Bangladesh’s annual clothing exports of $18 billion, the increase would provide an additional $600 million which could be allocated to the improvement effort.

The proposed business model also provides for competitive sourcing and the assurance of a long-term  business relationship that would, says Li & Fung, promote voluntary compliance no matter how complex the supply chain.

Long-term relationships between suppliers and buyers, according to Li & Fung, create mutually beneficial incentives and encourages factories to make voluntary improvements in working conditions to retain its customers.

Li & Fung or similar companies, would act as the intermediary under their plan, and collect the additional revenue earmarked for factory improvement.  With a trusting relationship established between supplier and buyer, the buyer would be confident that garments were manufactured in safe conditions, and factory workers would know their production facility was safe, and that their employment would be steady.

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