Wage increases and capacity pressure in traditional sourcing juggernauts like China have widened the playing field for several countries, including Bangladesh, according to industry sources. Sourcing in Bangladesh is not without significant challenges, but it is rapidly finding its footing as a significant apparel supplier. With continued commitment from apparel companies to circumvent existing challenges and more investment from the government to address systemic infrastructure challenges, Bangladesh will continue to grow, sources say.
Industry experts say that political and labor instability and the long-lead time required to source garments in Bangladesh remain major hurdles. Compliance challenges, illustrated vividly by the tragic fire in the Tazreen Fashion factory in Dhaka that killed 100 workers, continue to be significant if not insurmountable for some companies. Bangladesh may not ever be a one stop shopping destination for all retailers but for it is likely to continue to have a place in diversified global sourcing strategies.
A survey conducted by McKinsey & Company found that sourcing decision makers at major apparel firms almost unanimously favor shifting production out of China, creating a tremendous opportunity in the region for countries like Bangladesh to step up and shoulder more production. However, McKinsey said sourcing executives surveyed expressed concerns about five specific challenges in Bangladesh: lack of or subpar infrastructure; compliance issues; rising labor costs and a quality or capability gap; political and economic instability; and a reliance on imported raw materials.
In 2010 Bangladesh exported $15 billion USD worth of apparel and annual apparel exports grew at an average rate of 12 percent per year between 1995 and 2010, according to McKinsey research. Bangladesh more than doubled its apparel exports to the U.S. and Europe in that time, solidifying its spot as the fourth largest U.S. supplier and the third largest European supplier.
Major apparel retailers have been sourcing from Bangladesh for close to two decades, but they have shifted gradually towards a direct sourcing model, with many companies establishing their own offices in Chittagong and Dhaka. Bangladesh has easily satisfied two of the major factors apparel suppliers use to make sourcing decisions – price and capacity – particularly for basics and some value products, sources said.
With respect to capacity, McKinsey noted Bangladesh has 5,000 operating ready-made garment factories that employ 3.6 million workers. The quality is sufficient to make mid-market and basic products there, and the challenges that exist in speed-to-market and risk can be mitigated with careful planning, sources noted.
Infrastructure Challenges and Long Lead Times
Because of a lack of inland infrastructure in Bangladesh and limitations because of the size and depth of ports, industry sources said one of the major challenges to sourcing in the country are the long lead times.
McKinsey found that, “buyers today are forced to carefully select the type of products to source from Bangladesh, since congested roads, limited inland transport alternatives, and the lack of a deep-sea harbor add inefficiencies to garment lead time. With the aim toward sourcing more fashionable, shorter lead time items in Bangladesh, reliable and fast transport is becoming extremely important. The transport issues need to be solved quickly in order to avoid a collapse in the transport network as volumes continue to grow.”
For now the safest strategy for most companies is to put production of basic items into longer lead countries like Bangladesh, said Munir Mashooqullah, chief executive of Synergies Worldwide. Because items like denim garments and basics don’t change as rapidly and don’t require the same fast turnaround that fashion-oriented items do, it is easier to give the level of commitment to factories and to order the necessary fabric and other elements far enough in advance to produce in Bangladesh, he pointed out. Bangladesh benefits from its proximity to China, which is still the main source of textiles for its ready-made garment industry.
Even an anecdotal survey of labels in most apparel stores shows that basic items are primarily manufactured in Bangladesh, Pakistan and China, Mashooqullah noted, while “fashion” items come from countries like Turkey, Morocco, Portugal and Tunisia that are closer to their final destination market.
Despite the existence of modern, systems driven factories in Bangladesh, worker productivity, especially compared to China, can also be a challenge, said Rick Helfenbein, president of Luen Thai USA. Some cite productivity as low as 25 percent compared with China, which would undercut the lower labor cost and lengthen the time it takes for garments to reach stores, which has ultimately held many developing countries like Bangladesh back from competing with China, he said.
However, Helfenbein noted, making strategic decision about which products are manufactured in which countries based on the specific strengths has helped many companies move away from seeing China as the only viable source, he said.
“As worker productivity continues to improve in developing countries, then these decisions will become harder to make,” Helfenbein said. “For longer lead time items like basic pants/shorts, or outerwear, a country like Bangladesh can be a solid choice. For shorter lead times – fast turn items – like fashion tops or intricate design, then China is generally considered the main contender.”
There are also additional power challenges facing the apparel industry in Bangladesh, but the government has indicated that it plans to address all the existing infrastructure challenges in the coming years, and has already begun adding additional power capacity to the country’s grid.
Instability and Compliance Challenges
Labor compliance challenges are also a major concern for apparel companies. As a developing country it is subject to a fair amount of scrutiny of labor and environmental practices, and in the current age of consumer awareness of sustainability issues compliance problems can quickly become a public relations headache. Earlier this year H&M, which currently sources a sizable chunk of its goods in Bangladesh, publicly scolded Cambodia and Bangladesh for their low wages only to find itself on the receiving end of a public lashing when media reports about its own factories surfaced.
The tragic fire in the Tazreen factory last fall created a swirl of press worldwide about safety and compliance issues, attention which hasn’t abated as continued reports out of Bangladesh highlight the compliance challenges companies face. Companies are understandably wary of both the compliance challenges and the attendant negative press. When the Tazreen fire reports first surfaced a number of companies that were sourcing in the facility were apparently unaware that they had business there. That highlighted one of major challenges of a subcontracted sourcing model. Contracting and subcontracting are common practices in the apparel industry, but industry observers note that it can lead to problems for companies that have not successfully formed and implemented a compliance program.
“Most of the major companies have in place systems and programs to work with vendors to monitor and verify compliance with a litany of provisions that are intended to protect workers and companies and brands. … This is a huge concern that there still is a problem there [in Bangladesh],” said Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel.
Most of the companies that manufacture in Bangladesh have chosen to do so because of the inexpensive labor costs, Helfenbein said, but many large, well known companies are able to manufacture successfully there without safety problems because they implement and enforce strict guidelines and they pay attention to conditions and realities on the ground.
“If a company is going because labor is cheap and they are not paying attention to rules this is a disaster that’s going to happen, this horrible fire that happened,” Helfenbein said. Retailers that manufacture in Bangladesh must stay on top of where the safety challenges can arise. Many are well known problems, like lax wiring procedures in factories. “It’s almost a tragedy you could have predicted, therefore you could have prevented it.”
Beyond the social and safety compliance pieces, labor has also been an issue in terms of reliable capacity. Workers frequently strike, which carries with it not only the threat of unforeseen work stoppages but also an inherent risk of rising wages. If wages increase faster than capability or quality levels in Bangladesh, the risks could start to outweigh the benefits of sourcing there. Port workers have also gone on strike, further complicating the infrastructure problems suppliers must face.
“A gap between customer requirements and supplier capabilities/investment plans is emerging. Buyers want to expand their sourcing product mix into more sophisticated categories, such as outerwear, tailored products, ladies intimates, and functional clothing,” McKinsey found. However, less than 100 of the thousands of manufacturers in Bangladesh currently have both the ability to produce those products and the productivity and compliance levels that major apparel suppliers require.
Financial Supply Chain Challenges
In addition to the time delays that infrastructure issues and other challenges create, there can also be delays in the financial supply chain. Bank of America Merrill Lynch issued a report last year which pointed out that the flow of documents and payments in Bangladesh also makes financial supply chain efficiency challenging by adding numerous steps to the payment process. A slow financial supply chain in turn can contribute to a slowdown in the flow of actual, physical goods from manufacturers to the ultimate retail destination.
“As a normal part of their sourcing strategy large retailers will continue to rely on various countries for their sourcing locations and many of these countries have dynamic regulatory issues,” said Maureen Sullivan, North American trade sales head for global trade and supply chain solutions at Bank of America. Regulatory issues often develop out of policies designed to protect foreign currency or properly manage export sectors, she noted.
Bangladesh has implemented strict rules about how exporters deal with bills of lading, for example, in an effort to minimize fraud, money laundering and foreign exchange control circumvention. The process is cumbersome and relies on letters of credit. The slower flow of documents can translate into a slower flow of goods or additional financial costs, Bank of America said in its report. Most retailers have moved away from using letters of credit, but they still have enough familiarity to adjust their strategy to use them when needed, Sullivan said.
To address some of the barriers Bangladesh’s apparel sector faces the government has taken some proactive steps, including infrastructure investments, but sources agreed that the government needs to do more to help support the industry to keep its rapid growth from stalling out.
The government and local industry might have a ways to go to fully develop the industry, but industry experts noted that apparel suppliers and their partners can do a lot to mitigate the current risks by establishing strong, long-term relationships and encouraging or requiring the kinds of policies and procedures that might smooth over the existing challenges.