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Ethical Sourcing Forum: Subcontracting More Prevalent Than Brands Believe

Put simply, “Indirect sourcing is more prevalent than you think, it is more authorized than you think, and it makes business sense.”

That’s how Sarah Labowitz, co-director of the Center for Business and Human Rights at NYU Stern School of Business, opened her portion of a sustainable supply chain panel at the Ethical Sourcing Forum 2015 in New York City Friday.

Having done extensive research into the apparel sector in Bangladesh specifically, Labowitz is well versed in the hush-hush happenings of the country’s ready made garment (RMG) sector, and subcontracting, she said, is rampant.

Big factories subcontract to smaller factories, which sometimes subcontract further to even smaller factories in a sort of unregulated support system designed to enable these facilities to complete orders by any means necessary—and keep costs low.

“Pressures around delivery of inputs, tight delivery deadlines, etcetera, create all types of incentives for subcontracting,” Labowitz said.

And though audits have seen an uptick, they are doing nothing to quell the conduct, despite what brands might like to believe.

Labowitz describes Bangladesh’s RMG sector as a hub and spoke model of production, where the hub factories are the ones that have direct relationships with foreign brands, are often in good condition, with their own power plants, and are well lit and ventilated. And those hub factories have a lot of relationships with spoke factories.

“The spoke factories are the invisible factories,” Labowitz said. They are often in mixed-use buildings, above auto repair shops, for example, and some don’t appear on any registry of factories in Bangladesh. Labowitz and her partner Dorothée Baumann-Pauly, co-authors of the report, “Business as Usual is Not an Option,” are currently conducting research on how many unregistered facilities there are in Bangladesh. “The riskiest facilities are those in the spoke universe,” she said.

But because audits and inspections are directed at the hubs, no one pays attention, Labowitz said. “What brands are doing is pushing subcontracting further under the ground.”

The Tazreen factory fire in 2012, which happened just months before the Rana Plaza building collapse, thrust Bangladesh’s apparel sector into the limelight for its lackluster conditions, and sub-sub contracting was the reason big brands, like Walmart, ended up with product in the unsafe facility.

Walmart had given Bangladeshi factory Simco a 330,000-piece order for Faded Glory shorts. The zippers failed lead tests, the shorts were assembled 50 percent in an effort to still meet the promised due date, but according to Labowitz, the deadline pressure was too much and an agent ultimately told Simco they could have some of the shorts done elsewhere. Simco then turned the order over to Tuba Garments, which then further subcontracted to Tazreen. Once Simco visited the Tazreen facility and decided it was no good, they started to pull the order, and got 18,000 units of the 25,000 total order out of the factory just before the fire that killed more than 100 workers.

The system of subcontracting is more authorized than many brands believe, Labowitz said. The country’s apparel trade body, the Bangladesh Garment Manufactures and Exporters Association (BGMEA) authorizes subcontracting among members of the trade association, she noted.

“It makes infinite sense from a business perspective,” Labowitz said.

The best move forward, according to Labowitz, would be to acknowledge the roll small and medium size factories play in the industry, and figure out how to do subcontracting well, with transparency and supervision instead of pulling out of Bangladesh all together or turning a blind eye to what’s really happening in your business.

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