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Cost Pressure on Suppliers Leads to Poor Conditions and Pay, Study Says

Cost pressure is fueling unethical supply chains.

Aiming to exact the lowest possible cost during negotiations is the driving force fueling poor and unethical working conditions in supply chains a world away, according to the second semi-annual Better Buying Purchasing Practices Index (BBPPI), citing tactics employed by buyers to drive down prices as a key culprit.

“Increased financial pressure on suppliers raises the risk of business failure, supply disruption and environmental and human catastrophe,” reported the Better Buying initiative, a project funded by the C&A Foundation and Humanity United. “It is impossible to make tangible improvements to things like living wages and working conditions if retailers and brands do not ease the financial pressure placed on suppliers.”

Better Buying gathered anonymous ratings from 319 suppliers from 38 different countries for its Purchasing Practices Index to establish the performance of the buyer-supplier relationship of 67 retailers and brands between May and August 2018. Centered on buyers within apparel, footwear and household textile industries, the report works to achieve a more ethical supply chain by “empowering suppliers and amplifying their voices.”

In the study, each buyer is rated by an aggregate of responses from the suppliers surveyed, using a scale of 1 to 5 stars, for their performance in seven categories: planning and forecasting, design and development, cost and cost negotiation, sourcing and order placement, payment and terms, management of the processing process, and win-win sustainable partnership.

A rating of 4 to 5 stars in a given category represents good buyer performance over the last ratings cycle (May through August 2018), while 2 to 3.5 stars indicates the mid-range, and a rating of 1.5 or less is considered to represent the lowest rung of buyer performance.

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“From these actionable insights, retailers and brands can work to streamline their operations, create stronger partnerships with suppliers and monitor their efforts over time,” said Marsha Dickson, founder of Better Buying and a professor at the University of Delaware. “In fact, a few brands have informed us that they have set up internal improvement projects based on the BBPPI results.”

According to the study, 55.4 percent of suppliers have been “affected by high-pressure cost negotiation strategies, impacting their social, environmental, quality, and other compliance performance.” Although the effects vary by region, Better Buying said suppliers have indicated “increasingly more financial pressure” from buyers since launching its Better Buying Purchasing Practices Index in spring 2018.

“The categories of management of the purchasing process and sourcing and order placement improved by a full star and half a star, respectively, compared to the previous ratings cycle. Planning and forecasting and design and development remain unchanged,” the report noted. “In contrast, payment and terms dropped by two-and-a-half stars, while cost and cost negotiation and win-win sustainable partnership (formerly titled CSR harmonization) both dropped one star.”

Some of the tactics used by buyers responsible for the lower ratings include not paying for samples (61.4 percent of sample invoices in the study remained unpaid), not paying the full price of a purchase order (a practice reported by 27.3 percent of suppliers) and not paying on time, which suppliers reported only 64.5 percent of buyers paid bulk order invoices in a timely manner.

More than one-fifth of suppliers in the study claimed “fewer than 80 percent of the orders received from retailers or brands were priced to cover the cost of social, environmental, quality and other compliance requirements.” This raises the possibility that some brands claim to be sustainable while forcing the financial pressure of such action down the supply chain.

Better Buying said areas including planning and forecasting orders, along with sourcing and order placement, could benefit from further improvement if buyers want to enhance the supply chain.

Forecasting allows suppliers to better plan production and helps ensure compliance goals are met by limiting squeezes in production or supply. For these categories, the report noted significant differences between buyers when compared by region. North American retailers were shown to forecast purchasing needs “more consistently and accurately” than their European counterparts.