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Why Can’t Brands Commit to ‘Pretty Basic’ Supplier Terms?

Miran Ali, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), was speaking with his colleagues at the Platform on Sustainable Textiles of the Asian Region, better known as the STAR Network, when he had an epiphany.

This was early 2020. The surge in Covid-19 cases had just been declared a pandemic by the World Health Organization but the fallout was already immense. Phones were ringing off the hook as Western brands and retailers scrambled to cancel or suspend millions of dollars of orders, even for items that had already been shipped or were in production.

Commiserating with representatives from trade associations from Cambodia, Myanmar, Pakistan and Vietnam, Ali realized that “every one of our countries was facing the identical situation—the complete abandonment of responsibility by people who we thought were our long-term partners.” But together they had something else as well: leverage.

“We have a whole plethora of initiatives, both legislative and NGOs, as well as various initiatives to monitor the behavior of factory owners,” Ali said at a panel during the Sustainable Apparel Coalition’s (SAC) annual meeting earlier this month.

“There’s absolutely nothing in the world that monitors the behavior of buyers.”

Soon after, the STAR Network started meeting with the International Apparel Federation and the Better Buying Institute, with the goal of creating a “force for good that cannot be ignored.” Their discussions led to the creation of the Sustainable Terms of Trade Initiative, a manufacturer-driven organization that recently released a series of “core principles” of commercial compliance for redressing the power imbalance between buyers and suppliers. Together, the group’s members account for nearly two-thirds of the global apparel export industry.

“Our objective is not to talk about prices—prices will be determined by the market and many other factors,” Ali said. “Our objective is to discuss minimum standards of behavior that should be applicable regardless of which country you buy from. It doesn’t matter whether you’re buying from Egypt or Bangladesh; we are still manufacturers who have to pay our workers.”

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The recommendations include crafting payment terms that do not exceed 60 days or the number of days that is customary between a buyer and supplier, whichever is shorter. There should be no late payments and no invocation of force majeure unless on  “mutually agreed and legally valid grounds.” Prices negotiated must cover all costs of compliant production and allow for a “reasonable and maintained” supplier profit, while timelines should be jointly developed to allow production to take place within regular factory hours.

“Will every buyer accept it? Absolutely not. Will some do? Yes,” he added. “We are trying to build up a momentum where we can get a certain number of buyers to agree to this. And if we can do that, then we will have made substantial changes.”

A sub-standard ‘standard’

While poor purchasing practices are in the spotlight after a grueling year and a half for garment manufacturers and workers, they’re not a pandemic-induced phenomenon, said Marsha Dickson, president and co-founder of the Better Buying Institute, which studies how buyer-supplier engagement affects working conditions. Rather, they are “standard ways of operating that suddenly became highly visible” in the face of global catastrophe.

“We’ve known for years that purchasing practices were creating problems for suppliers, business sustainability and therefore their ability to support workers better, upgrade their environmental systems and things like that,” Dickson told Sourcing Journal. “Covid-19 just blew everything up—we got comments back from suppliers about the order cancelations and how they had never seen anything of that scale. They’re also fearing the payment term extensions aren’t returning to where they were before and so those longer terms are becoming the new normal.”

Earlier this month, the organization released its latest purchasing practices index, which it based on responses from 21 buyer companies and their suppliers. The study found that repeat “subscribers,” which have signed up with the Better Buying Institute to receive anonymized data from their suppliers, showed improvement in some aspects of every category of purchasing practices except for sourcing and order placement. The biggest gains were in planning and forecasting, where one subscriber increased its score by what Dickson called an “impressive” 27 points.

On the flip side, more than 63 percent of suppliers reported a cancelation of some portion of their orders after the purchase orders were issued, and 13 percent saw unilateral extensions of payment terms of up to 120 days, creating cash-flow challenges. Meanwhile, monthly order variability, meaning ​​the changes in units shipped from one month to another, increased by 20 percentage points compared with last year, making it difficult for suppliers to plan their production capacity or adjust their operations accordingly. As expected, Dickson said, the largest year-year-over declines happened during April and May 2020, when order cancelations started pouring in. Though volumes clawed back some ground through the end of 2020, they had still not fully recovered to pre-pandemic levels.

Previous studies from the Better Buying Institute have found that poor purchasing practices can have other knock-on effects on suppliers and their workers, increasing management stress, worker layoffs, worker time and job precarity while reducing worker productivity. Squeezing already razor-thin margins also makes it more challenging for suppliers to provide fair wages, maintain safe working conditions or meet sustainability goals. “You cannot do any of that without that fundamental business relationship and a financially fair set of arrangements with your suppliers,” Dickson said.

‘Pretty basic stuff’

Commercial compliance that in effect creates a buyer’s code of conduct that doesn’t cause “obvious and avoidable harm” to manufacturers could help with that, Matthijs Crietee, secretary-general of the International Apparel Federation said at the SAC panel. “It’s remarkable that those key recommendations for better purchasing practices are really pretty basic stuff,” he said. “They’re hugely important but it’s very much about sticking to the agreed terms.”

Andrew Olah, founder of the Transformers Foundation, has also been mulling the buyer-supplier dynamic and how it can be improved. Shortly after its launch in 2020, the denim-focused nonprofit laid out eight “ethical principles” of purchasing jeans, which Olah dubs the “10 commandments of buying product.” They include accountability, transparency, empathy and trustworthiness.

“When a brand goes to a factory, they bring their whole book of all the things that the factory has to comply to in order to be qualified to do business with that brand,” he said at the SAC panel. “And the garment factories diligently do that because they want the orders. The supplier gives the brand nothing back and says, ‘Oh, the only thing that we would like is that you maintain your contract and that you act ethically.’ I don’t think it’s a very big leap.”

Next year, the Transformers Foundation will establish an “ethical council” that will help arbitrate any disputes between brands and factories “quietly and privately.” If that’s not possible, the council will enlist a team of law and business experts to hear both parties’ cases and make a determination, which will be published on the organization’s website.

“When somebody has a problem in the supply chain, generally speaking, there are no rules, there are no structures and the legal resolution is not really effective, timely or helpful,” he added. “And in many cases, you can be right but you can’t win. So [while] the legal side didn’t seem possible, what we [realized] was that every brand has a lot of interest in their reputation.”

Not everyone is convinced that voluntary efforts alone will shift the tide. Buyers engage in poor purchasing practices because they’re not incentivized to do otherwise, said Fiona Gooch, senior policy advisor at Traidcraft Exchange, an ethical trade group based in the United Kingdom.

“If retailers are about to face a profit warning, the easiest place for them to recoup their money is how they buy from suppliers,” she said at the SAC panel. “That is the bulk of their spend. So that is where they apply the squeeze to be able to achieve their profits. And ultimately applying the squeeze means bad purchasing practices.”

When thousands of consumers and campaigners petitioned brands, as part of the #PayUp social media campaign, to honor their contracts, they were met with only “small improvements,” she said. “And this highlights to me that begging retailers to do the right thing when they feel that their fundamental profits and core business are at risk is not going to work.”

Regulatory affairs

Gooch echoed calls by a group of British Members of Parliament to appoint a “garment trade adjudicator” that will serve as a “fashion watchdog” overseeing purchasing practices. The existing groceries code adjudicator, which regulates the United Kingdom’s food industry, has curtailed many abusive behaviors, she said. In the United States, the American Bar Association has published a set of “model contract clauses,” including a responsible purchasing code of conduct, that companies can include in their supplier contracts. In garment-manufacturing hubs such as India and Sri Lanka, trade unions are filing legal complaints to hold brands jointly liable for wage theft and other labor offenses under local laws.

Private-run initiatives work well in parallel with regulation, which is where financial penalties can arise, Gooch said. “You must be able to apply fines that are ideally in proportion to turnover, i.e., the fine must be larger than that amount of money that you make from bad purchasing practices,” she said. An effective regulator must also provide a mechanism for anonymous complaints, as well as act on its initiative so that an investigation will never result in a retailer “initiating a witch hunt to find the particular supplier that complained.”

She agreed that regulators are typically “slow, lumbering beasts,” although she argued that the grocery code adjudicator in the United Kingdom has been able to act “extremely” quickly. “I would very much welcome working with suppliers to set up such a regulator in parallel with your initiatives because your initiatives can solve problems quicker, but if a retailer fails to act, having a backstop of a regulator is something worth pursuing,” she said.

What everyone wants is a “fair share of risk and benefits,” Gooch added. “Workers do work, they need to be rewarded; suppliers have taken [a] risk on their business, that also needs to be rewarded; retailers and brands are also taking on a different type of risk on their business. And that also needs to be rewarded. So it’s about a fair sharing of risks and benefits.”

Suppliers are on the offensive in other ways. On Saturday, BGMEA president Faruque Hassan urged suppliers to be more cautious in negotiating prices with buyers to avoid taking on orders below a reasonable rate. “We should no way negotiate any export order at a price that might go below the production cost,” he said at a press conference in the Bangladeshi capital of Dhaka.

Hassan also appealed to brands and retailers to offer fair prices that take into account the increased costs of cotton, freight and energy, among others. The international supply chain will only continue uninterrupted, he said, if suppliers can “sustain and survive.”

“Please do not negotiate the prices of apparel items below the production cost any more as we are receiving adequate number of work orders but there is a fear of the return of a crisis in the supply chain,” Hassan added.