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What Does a 77% Increase in Wages Mean for Your FOB?

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Wage hikes and the political instability that accompanied them have headlined major media outlets for a good stretch of 2013. I expect labor issues to remain a hot topic in 2014 as supply chain transparency becomes more important and the apparel industry continues to undergo intense scrutiny. Also, I expect the topic of living wages versus minimum wages to be equally central, as low-income laborers continue to struggle despite progress. And, of course, Bangladesh’s massive 77 percent wage increase will remain a subject of debate as its consequences reverberate throughout the apparel industry.

A wage increase of that magnitude seems staggering at first glance, but it’s important to properly situate it within the context of the actual costs of your goods. While in Bangladesh last month, I spoke to several factory representatives and agents on precisely this issue. Of course, I often feel the perspective provided by the supplier side is laced with exaggeration. First, this is simply what they do–sorry factory owners, you know this is true. Secondly, they would love to use the press to generate the expectation among their buyers of a large increase in next season’s pricing.

After speaking to all relevant parties and digesting the data available to me, I’ve come to believe the following: a 77 percent increase in the minimum wage roughly amounts to a 30 percent increase in CM.

Keep in mind that this is a rough estimate. A home textile product like a bed sheet that carries a lower CM is going to be affected differently than a heavily embellished garment that requires a lot more labor.

According to my calculations, a 30 percent jump in CM translates to a 7 to 10 percent increase in FOB.

These numbers are consistent with what Munir Mashoquallah, Founder of Synergies Worldwide, told a packed audience at our Sourcing Journal Summit last fall. He said that for every 10 percent increase in labor costs, expect a 1 percent increase in FOB.

As it stands, it’s unlikely that the factories will be able to recoup the totality of the wage increases. The good news is that retailers are being cooperative, having understood the dangers of non-compliance and the need for improvements in factory safety and labor conditions. They don’t want to surrender much-needed capacity over short-sighted nickel-and-diming.

The sourcing world is a complex one and many variables affect final costs. It’s important to remember that 77 percent wage increases might strike many of us as generous but, in the third world, that’s a modest step toward a living wage; for many, it’s the difference between eating and starving. It’s easy to lose perspective when the making of a garment and its purchase are worlds apart.

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