The Covid-19 pandemic threw constraints on many areas of the apparel industry, but perhaps no greater tension was created than that between retailers and their suppliers. Amid the abrupt stop in demand, many retailers delayed or even canceled their apparel orders entirely, sticking factories with a bill that they could ill afford to pay.
While many relationships were damaged or even fractured entirely, the black swan event should serve as a lesson for all apparel retailers going forward in terms of how they must approach their relationships with those who produce their goods.
To get to the bottom of which retailers weren’t holding up their end of the bargain, the Worker Rights Consortium (WRC) in association with the Center for Global Workers’ Rights (CGWR) at Pennsylvania State University, tracked a list of major retailers and brands and their commitments to pay in full for orders completed and in production. Names such as Adidas, H&M and Zara owner Inditex committed to pay suppliers in full for previously canceled finished and in-production orders, while companies like Lululemon and Uniqlo parent Fast Retailing paid for their committed merchandise orders up front.
The latter option is preferred by suppliers, as they would get their payment immediately, easing worry about paying their employees.
The situation and sentiment from the manufacturer side, however, was crystalized by Denim Expert Limited’s managing director Mostafiz Uddin from a Sourcing Journal summit panel last fall.
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“During this pandemic, we have realized that partnerships are a marketing tool for brands and retailers,” he said. “And we talk a lot about partnerships, but I don’t see one single example of a true partnership.”
Last year, Uddin’s factory experienced a number of cancellations on finished and unfinished goods—both of which required raw materials that the factory purchased itself.
“When the pandemic started, they canceled all of their orders just by sending a letter—that’s all,” he said. “Millions and millions of dollars, raw materials, finished goods, unfinished goods—all just [canceled] in a simple e-mail. Obviously, our relationship is totally destroyed, the trust is broken, and it will take a lot of time to rebuild this relationship.”
Attention has since turned to another issue. An October report from the CGWR found that suppliers were asked to make their prices an average of 12 percent cheaper than last year, with the organization describing such practices as “leveraging desperation.”
The study, conducted in July and August, said 65 percent of suppliers reported that buyers have demanded price cuts on new orders that are bigger than the year-over-year reductions buyers usually ask for.
In the survey of 75 factories in 15 countries, suppliers said they had to wait an average of 77 days for payment, compared with 43 days before the pandemic, raising fears of further factory closures in an industry employing 60 million people worldwide.
“We are seeing a dramatic squeeze down of price, reduced orders and late payment,” said Mark Anner, author of the report and director of the CGWR. “This worries me for the wellbeing of the suppliers and the workers. This will affect the small and medium suppliers first. It’s a little hard to see right away the gravity of the crisis because the new order volume is being mixed with the pay up of old orders that were pent up. It’s hiding the new crisis, which is the decline in order value.”
In a conversation with Sourcing Journal, Ken Loo, secretary-general, Garment Manufacturers Association in Cambodia (GMAC), put the situation rather bluntly, “Prices are still no good, we are accepting quite ridiculous payment terms.”
In an era when social media is prevalent and technologies are available to build out transparency and sustainability, brands don’t have an excuse to put their head in the sand regarding the wellbeing of the workers, particularly those in the factories that had to handle both the order delays and facility closures.
“I think that the side issue that brands are going to need to address is not so much around the orders and order cancellations—we already know clearly that that needs to be addressed—is are they doing the right thing in terms of looking after workers’ safety,” said Chris Rogers, research analyst, global supply chains at global trade intelligence firm Panjiva. “Going into next year, there needs to be a holistic discussion between the brands and the manufacturers around safety of staff, and of course the usual topics like ESG, environmental footprint and so on.”
Alternative financing could help bridge payment gaps
For the brand-supplier relationship to continue evolving, especially as money remains tight, alternative solutions that otherwise might not have been relevant in the past may need to be considered. One such example, especially in the light of the rough financial climate, is the introduction of trade finance, particularly as companies that saw major supply chain disruptions seek out more flexible and faster sources of funding.
Firms offering vendor financing can provide funding to suppliers almost immediately and support longer payment terms for buyers. In some cases, these firms can finance payment terms up to 180 days. For small- and mid-sized apparel and footwear companies that are out of options with banks and might need funds in addition to those provided by the government, alternative financing can be an effective option to inject liquidity into their business in the short term.
“Alternative financing allows for quick and flexible funding, with advance payments on invoices provided within two days of invoice submission in some cases,” said Peter Maerevoet, chief financial officer at Tradewind Finance. “The requirements to qualify for funding are less rigid, and no collateral is necessary, which is especially beneficial for companies already struggling financially. Since alternative financing is not a loan, the fact that it does not have to be repaid can take the pressure off of a company experiencing tight cash flow. When demand does rebound, funding increases as the business generates more sales.”
The application process to receive trade financing is designed to be simple, so both the brand and the supplier can focus on running their business instead of navigating a potentially cumbersome situation. In particular, leveraging trade finance can strengthen areas like R&D by freeing up working capital for retailers and their supply partners, according to Maerevoet.
From oversight to empowerment
The increased burden of financial woes temporarily placed the ongoing issue of work conditions and worker safety on the back burner. But ultimately, this needs to be addressed as well.
While efforts to eliminate the policing aspect of inspections and factory audits have been rampant in recent years to move toward a more collaborative environment focused on continuous improvement, Michael Bland, senior director of Qima, says the problem has been a lack of data.
“How are you collecting whatever information you need on your products?” Bland said. “I can tell you in China, where I was based for about 12 years, that everything’s paper based at the factory, amazingly enough, even today. Certainly whatever you’re getting is just scattered e-mails throughout multiple staff at the retailer.”
Bland cited a report from the Business Continuity Institute that said Excel was still the software of choice for 46 percent of supply chain professionals, indicating that there is a significant need for an upgrade to a centralized system that collects inspection and audit data on a cloud server in real time.
Additionally, a focus on empowerment through training is key toward building two-way trust and ultimately making the production facility more self sufficient. With more e-learning modules now available to train factory workers and managers remotely on best practices, a better path forward can be seen as possible.
“It’s about making that training available and then nominating those people,” Bland said. “There could be one or two key people that you identify at a factory, you get them trained up and they become the nominated QC at that factory. They’re the one who’s responsible for it. You’re not only empowering that factory but you make a person feel empowered and motivated by giving them a title and a certificate.”