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The Missing Middle: Rewarding Compliance in the Supply Chain

Rivet's 2020 Denim Circularity report takes a deep dive into how the global denim industry is plotting its circular future amidst a worldwide pandemic.

This is the second installment in a limited series exclusively on Sourcing Journal of research provided by Cornell University’s New Conversations Project. The New Conversations Project is dedicated to independent research and action that seeks to discover what works on a global scale to end abusive labor practices.

 

For apparel brands, sourcing can be a sort of supply chain super power, like flying or walking through walls.

But in the ESG era, how well are firms doing at getting their old-school superheroes—Under Armor COO Colin Browne calls them “marauding garmentos”—to team up with the new squad whose powers (labor compliance! environmental sustainability!) are a little less awesome?

In the code of conduct-auditing-remediation process that still dominates most firms’ labor programs, the need to align sourcing and compliance activities still remains on the to-do list for many—and has remained on that list since the inception of private regulation. This alignment means more than getting out of chronically bad factories or cutting out unfair purchasing practices. It means that buyers would reward highly compliant suppliers with more orders. (And at the macro level, it means revisiting which countries are acceptable sources based on how governments and industries act on their obligations to workers).

How do we know that sourcing-and-labor compliance alignment isn’t happening? Three new analyses show us how sourcing and “social” work at cross-purposes or—at a minimum—do not know how to sync their mandates.

The June 2020 “Purchasing Practices in the Spotlight” report from the Dutch and German apparel partnerships starts from the premise that apparel buyers’ sourcing habits affect working conditions in supplier factories. That’s not news, but the anonymous results of the self- assessments by the German and Dutch buyers—small and large—are quite revealing. The responses show that in general companies score themselves highly in terms of their sourcing policies, but the more middling results reveal a significant lack of awareness of sourcing issues among labor and sustainability staff.

And on the key question of alignment of sourcing and labor strategies, only one-third of buyer respondents said it was happening. The other two-thirds reported that alignment doesn’t happen at all, it’s planned but not happening, it’s in place but not working or they just don’t know. Based on the New Conversations Project’s (NCP) experience, we think it likely that even among the one-third of buyers who reported that labor-sourcing integration is working, their companies don’t really have measures and metrics to substantiate that.

These results point to the existence of what academics called “policy-practice decoupling.” In other words, there is a perception that good sourcing policies exist but, in fact, those policies are not practically integrated with labor programs, or even work against them.

Cornell NCP sees this pattern in our studies and convenings with major apparel companies in the U.S. and E.U. We see it revealed, too, in the work of NCP network researchers Matt Amengual and Greg Distelhorst in the August 2020 issue of the scholarly journal Industrial and Labor Relations Review.

Their article, “Global Purchasing as Labor Regulation: the Missing Middle,” is a landmark study because it is the first to marry sourcing and labor compliance data to analyze the extent to which a global brand had achieved alignment between the two. The data came from a North American maker of active apparel, a company with a reputation as a leader in environmental and social standards, and with a relatively small supply chain. The researchers obtained compliance information from audits and data on sourcing, including order dates, prices, and order volumes. They were able to match compliance records (including all communication between the compliance department and the factory) with purchasing records.

The analysis revealed a highly engaged compliance department communicating regularly with the factories and making a variety of suggestions to improve compliance, but no real connection with sourcing practices. In many instances, suppliers saw the value of their orders increase despite higher numbers of labor violations, and orders decreased even as factories improved their labor compliance.

“The signals sent by the purchase orders appeared to undercut the efforts of the compliance team,” the researchers wrote. Compliance managers were effective in terms of both persuading and problem-solving, often with positive results in the factories, and they had some success in terminating the most egregiously violating suppliers, but the right mix of incentives for sourcing and compliance staff did not exist for the bulk of their suppliers—the “missing middle.”

What is particularly interesting about this case is that the relationship (or lack thereof) between sourcing and compliance had nothing to do with either price or delivery times. In fact, more orders were given to a factory with higher violations even though it charged a higher price for the product.

What are the obstacles to aligning sourcing and labor compliance for this company? There were many difficulties in flexibly adjusting order volumes in the context of compliance information. First, the researchers note that placing an order involved coordination among staff members from multiple departments. In their words, “Each team signed off on specific attributes of a purchase order, such as product specifications, projected sales, and the availability and price of inputs. This coordination took place under extreme time pressure to issue orders early enough to allow factories time to source inputs needed for manufacturing.” Second, as a relatively small brand, this company needed to meet minimum order quantities specified by each factory to ensure production capacity was reserved, which meant that it injected “rigidity into the relationship.” And third, finding replacement factories that could produce this company’s highly specialized products would have been difficult. Thus, there were significant transaction costs to altering orders based on compliance data.

Most importantly, the researchers noted that “many staff involved in the purchase order process did not view monitoring as central to their roles [and] key compliance managers were not involved in meetings in which orders were allocated to factories.”

In the third new study, Sarosh Kuruvilla takes this kind of analysis further in his forthcoming book “Private Regulation of Labor Standards in Global Supply Chains: Problems, Progress and Prospects,” due out in Spring 2021. The book evaluates new data from the vast global ecosystem of voluntary private regulation. In particular, it documents the efforts of a major North American apparel retailer to link sourcing and compliance in ways that result in concrete improvements in working conditions in supplier factories.

Cornell NCP’s analysis of sourcing and labor governance data of major global apparel buyers makes clear that firms cannot understand the effect of purchasing practices on supplier compliance and get to the larger goal of working conditions improvement without marrying sourcing data with compliance data, and analyzing that data for cause and effect relationships.

Maybe data analysis, self-reflection and accountability are the new superpowers.

For a more in-depth look into this research, please visit the New Conversations Project.

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