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Purchasing Practices Need to Change. Suppliers Say This is How.

A new manufacturer-driven initiative wants to end the garment industry’s sourcing race to the bottom. A new code of conduct for buyers regarding purchasing practices might be a start.

The Sustainable Terms of Trade Initiative (STTI), a group that includes the International Apparel Federation, the Better Buying Institute and the Platform on Sustainable Textiles of the Asian Region, or STAR Network, published on Thursday a white paper that outlines the “core principles” of commercial compliance that buyers must uphold, along with recommendations on how poor purchasing practices, such as canceled orders, extended payment terms and demands for steep discounts, can be improved. It’s the first joint manufacturer position of its kind.

As the lowest link in the supply chain, garment manufacturers have little choice but to accept the terms that brands and retailers dictate, whether fair or not, because they fear jeopardizing future business, the paper noted. The vast array of choices at buyers’ disposable means suppliers are often forced to reduce their already razor-thin margins to stay competitive, even as they’re compelled to churn out clothes at even more dizzying rates than before.

Eroded trust in buyers

The Covid-19 crisis has only thrown this “unhealthy” buyer-supplier relationship” into painful relief, it added. Widespread declarations of “force majeure” in the early days of the pandemic left many manufacturers with large quantities of finished and in-production garments that were no longer wanted and hadn’t been paid for. The value of canceled orders likely ran into tens of billions of dollars, according to one estimate. Amid financial duress, suppliers in Cambodia, Bangladesh, India, Myanmar and Vietnam suspended production, pared back operations or shut up shop entirely. Millions of garment workers saw their hours cut or their jobs evaporate.

“Covid-19 has accelerated the loss of trust of manufacturers in their buyer’s ability and/or willingness to enact good purchasing practices,” the STTI wrote. “Buyers’ sense of their responsibility to the supply chain and often even contractual agreements were overruled by some powerful buyers’ sole focus on preserving their own bottom lines, as they faced dramatic changes in commercial conditions.”

It was this sudden economic trauma that helped galvanize the formation of the STTI, the organization said. Manufacturers were tired of their position of vulnerability and wanted to play a more active role in fostering purchasing strategies that benefited all stakeholders, not just the ones that called the shots.

Despite their diversity of backgrounds, trade groups such as the Bangladesh Garment Manufacturers and Exporters Association, the China National Textile and Apparel Council, the Garment Manufacturers Association in Cambodia and the Vietnam Textile and Garment Association wrestled with the same problems, including imprecise contracts and a frequent revision of terms after an order has been negotiated. Brands’ and retailers’ need for flexibility also frequently stymies manufacturers’ ability to accurately forecast resource and operational capacity. And while buyers tend to set the terms of their contracts, suppliers are often yoked to the resulting costs and risks, meaning they’re essentially financing production. All this needs to change, the report said.

A healthier buyer-supplier dynamic also benefits the industry as a whole, the STTI said. Untenable purchasing practices prevent manufacturers from meeting their own objectives for sustainable business, let alone those of their buyers. “Soft” laws such as the United Nations Guiding Principles on Business and Human Rights and the Organisation for Economic Co-operation and Development’s due diligence for responsible supply chains also acknowledge the importance of improved purchasing practices in elevating social, economic and environmental conditions in the apparel sector. Growing due-diligence legislation from France, Germany and the European Union, too, is demanding a reassessment of practices that contribute to low wages and unsafe working conditions.

A phased approach

The STTI listed a slate of recommendations, foremost of which is that payment terms should not exceed 60 days or the number of days that is customary between a buyer and supplier, whichever is shorter. (According to a 2020 Better Buying Institute report, roughly 40 percent of suppliers reported terms exceeding 60 days.) There should also be no late payments, a problem that multiplied during the pandemic. If payments are deferred, the buyer and supplier should negotiate a fee that covers the supplier’s interest for the period and loss of opportunity or profit from the late payment.

Meanwhile, all prices negotiated must cover all costs of compliant production and allow for a “reasonable and maintained” supplier profit, and timelines should be jointly developed to allow production to take place within regular factory hours while meeting the agreed-upon deadlines. Clarity and fairness on orders, penalties and the transfer of ownership of goods are also urged.

Perhaps one of the most salient points, considering the events of the past year and a half, is that force majeure can only be invoked on “mutually agreed and legally valid grounds” and should respect the transfer of ownership and risks defined elsewhere in the contract. In the event of force majeure, costs already incurred by the manufacturer must be paid by the buyer.

Part of a “phased approach” to tackle the issue of purchasing practices, the white paper isn’t meant to “collectively mandate manufacturers’ terms on buyers,” the STTI said. Rather, it is “up to the individual economic actors to decide whether they take the STTI’s recommendations.” A second phase will later open the discussion to brands, retailers and other stakeholders.

The white paper is, however, “clearly meant to create a strong and effective orientation for individual manufacturers regarding potential improvement of purchasing practices,” the report said. “Moreover, the key recommendations should not be regarded as a ‘ceiling.’ They should not prevent or undermine manufacturers’ and brands’ efforts to go beyond this initial set of recommendations.”

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