Real Cost of Supply

More than 1,000 workers were killed in Bangladesh in April when an eight-storey building – housing factories producing clothes for western retailers – collapsed under its own weight. As building cracks widened and the structure weakened, workers had pushed on making cut-price T-shirts for European and western stores, until disaster struck.

With a number of well-known low-cost clothing stores identified as buyers, the disaster serves as a harsh reminder of the potential risks linked to the pursuit of cheap goods. The consumer appetite for bargains has grown significantly during the economic downturn and has been responsible for pressurising manufacturers and retailers to cut costs still further.

This is not the first time that a man-made disaster costing lives has forced those in the supply chain and consumers alike to question their involvement and responsibility. Last year, the Tazreen Fashions factory, also situated in Dhaka in Bangladesh, was destroyed by a fire that killed 112 workers and injured scores of others. Safety negligence was among the factors cited as the possible cause, but the most recent disaster shows little has changed.

Taking responsibility

It might be fair to argue that responsibility should to be shared equally between the consumer, retailer and supplier – after all, consumers continue to demand cheap goods and eastern factories continue to supply bargains to Western buyers. But in the case of the Bangladesh building collapse, the EU also felt it should take a stance, with talks of possible trade action against Bangladesh, which has preferential access to European markets for its garments.

For many in the risk management industry, however, it is the major brands that should be held accountable, says Cass Business School operations and supply chain management professor ManMohan Sodhi.

“In the Bangladesh building collapse, you can argue that the responsibility is with the building owner and/or the managers who told their staff to turn up for work despite unsafe infrastructure,” he says. “But eventually it boils down to economic incentive. Whoever has the most to lose will have the most incentive do something about it.

“It might be that an organisation bought from somebody who bought from somebody who bought from somebody, say Nike for example, buying from a supplier that was guilty of child labour. Eventually the consumer is buying Nike’s product and so it isn’t the reputation of the supplier’s supplier that is on the line, it is the brand’s reputation that could be lost.”

Consumers have a moral obligation

Add to that the social and media pressures placed on retailers to sign health and safety contracts, conduct independent factory inspections and share the cost of factory renovations, it is clear to see why many feel the ultimate supply chain responsibility lies with the retailer.

However, this does not necessarily eliminate consumer responsibility. Carl Leeman, chief risk officcer at Belgium-based international logistics and hi-tech services company Katoen Natie, and Ferma board member says: “We have a moral obligation as consumers. If you see jeans on sale for €7 or €8, then you shouldn’t buy them. Consumers should question why they are selling at such a low price. It’s impossible that jeans going for €7 are made in a safe and human-friendly working area.”

Demand for bargain goods is apparent and there are significant profits to be made. Some retailers rely on a business model involving outsourcing the production of goods to developing countries, making it possible for them to sell T-shirts and other goods at extremely low prices. For many consumers, quality is not a concern. If the item falls apart in the wash, they can always purchase another one.

Sodhi says: “It’s that whole culture of consumerism. If you go into Primark you’ll see people carrying very large baskets and buying things by the kilo. How many clothes can one wear? But then you look at the prices and it doesn’t really matter.”

Boycotting retailers that source products cheaply and sell in high volumes at low prices, however, isn’t an answer shared by campaigners, who fear that such action could cost jobs in much-needed areas in Asia. This makes placing the onus on consumers unreasonable. If any positive movement were to be gained from consumers, it would mean forcing billions across the globe to change their shopping habits and think twice about what they buy.

Fashion retailer Arcadia Group’s head of risk and compliance Colin Campbell says: “I’m not too sure whether Joe Public going into a shop and buying a product will consider where it came from, how it’s made, who made it and how it got there. There are steering groups and individuals concerned about the environment and related ethical issues, but is this a growing community? I would say probably not.”

April’s disaster in Bangladesh has prompted retailers to take action. European high street stores including Associated British Food’s Primark, Tesco, Hennes & Mauritz and Inditex’s Zara have signed a legally binding agreement to improve safety conditions in factories in Bangladesh.

The Bangladesh Fire and Safety Act commits retailers to establish a fire and building programme as well as inspect factories. In addition, Primark has since agreed to pay compensation to the victims of the collapse.

An opportunity for those less scrupulous

But there are hidden partners associated with the supply chain who should also come forward and share the responsibility of ethical trading, according to Peter den Dekker, Ferma board member and insurance and risk manager at Amsterdam-based global telecommunication firm VimpelCom.

Global operating insurers and reinsurers are accepting and underwriting risks in Asian and African countries that have provided inadequate risk information

Peter den dekker, insurance and risk manager, VimpelCom

“The global insurance and reinsurance industries, in my view, also have a responsibility,” he says. “Unfortunately, it is common practice that global operating insurers and reinsurers are accepting and underwriting risks in Asian and African countries that have provided inadequate risk information.

“This also includes global operating risk managers who are in charge of health, safety, security and fire prevention. As a community we should contribute in sharing our experience to raise risk management standards globally.”

While post-disaster action promised by some retailers is welcomed, there are the concerns that less scrupulous small and medium-sized businesses may see the situation as an opportunity to provide competitive prices by sourcing from these factories as major brands rethink their strategies.

“Economically we have another issue. If, for example, I do it the right way – I source my products ethically – and my competitors continue to go the crooky way – they source cheaply – then I might have a problem selling my products because businesses that have their production in those tricky environments will be able to sell for cheaper,” says Leeman.

“Buyers need to state in their contracts that suppliers cannot subcontract out to third parties. They should only agree to this if they have proof that the subcontractor’s working conditions are safe.”

Ultimately, though, it is the major brands that hold the power to make the necessary changes. It is clear that media and social pressures are beginning to force the hands of some companies. And if moral and ethical obligation does not fit well in a business model that outsources to dangerous factories, the drive to protect brand reputation is likely to give the necessary push.