Thursday, June 6, 2013

Cheap Labor, out of Fashion?: New Models for Assessing Supplying Decisions after the Bangladesh Factory Collapse

Social Aspects of Green and Sustainable Manufacturing

From time to time this blog will include appropriate contributions from others. This posting is one of those and comes from a PhD researcher in the Laboratory for Manufacturing and Sustainability, Ms. Rachel Simon.

The Rana Plaza factory collapse in Bangladesh, with a final death toll of 1,127 workers, officially ranks as one of the worst manufacturing disasters of all time. The tragedy exhibits a new reality for producers with supply chains that are global and complex: a diversity of suppliers along the value chain may protect producers from the vulnerabilities of disruptions, but it can also expose them to additional risks—such as hidden costs and a damaged reputation—resulting from using even a single supplier with any bad environmental or social practices. In light of these developments, what will be needed for companies to consider and mitigate these risks?

You may recall from earlier articles about labor and the social impacts of sustainability  we have discussed here the “triple bottom line.” For those that did not read these postings, the “triple bottom line” term originated in 1994 with John Elkington (he called it the 3-P’s: profit, people and planet) with the “people” part indicating “a measure in some shape or form of how socially responsible an organization has been throughout its operations.” What remains debated is what the social responsibility measurements of a company should be, and how they can be accurately assessed. While we, at our lab, have been working on identifying the best social metrics for manufacturing, supply chain management, and risk aversion, it is often difficult to pinpoint the perfect social metrics because, they are, in general, an indirect and imperfect measurement of a conceptual ideal.

Similar to the environmental issues that result from production, there are often social costs to workers and surrounding communities, the burdens of which are borne by people beyond the scope of production and consumption (you may also recall our reference in the blog to Elizabeth Kolbert’s analogy on externalities about global warming being like a drunk man that the public must pay for in the cost of a police escort home or a visit to the emergency room). For instance, while companies may contribute to the costs of the rescue and relief efforts at Rana Plaza, their contributions will not likely exceed the long term total costs to survivors, the families of workers, and the Bangladeshi public. Also, just as with environmental issues, it is a short-sighted perspective that often leads to business decisions that create entrenched social issues. With sourcing garments from Bangladesh, companies have been mostly concerned with the cost of sourcing per unit produced. However, when everything is taken into account, companies may end up spending more to compensate for these disasters, repair their damaged reputation, find and build relationships with new suppliers, or improve the existing conditions in Bangladesh in order to continue doing business there. Social metrics are precisely what are necessary to prevent producers from being associated with, or contributing to, the conditions that led to the tragedy in Bangladesh repeating in the future. Regardless of which party is ultimately responsible, these disasters in the production chain put brands at risk, and the issues that created them need to be handled to achieve sustainability.

One of the benefits to a company that outsources components is that they do not have to invest their own resources into managing the conditions under which they are produced. Companies have challenged the idea that they hold a large part of the responsibility to enforce the working conditions of their suppliers. However, in Bangladesh, brand owners appear to be past the point where they can debate on the principles of what should be. Instead, they have been faced with strong public sentiment about their role in incidents such as the Rana Plaza collapse, and the Tazreen factory fire that preceded it which killed 112 workers last November. In both of these catastrophes, labor groups and the media have been quick to identify which fashion labels have been found in the rubble of the fallen factories. In the wake of Rana Plaza, the Los Angeles Times, the New York Times, the Wall Street Journal, and the Washington Post, have all featured articles about which retailers have signed a proposed legally binding agreement on worker safety and building regulations for Bangladesh. Sumi Abedin, a survivor of the Tazreen factory fire, who jumped three stories—not to save her life, but to save her body in hopes that her family could identify her remains—tours the United States, advocating companies and consumers to improve the working conditions for garment workers like her in Bangladesh.

Now companies that do not wish to further tarnish their brands are faced with the decision to continue to source from Bangladesh, and help improve the working conditions there, or sever their ties with a location that has proven to be risky. Unfortunately, neither option can be implemented immediately, or without costs. For manufacturers wishing to leave Bangladesh, the limitations on the existing production capacity elsewhere makes it impossible to do so anytime in the near future. KeithBradsher reports in the New York Times that only a few countries in the world—China, Bangladesh, Vietnam, Indonesia; and potentially, Cambodia and Pakistan—have developed the production systems necessary to turn out the quality and volume which retailers need within the timeframe in which they want it. He further notes that this production capacity in alternative Southeast Asian factories is already being fully utilized. In fact, a leading garment sourcingcompany estimates that only 10 to 20 percent of Bangladesh’s current output, or $2 billion to $4 billion worth of goods per year, could be shifted in the next nine months to other countries. So, even for companies wishing to move out of Bangladesh, the feasibility to do so is questionable. In the meantime, companies will likely have to develop a strategy for their continued sourcing from Bangladeshi factories.

Additionally, a move out of Bangladesh will be accompanied by increased costs. Today, Bangladesh is the cheapest place in the world to manufacture clothing on a large scale. For instance, the average Bangladeshi garment factory worker earns $37 a month, compared to $120 in Cambodia’s Phnom Penh, $145 in Vietnam’s Ho Chi Minh City; $190 and $300 in Indonesia’s Semarang and Jakarta and $500 in China’s Guangzhou. Historically, brands turned to Bangladesh for cheaper production when prices in China began to increase. As demand for the cheap Bangladeshi labor grew, the existing garment industry was not able to support it. Low wages, paired with an expiration of the quotas governing the amount of garments that U.S. companies could import, drove rapid development in Bangladesh to serve unmet demand. Elizabeth Cline, a journalist and author of Overdressed: TheShockingly High Cost of Cheap Fashion, notes that the approximately 4,000 factories in Bangladesh could not keep up with the pressure of trying to compete with the 40,000 garment factories in China. According to Kapner, Mukherji, and Banjo of the Wall Street Journal, labor groups in Bangladesh say that factory owners illegally converted hundreds of residential and other buildings into makeshift garment factories. They also cite monitors who claim that factory owners would often build additional floors on to existing factories without concern for fire or other building codes. From 2005 to 2012, the number of garment factories increased 30% to 5,400 factories, according to the Bangladesh manufacturers' association.
Not only did cutting corners allow factory owners to keep pace with the expanding demand, but it also allowed them to keep the prices low. The tragedies that have recently occurred in Bangladesh happened in factories where owners neglected to provide—and pay the overhead associated with—appropriate building construction and maintenance according to codes: adequate lighting, ventilation, and emergency exits, and the necessary oversight to enforce safety standards. Additionally, it became difficult for brand owners to determine precisely in what factory, and under which conditions, their garments were being made, as a network of sub-contractors grew to serve primary factories that were at capacity.
Certainly, fixing these long standing issues of negligence in the Bangladeshi garment industry will require a capital investment. However, the question that should be asked is: will the capital that is required to fix the existing issues in Bangladesh cost more or less over the long term than the higher prices of production in other locations. Also, and more broadly, is there a cost level below which ensuring a minimum level of working conditions become untenable?

While relocating can alleviate some of the issues associated with manufacturing in Bangladesh, it does not guarantee that the problems occurring there will not be duplicated elsewhere. Could new demand in a different country drive rapid expansion at the cost of building safety? Will factory owners elsewhere compromise standards to improve their profit margins? With demand for production exceeding supply, will unsafe factories be sub-contracted against the wishes of manufacturers? Investing in Bangladesh will likely improve the status quo, while it is uncertain if moving elsewhere will be trading in one set of problems for another.

What is clear is that the existing model of developing and monitoring corporate codes of conduct for suppliers has not worked in Bangladesh. Foxvog and Gearhart of the International Labor Rights Forum criticize corporate supply chain monitoring systems for placing additional requirements on factories without providing them the financial means necessary to meet them. They also claim that these systems encourage factories to keep safety risks secret, out of fear that the companies will stop doing business with them, if they were to find out. While these sentiments clearly reflect the perspectives of labor, their accuracy does not hold less true.

Extensive research has been conducted proving that the environment in which laborers work affects their productivity. Even without reference to such studies, it is easy to suppose that in Bangladesh, where the work force is already trained and incredibly effective, productivity may improve if factory employees had adequate lighting and a consistent power supply, and did not work while in fear of a fire or a building collapsing. For manufacturers, improved working conditions would also reduce the uncertainty and risks of disruptions resulting from a similar disaster, and the unrest that would likely follow it, such as was seen with the worker protest that following the Tazreen factory fires.

Multiple polls and studies have indicated that consumers have a desire to buy ethical clothing, and may even be willing to spend more on garments that are made with good labor standards (see, for example, a. Hiscox, M. J., and Smyth, N. F. (2006). Is There Consumer Demand for Improved Labor Standards? Evidence from Field Experiments in Social Labeling. Department of Government, Harvard University; b. Elliott, K. A., and Freeman, R. (2001). White hats or Don Quixotes? Human rights vigilantes in the global economy (No. w8102), National Bureau of Economic Research.; and Kimeldorf, H., Meyer, R., Prasad, M., & Robinson, I. (2006), Consumers with a conscience: will they pay more? Contexts, 5(1), 24-29). 

However, while this sentiment has been expressed for over 20 years, growth in the ethical fashion market in recent years has been small - so called ethical consumerism and ethical clothing (see, Mintel, 2009. Ethical Clothing –UK-2009. Mintel International Group Limited).

For garment manufactures currently sourcing from Bangladesh, moving past the Rana Plaza collapse will be a challenge, regardless of what steps they take. However, perhaps this point also serves as an opportunity to fill a niche that currently isn’t being served, for those with the foresight to pursue it.

Comments and inquiries about this posting will be referred directly to Ms. Simon for her response. 

More on the social aspects of sustainability next time.