Rethinking Purchasing Practices: How the Corona Virus has shone a light on the double standards of the apparel trade
May 17, 2020 | Dhaka, Bangladesh
Rethinking Purchasing Practices. How Covid-19 Has Shone a Light on the Double Standards of the Apparel Trade.
On March 23rd the head of the Bangladesh Garment Manufacturers and Export Association posted a YouTube video pleading western brands not to cancel orders placed with Bangladeshi suppliers following the outbreak of Covid-19 and subsequent store closures. In order to generate cash flow amidst a drop in sales many brands have opted to back out of their agreements with supplier factories cancelling orders and thereby avoiding any due payment.
Since then, data from the Bangladesh Garment Manufacturers Association shows that 1150 factories have reported $3.18 billion in order cancellations since the virus outbreak. The cumulative liability of unfinished items is further estimated at nearly $10 billion. The stark lack of orders coupled with a sudden glut of cancelled finished goods has forced many factories to shut down altogether.
Cancellations leave supplying factories in a precarious position as most have to take out a loan to finance raw material purchase and production then receive payment at a later date. A cancellation therefore leaves a supplier with huge production liabilities and no revenue to pay worker wages. For brands, the outbreak has caused a slowdown in sales and a dent in profits. However, with Government support being extended to furloughed employees and bail out packages for struggling businesses, many of these brands will eventually recover. For many suppliers however, a brand’s response to the outbreak may either keep a factory/supplier in business or cause bankruptcy and cessation leaving many workers out of a job.
The order cancellations have shone a light on a disparity that has long disadvantaged suppliers across the world. Buying practices define power distribution across the supply chain- when payments are made and on what terms, and more importantly who takes on the risk. They have favored the brands for a long time, and the most vulnerable in the global fashion supply chain continue to pay the price.
How your clothes are made
Typically, fashion brands will require the manufacturer to produce goods on a credit basis. For example, a brand places an order for 50,000 pairs of denim jeans, an amount usually placed at high volume exporters such as Bangladesh, Vietnam and Cambodia. Following price negotiations, a purchase order (PO) is placed stipulating volume of raw material required. The next step would then be for the brand and the supplier to open what is known as a ‘letter of credit’ (LCs) with their respective banks. This would act as a legal guarantee of payment in the event that the order incur any changes. However, over time, fewer brands are willing to issue LCs instead and instead expect their supplying factories to operate on a trust basis or absorb any production risk.
Some brands will instead offer a Sales Contract. This ensures that in the event of late delivery or default goods the supplying factory must take ownership and accept some form of financial penalty. Similarly the sales contract holds a customer legally responsible for paying for the goods as agreed. However, even this is a rarity these days and in the event a Force Majeure clause is included in the sales contract, an ordering customer can opt out of paying at all for their full order.
Brands have instead been pushing their supplying factories to undertake all fulfilment on just a ‘purchasing order’ (PO). The PO acts as an unofficial agreement upon which a manufacturer takes out a loan from their respective bank to begin sourcing all raw materials for the pair of jeans. It does not have to provide the supplying factory any legal or financial guarantee of payment (like a LC) nor does it highlight a customer’s contractual obligations, which must be legally upheld (available in a sales contract). Thus, over the last 10 years more and more suppliers have had to adhere to unfair payments terms as brands threaten to cease business relations otherwise. As a consequence, today supplying countries are facing order cancellations, pressure to issue payment discounts, suspensions and other order alterations with no legal ground to fight back.
Further risks are undertaken in the deferred payment model most brands will push supplier factories to accept. Although it varies, brands often pay 90-120 days after order completion. Meanwhile, factories pay for the fabric to make those orders up front or at a slightly later date. In other words, the supplier can sometimes finance the purchase of raw materials for up to six months before they receive any payment from the customer, and well before they might make or cancel an order.
In expecting factories to operate on such a model brands outsource the risk of production to the manufacturers. Factories in these nations are generally labour intensive with little capital and next to no bargaining power. When protests are made regarding payment terms or order suspensions, factories can be threatened with further cancellations (there is nothing to guarantee payment without an LC or Sales contract) or termination of business arrangement. There have been a multitude of cases whereby a brand experiences disappointing sales (well before the outbreak) and subsequently disregards the terms stated in the sales contract knowing there is little the supplier can do to retaliate.
Recent decisions by brands highlight just how easy it is to take advantage of a system that shifts the liability to a factory/supplier. The Sourcing Journal reported that Primark for example originally claimed Force Majeure on its sales contracts to supplying factories and following international outrage, changed its stance opting instead to pay just the wages of affected garment workers on these orders. However, this represents just 10-15% of the money they owe to their supplier factories. The problem with this is that, while this money will cover wages, it will not cover the suppliers’ liabilities in terms of raw materials and other overheads. When factories cannot pay these costs, they go bust, leaving workers out of a job.
A number of well-known brands have opted for similar tactics. Labour behind the Label highlighted how Asda for example announced is cancelling a quarter of orders with clothing suppliers, despite seeing record food sales during the pandemic.
Are Brands and Suppliers Held to the Same Standard?
What is particularly cryptic about a brand’s decision to shift the liability on to the supplying factory is that it then puts at risk the very people that brands have so ardently vowed to protect. Organizations such as the Sustainable Apparels Coalition have come together to hold factories and brands accountable for neglecting worker’s rights worldwide. Factories will pay up to $5000 for SAC membership to assure brands that they will go above and beyond to assure welfare of all workers employed. Yet research from Apparel Insider shows that many of the SAC member brands themselves who are now refusing to pay for orders.
Brands require that suppliers take full responsibility for the goods arriving on time, as per stringent quality, with all correct documentation and as per each brand’s tailored work process. In a fiercely competitive market, each supplier has to perform 100 percent otherwise there are heavy penalties attached. In light on the order cancellations it’s for brands to be held accountable for delivering their end of the deal.
Time for Change
The hard truth of the industry is that that distribution of risk and therefore negotiating power between supplying factories and brands are extremely unequal. Most garment factories have razor thin profit margins, which coupled with the up-front financing, production costs and risky payment terms means tight cash flow. A canceled order isn’t just a case of lost revenue which can be made up against future orders. The costs have already been sunk, and it’s the people at the bottom who will pay for it.
To truly ensure the wellbeing of a brand’s supply chain workforce, business terms need to change. Without sharing the risks, brands can abandon their financial obligations that pay for wages and worker wellbeing. By returning to former payment terms, by ensuring all orders are undertaken against a letter of credit will assure workers are never left producing a good for free. Alternative options include providing a sum of the final order price as an upfront payment or taking on the cost of some or raw materials. Issuing sales contracts will also provide some assurance to supplier factories that brands intend to pay for goods ordered, however, as seen with Primark, there are legal loopholes that still render these redundant.
Anyone wearing clothes is part of a fashion supply chain and has a responsibility to demand answers about brands’ purchasing practices. Demand to know how a brand pays its supplier factories. Does it take on any legal responsibility for pay for the orders it has paid? When brands announce canceled orders, demand to know whether they will reimburse the costs the factories have sunk and will they cover a factory worker’s wages? As a consumer, you have every right to know.
Unfortunately, the spate of disproportionality was already threatening fashion’s sourcing viability before the virus surfaced. Now, the financial and human chaos is shining a light on practices that are in urgent need of change. If this calamity doesn’t elevate the need for shared risk and value for fairer more sustainable purchasing practices, nothing will.
Raisha Sajjad | Industry Bangladesh