This past week provided stark reminders for apparel retailers and their suppliers on the realities of chasing the lowest cost producer, and of the blowback to the brand and its consideration of social responsibility.
Two different yet disturbing incidents involving suppliers located in the country of Myanmar have came to light.
Reuters reported that workers of a Chinese-owned factory making clothes for Swedish fashion retailer Hennes & Mauritz, conducted what was described as a violent demonstration that literally destroyed the production line of the factory. According to the Reuters report, production at Hangzhou-Tex Garment (Myanmar) Company, one of 40 H&M suppliers in that country, have been halted since February 9, nearly a month to-date. The worker dispute started with a strike in late January following the termination of a local labor leader advocating for an improved performance review system and healthcare coverage. Video observed by Reuters described dozens of female workers physically assaulting a factory manager. In late February, hundreds of workers were reported as storming this factory and damaging facilities including machinery, computers, and surveillance cameras. The Chinese embassy in Myanmar described the incident as an “attack” and filed a “serious request” to local government authorities to hold those involved accountable.
H&M issued a statement indicating that it was deeply concerned about this recent conflict and is monitoring the situation closely to include dialogue with concerned parties. What makes this news more troublesome is that H&M has been widely viewed as being outspoken among apparel retailers in promoting worker rights and fair wages. H&M was one of several retailers that demanded labor reforms and improved working conditions after the devastating 2012 Tazeen Fashion and 2013 Rana Plaza factory fires in Bangladesh that cumulatively killed upwards of 200 workers and injured over a thousand workers. In its reporting, Reuters cites H&M as ranking high in sustainability indexes.
A report also indicates that H&M has plans to influence apparel suppliers within the retailer’s supply chain to digitize payments for workers. A report conducted by the Better Than Cash Alliance indicates that 80 percent of factories in Bangladesh pay employees in cash notes. A review of 21 garment factories already utilizing digital payments pointed to significant savings in administrative time handing out cash to workers as well as some security for workers themselves with a more transparent way to receive money, provide more accurate data on wages paid, and afford greater economic independence to female workers.
Separately, a published report by The Wall Street Journal indicates that Europe private equity firm Apax Partners, which controls Germany based retailer Takko Holding, is facing questions from some influential investors after Takko Holding was found to be sourcing production at a garment factory in Myanmar that employed underage workers. Such findings were reported in February by the Dutch based Centre for Research on Multinational Corporations, known as SOMO. That report indicated that several apparel factories in Myanmar had unsafe working conditions, paid low wages or enforced long worker hours. Besides Takko, the SOMO report identified 12 factories utilized by six other Western retailers.
The WSJ report notes that Influential investors of Apax Partners include the California State Teachers Retirement System as well as the Greater Manchester Pension Fund. Each of these investors are highly sensitive to corporate social responsibility and human rights practices and each was vocal to express direct concerns about the latest reports.
Both Supply Chain Matters and apparel industry observers and participants continually point to an industry sourcing model where individual garment factories produce for multiple brands, and in some cases, factories will sub-contract to other factories often without the knowledge of the branded customer. As the WSJ concludes, brands certainly have influence in demanding certain working standards but have little direct control, other than continuous audits. Another ongoing challenge identified after the Bangladesh tragedies was factory owner access to capital to make necessary factory improvements to achieve minimal safety standards, with owners themselves seeking financial subsidies from apparel industry associations who source production in a particular country.
In the specific case of Myanmar, Reuters cites International Labor Standards data indicating that line worker wage rates average $63 monthly as compared to $90-$145 monthly wage rates in Vietnam and Cambodia. Yet in Myanmar, the government has yet to establish a standard for garment factory safety and labor practice standards.
Thus, the challenges of social responsibility continue to persist with the addition of a new lower-cost manufacturing region with a new set of workers becoming impacted by industry practices that weigh direct labor expense as a prime sourcing determinant. It would seem, though, that the risks get higher.
Most apparel retailers and brand producers have declared social responsibility statements and supporting practices. We all know that supply chains are driven by customer and consumer desires and needs, and in the case of apparel, that demand translates to continual variety and the lowest cost. Quality, or perceptions thereof, is sometimes overridden by the attraction of cost, when styles have a short market life.
We continue to submit that we, as consumers of apparel, have the ultimate voice on the weighting of social responsibility practices in the selection and consumption of our apparel choices.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Earlier this month, Supply Chain Matters unveiled our 2017 Predictions for Industry and Global Supply Chains (Available for complimentary download in our Research Center). Our last grouping of predictions focused on unique, industry-specific supply chain challenges, and included apparel and footwear supply chains. Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel, and the new trade agenda being pursued by President Donald Trump has the potential to provide significant impact to this industry’s supply chains.
The geopolitical forces of increased trade protectionism are expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing North American Free Trade Agreement (NAFTA), the goods flow freely and duty-free across borders in North America.
Since publishing our specific apparel and footwear industry specific prediction, this Editor had the opportunity to reach out to the American Apparel & Footwear Association (AAFA) to garner additional insights on the industry and its challenges in the coming year.
We spoke with Nate Herman, senior vice president of supply chain at AAFA regarding current industry challenges and impacts. Our discussion referenced a report from global business network CNBC regarding the potential impact of a trade war among the United States and Mexico. We provided AAFA a copy of our 2017 predictions related to the industry and the impact of revisiting the existing North America Free Trade Agreement (NAFTA) governing trade among the United States, Canada, and Mexico.
The CNBC report included some definitive data on apparel and footwear retail categories exported from China to the United States. We asked on specifics related to Vietnam and Bangladesh. The AAFA referred us to the U.S. Department of Commerce, International Trade Administration, Textiles and Apparel Import Report. The latest reported dated February 7th, for the category: United States Imports of Cotton, Wool, Man-Made Fiber, Vegetable Fibers Except Cotton ad Silk Blend Textiles provides the following data related to Top-Ten import countries for 2016. (Data expressed in million square meter equivalents-SME)
The data indicates that total U.S. imports of textiles and apparel was down 1.0 percent in 2016 over that of 2015. That is an important indicator of product demand. Of the top ten countries importing to the U.S. China remains as top exporter of apparel to the U.S., but overall volumes were down 2.4 percent from the year earlier period. India ranks #2 with a significant 5.8 percent increase while Vietnam ranks #3 with a 2.5 percent increase. Mexico ranks #5 with a 2.4 percent increase while Honduras ranks 9th with a 2.5 percent decrease.
Besides NAFTA, there is also the Central America Free Trade Agreement (CAFTA) that includes trade with the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. We wanted to explore whether a cross-border or import tax involving the existing CAFTA would have an impact to existing industry supply chains. Many supply chains of U.S. based apparel and footwear providers extend to Central America, as well, now estimated to be as much as 15 percent of total U.S. imports. The region is particularly to manufacturers and retailers that are anchored in quick turn-around “Fast Fashion” supply chain response.
We asked Herman if the Trump Administration has made any indications toward revisiting the CAFTA agreement in addition to NAFTA. His response was that there has been little reference thus far. Today, advanced yarns and fabrics produced in the U.S. transit to Central American countries under duty-free conditions where they are cut and sewn into finished apparel and distributed back to U.S. entities. Herman further pointed to the appointment of Wilbur Ross as the new Secretary of Commerce and chief strategist for trade policy.
Ross’s previous business investment interests included in 2005, combining the then bankrupt Burlington Industries and Cone Mills, a leading supplier of Levi Strauss denim, to create International Textile Group. Ross then lobbied for what became CAFTA. Thus, the industry currently views Ross as knowledgeable of U.S. centric apparel supply chains flows and needs for access to lower-cost, duty-free manufacturing sourcing.
We then asked if higher volume apparel products can be economically produced solely in the United States. Herman indicated that since 2009, there has been a small but sustained 50 percent resurgence in domestic apparel manufacturing. The trend is likely to continue but there are also certain realities relative to any higher-volume manufacturing presence. They include the need for advanced factory automation and access to a trained and skilled workforce, not to mention a inherent domestic based supply chain. The Administration’s current anti-immigration environment could prove to be a detriment to growth in domestic manufacturing. The fact remains that much of apparel’s supply chain value-added remains sourced in lower cost manufacturing regions.
We honed-in on the fast fashion sector where brands tend to rely on Central America and Mexico for sewing and production. We asked if U.S. trade policy changes could impact this specific sector. Herman believes that fast fashion provides great opportunities for the Western Hemisphere to regain market share from Asian producers, and that the industry should be moving in this direction. That stated, the industry was stated as being “in-pause” pending the outcome of any Trump Administration trade policies.
Specifically regarding Vietnam, which would have been a significant benefactor of the now in-doubt, Trans-Pacific Partnership Agreement (TPP), AAFA cites this country as a #2 supplier for clothes and shoes imported into the U.S. The industry views this country as a growing supplier currently growing at double-digits. One of the important tenets of TPP was protections for intellectual property as well as counterfeit goods protections among trading partners. Such provisions remain a concern for U.S. importers.
As the industry moves forward in 2017, Herman indicates that AAFA’s mission is to make sure association members have all the information related to any changing trade policies, but the current perspective is that it’s anyone’s guess as to what’s in the cards for trade policy changes. It will require constant diligence and analysis by AAFA and its industry members.
To that end, Supply Chain Matters will check back at mid-year to ascertain any additional industry developments.
We would like to thank Nate Herman and the American Apparel & Footwear Association for their time and perspectives on what supply chains should anticipate in 2017.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.
As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.
In prior industry-specific predictions posting, we dived into Automotive Supply Chain Residing Across North America .
Apparel and Footwear Producers and Respective Supply Chains
Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel. Apparel supply chains are global in nature with many interlinked flows and sometimes, hidden flows. Because of the high content of direct labor involved in the production of apparel and footwear, the cost of direct labor is a prime determinant as is the overall cost of transportation to move goods to designated geographic markets.
U.S. consumers have become very accustomed to expect cheaper apparel prices. More affluent consumers demand higher and latest fashion and have been willing to pay a premium price for availability. The Trump Administration policies to initiate business tax reform and protect U.S. jobs will likewise have a significant impact to apparel and footwear supply chain sourcing and pricing strategies.
The geopolitical forces of increased trade protectionism is expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing NAFTA agreement, the goods flow freely and duty-free across borders in North America.
Any threat of a trade war among the U.S. and China, or a border adjusted tax on goods imported from other countries, will have a dramatic impact on apparel and footwear financial margins.
At the same time, traditional retailers are under enormous profitability pressures in 2017. Retailers with volume buying clout may well force suppliers to shoulder the burden of increased footwear and apparel costs. They likewise can continue to turn a blind eye to the ongoing and elusive practices of hidden sub-contracting of production among low-cost region apparel producers. Similarly, industry efforts directed at better and fairer enforcement of social responsibility practices related to sub-standard factory working conditions and excessive daily labor hours’ burdens of apparel workers in low-cost global manufacturing regions could be re-railed by a new round of industry cost burdens.
Smaller, more specialty retailers may have little choice but to pass along cost increases in higher prices. More popular branded or in-demand producers may be able to pass along price increases as-well, but that can be risky.
Industry disruptors focused on “fast fashion” business strategies have been leveraging supply chain near-shoring strategies to provide far more agile responses to the latest and most prominent fashion trends. Their appeal to higher margin, in-demand fast fashion supports higher pricing and thus flexibilities to support near-shoring of fast production. The key to fast fashion has proven to be more agile supply chain sourcing strategies and that will expand in 2017. That may prove to be a significant strategic advantage and opportunity in 2017, but here again, if the existing NAFTA agreement is changed or eliminated in 2017, such strategies will need to be revisited or altered.
This concludes our 2017 prediction related specifically to apparel and footwear industry supply chains. Next up in the industry-specific category will be pharmaceutical and drug supply chains.
A final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on Prediction Four.
2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP). Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.
For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.
Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.
A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”
As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.
Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.
We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics. They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.
Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.
Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.
As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.
Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017. Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.
This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Three years have passed since the tragic Rana Plaza apparel factory fire that killed many hundreds of garment workers that were trapped by a factory collapse, and according to a recently published Bloomberg report, (Paid subscription may be required) an uncomfortable truth is emerging: “Vigilance isn’t enough.” The result is both continued efforts by branded apparel buyers to require more fashionable clothing at cheaper costs, while factories that need to producer such garments are subject to an economic and policy vise.
The report indicates that some factories in Bangladesh have improved, completing more than 60 percent of fixes required by the inspectors sent by major clothing brands. However, of some 1,600 factories covered by the Accord on Fire and Building Safety in Bangladesh, a major inspection program run by the apparel retail brands, more than 80 percent are behind schedule on completing necessary improvements. Factories covered under the smaller Alliance for Bangladesh Worker Safety initiative have also reportedly lagged. The government of Bangladesh has since shut down just 39 facilities that posed an “immediate” danger to workers. Meanwhile, industry consortium and government investigators, along with outside organizations, keep finding factory defects.
An ironic observation from this latest Bloomberg report indicates: “The craze for cheap, on-trend clothing that helped turn Bangladesh into the world’s second-biggest apparel exporter, after China, has actually intensified since the disaster. Low-priced brands keep undercutting one another, and that keeps squeezing the factories that produce their clothes.”
The United Nations International Labour Organization (ILO) which vows to shutdown unsafe facilities determined in June that factory safety upgrades within the country would cost an estimated $929 million, of which, an estimated $635 million in upgrades have yet to be accomplished. The economics of factory owners being able to secure affordable loans or even be granted such financing to fund needed worker safety improvements clashes with the reality that brand safety consortiums’ financial support is limited. Securing and installing necessary safety equipment is noted as another challenge because of the relentless pressures for product output at lower cost.
Another noted irony is structural in nature. The country’s overall garment industry has new factories opening all the time, in some cases prompting a Darwinian closing of less safe factories, but in-turn, adding to the list of factories that now need to be monitored. The country’s factories are inherently small and their ties to brand apparel buyers is described as tenuous. A further factor is that both industry sponsored worker safety consortium programs only extend to 2018, leaving little time for changes to financed and implemented.
As Supply Chain Matters and others have pointed out in many apparel-specific commentaries, buying practices within the industry continue to foster multiple sub-contracting arrangements where brands are de-facto sheltered or hidden to visibility as to which specific factories are producing certain garments. Such buying practices make contract interpretation and safety compliance standards difficult and subject to needs for continual inspections as to which brand apparel is being produced in any of the country’s apparel factories. Then there are the realities of the workers themselves who must work, regardless of factory safety conditions to sustain their families and livelihood.
As we all look forward to the upcoming holiday buying and gift-giving season, we wanted our readers to be aware of this latest report regarding factory and worker safety progress within Bangladesh, and perhaps other countries as well.
As long as we as consumers, continue to desire fashionable clothing at the cheapest possible cost, without consideration as where and how that clothing was produced, then the industry will continue in its strategies for chasing and demanding the lowest-cost manufacturing source.
The de-facto result seems to be heading toward highly automated garment factories that can produce thousands of garments from robotic machines. The byproduct with that approach are impoverished workers, desiring opportunities to better their economic stature, having such opportunities eliminated.
By our lens, this has always been a challenge for both industry and government collaboration and investment. Sadly, for the country of Bangladesh, such challenges remain.