Since our last Supply Chain Matters commentary regarding developments related to the recent factory building collapse tragedy in Bangladesh, events seem to be moving rather quickly. In our last commentary, we further noted a report of yet another factory fire. It is now reported that this factory contained clothing destined for Zara.

Tragically, the death toll involving the Rena Plaza collapse now exceeds 1100 persons, with many more with injuries, branding this as the single largest factory tragedy in many years, and certainly the most noteworthy concerning the apparel industry.

On Sunday, the textile minister for the government of Bangladesh indicated that that government will begin talks with labor groups and factory owners to agree to higher minimum wage guidelines that could be retroactive to May 1.  However, the Wall Street Journal reports that this may only be a gesture since the majority of factory owners oppose the increase because consumers have become too accustomed to cheap clothing.

Yesterday, some of Europe’s largest and most agile retailers, along with others, agreed to sign a five-year legal agreement designed to improve safety conditions among Bangladesh garment factories. Reported to be among those retailers are Hennes & Mauritz (H&M), Inditex, the parent of Zara, Primark, Tesco PVH Corp, the parent of Calvin Klein and others. The accord calls for refraining from buying apparel from manufacturers who fail to meet prescribed safety standards.

However, some major U.S. retailers were missing from this agreement including Wal-Mart, Sears Holdings, Gap, JC Penny and others. According to separate reporting by WSJ, Gap indicated it would not sign the agreement because the current language provides liabilities in U.S. courts. No doubt, in-house lawyers are having their influence heard. Wal-Mart is reported to be one of the largest customers for clothing produced in the country.

Efforts among retailers and contractors to improve the overall working conditions in Bangladesh factories are all positive signs.  However, without the collaboration and direct support of the country’s biggest customer, Wal-Mart, these efforts will not, in our view, have the teeth to change the supply chain business culture within Bangladesh.  To be a global leader in retail implies leadership in supply chain and corporate social responsibility.  Apple and other OEM’s are demonstrating leadership commitment in the consumer electronics area and Wal-Mart needs to step-up as well for clothing and apparel.

Consumers themselves have to leverage their influence through their buying actions.  Much of the current reporting and editorial in business media these past days continues to reinforce that cheap clothing has become too much of the expectation from all of us.  We are not as consumers cognizant of where our apparel originated and under what conditions it was produced.  Many retailers are perhaps betting that this behavior will continue as the current news cycle passes to the next event.

Our community takeaway is that some supply chain organization will hopefully demonstrate that fashionable and trend setting clothing can be provided in safe factories, in a timely fashion, and at a reasonable cost. Others will then surely jump on the bandwagon.

Bob Ferrari

It has been 13 days since the building collapse in Bangladesh housing six apparel factories among other businesses. The death toll is tragically up to 900 persons. As we pen this posting, there is a report of yet another apparel factory fire in an industrial district of Dhaka that has been reported to have killed at least 8 persons.

Our previous Supply Chain Matters commentaries have focused not only on the Rena building collapse tragedy itself but the implications to global branded apparel supply chains.

Our initial commentary noted an environment of see no evil, tell no evil among retailers and other contractors for apparel sourced across Bangladesh.  We joined other voices in urging the apparel industry to initiate a serious call to action regarding current global sourcing practices and supplier standards.  Last week’s commentary focused on increased media attention, and we especially noted an opinion piece published in The Financial Times.  That editorial stated it would be a tragedy for retailers and apparel sub-contractors to walk away from Bangladesh to continue the quest for the lowest cost apparel, regardless of the consequences. We opined that we did not dispute the difficult challenges that lie in apparel sourcing within low-cost manufacturing regions.  At the same time, retailers and contractors cannot continue to turn a blind eye or hide behind sub-contracted chain of custody regarding unsafe working conditions.  Neither can global social responsibility standards continue to be ignored.

Business and social media continue to provide added attention and opinion on this supply chain tragedy, and that, in our view is a good thing. There is a need for additional discourse for the buy, sell and consumption side of the apparel industry.

Here are just a few examples:

In an article published in Bloomberg Businessweek, Charles Kenny declares that pulling out of the country is the wrong call.  “The right response of the Western retailers who source from Bangladesh is not to walk away from the country but to work with officials and owners to make the situation better.  And consumers who claim to care about people in developing countries shop at retailers who make that choice.” The author calls for global retailers to sign on to commitments such as the Bangladesh Fire and Safety Agreement which mandates independent inspection and renovation of unsafe factories.

An Op-Ed article published in the Los Angeles Times, authored by Richard Greenwald, dean at St. Joseph’s College in New York, parallels the building collapse to the 1911 Triangle Shirtwaist factory fire in New York City that led to new safety and health codes, labor law reforms and modern regulations to a termed “primitive” industry. “Rana should be our global Triangle fire moment. It should force us to wake up as consumers support the workers who make our clothes. It is our moral responsibility to demand that the labels we wear not be stitched in blood. To do nothing, to simply wait for the next tragedy, is to remain guilty as charged by Schneiderman in 1911”

Steve New commented on the Harvard Business Review Blog that this latest tragedy is a “hideous sense of déjà vu.” “We’ve seen this before and we know that it will happen again.”  He calls for broad public disclosure of factory sourcing data and that all concerned parties should focus all their energies on only one area of supply-chain ethics, the freedom of association and the right to collective bargaining.

In a published article in yesterday’s Wall Street Journal, Kathy Chu observes that big apparel retailers seeking better standards, without giving up the requirement for low-wage workers, are not going to find better prospects across the rest of the developing world, and that many Arian countries do not fare much better than Bangladesh in independent assessments of labor conditions. She further notes: “Apparel retailers however, face potential threats to their reputation just about anywhere they turn for their wares.” The article quotes the CEO of the Fair Labor Association: “The manufacturing industry is running out of low cost sourcing destinations, and it’s time to invest in making factories safer and better, rather than searching for cheaper labor.” The article again calls attention to concerns for the industry de-facto practices of sub-contracting, allowing contractor to secure orders for apparel that far exceed owned capacity and forcing the final sourcing decision to sub-standard factories.

The bottom line is that the apparel industry, in our view, is facing an important crossroad.  On the buy side, retailers and contractors believe they can continue to find yet another low-cost sourcing option regardless of the implied working conditions.  While the industry mantra is to avoid the dreaded “unionization effect” driving-up labor rates, as noted above, collective voices calling for a sole focus on the right of worker collective bargaining. Similarly, additional options related to added sourcing in newer low-cost manufacturing geographies will come at a brand reputation price.

On the product demand side, the calls for consumers to stand-up to ethical standards in clothing and other apparel demand visibility to factory origin and paying a little extra to assure social responsibility will only get louder. These voices will only get louder and more vocal.

In short, these latest incidents may or may not endure past the latest hyper news cycle, but should remain a threshold for improved accountability and responsibility.

It is time for the apparel industry to step-up and take the lead in responsible sourcing and stop pretending that these issues will just fade away with the next fashion cycle. Global retailers such as Disney, H&M, PVH, Wal-Mart, and others need to continue to take an open lead in coming up with solutions to a global-wide problem for the apparel industry. The good news is that solutions may not be as expensive as perceived if the majority of the industry comes together.

Supply Chain Matters also calls on the supply chain management technology and professional services community to add their voices and expertise to help the industry in more transparent visibility to apparel sourcing and to worker standards.

Bob Ferrari

Supply Chain Matters notes yet another installment in the continued risk of counterfeit drugs and goods within supply chains.

The Financial Times reported that leading generics drug producer Teva Pharmaceutical is stepping-up quality inspections of its products across Europe after discovering a sophisticated counterfeiting operation involving a popular off-patent heartburn treatment medicine.  The fake versions of the drug Omeprazole were discovered by Ratiopharm, a subsidiary of Teva after being alerted from a patient in Germany, who noticed spelling mistakes on the label of the packaged drug. Apparently, the drug contained genuine ingredients but was not produced by the manufacturer stated on the label. While the counterfeit version of this drug does not appear to pose a health risk, it has exposed weaknesses in government drug discount reimbursement programs based on the volume of drugs sold. A spokesperson for Teva was quoted as noting that this company was somewhat surprised to discover this counterfeiting scheme involving one of its products. Stepped-up efforts now include random testing of the company’s products that are in distribution, along with other products.

The alert has now triggered other manufacturers of Omeprazole to make further discoveries of fake versions of both the 20 milligram and 40 milligram packs of this drug.  One other manufacturer mentioned included Hexal, a subsidiary of Sandoz.  Here again, it is noted that while the unit cost of this drug is relatively low, thieves have been able to generate substantial profits through volume distribution of the counterfeit version.

Bob Ferrari

In our 2013 Predictions for Global Supply Chains (available for no-cost download in our Research Center), Prediction Nine declared that higher and more expensive incidents of counterfeit products appearing in multiple industry supply chains will motivate step-up mitigation efforts.

Thus, we were not terribly surprised to review a published article appearing on The Wall Street Journal which noted that dealing with fake goods is as profitable as illicit drugs. (Paid subscription required or free metered view)

This article summarizes a report from the United Nations Office on Drugs and Crime which concludes that counterfeit goods, mainly from China, have become as profitable as illegal drug trafficking for Asia’s criminal gangs.  The UN report reviewed 2008-2010 data and concluded that $24.4 billion was earned from fake drugs and goods originating from the East Asia and Pacific region. This UN report further notes that much of the trade in counterfeit goods is traced to China which the report estimated to be a direct source of about two-thirds of the world’s counterfeit goods.

While government agencies in China have been stepping up efforts to identify and provide harsher penalties to people convicted of breaking China’s laws on counterfeiting, the producers themselves are much more sophisticated.  Not alone to drugs and goods appear more identical to their original counterparts, sophisticated distribution methods disperse these goods through a layer of various global distribution networks which mask the original origin of these goods.  These facts were brought to light in last year’s episodes of fake cancer medicines entering the U.S. and other countries.

Supply chain risk identification and mitigation teams need to continue with the assumption that the volume of counterfeit goods is increasing and that mitigation plans, processes and tools to identify potential sources of fakes must be vigilant and active.  This would include testing and traceability mechanisms.

Bob Ferrari

When I speak to clients and audiences on the topic of supply chain risk, I’m increasingly including the category of information security in the listing of top risks.  The reasons are obvious and stem from increasing incidents of cyber-attacks on corporate networks where key information is pilfered. Earlier this month we penned a specific commentary that highlighted increased concerns for information security and IP protection related to operations in China, which falls under this same umbrella.

The London based Information Security Forum (ISF) has released a research report, Securing the Supply Chain, which concludes that information compromised along the supply chain is just as damaging as that compromised within an internal organization. This report, which has been 9 months in its making, involves inputs from various ISF members. In its press release announcing this new report, Michael de Crespigny, CEO of the ISF is quoted: “Supply chains are inherently insecure and organizations can create unintended information risk when sharing information with suppliers.  There is a ‘black hole’ of undefined supply chain information risk in many organizations- they understand and manage this across their hundreds or thousands of suppliers.”

This author had the recent opportunity to speak with Mr. de Crespigny regarding this new report. He shared recent research findings from the Ponemon Institute indicating that among U.S. companies, 41 percent of information breaches occurred from information compromise at a supplier. One of the areas we explored was the conflicting goals of nurturing an enhanced relationship with a key strategic supplier, which implies increased sharing of information. One of the first conclusions of the report is that the sharing of information with suppliers is essential, yet it introduces the added potential for information leaks. Supply Chain Matters has offered various commentaries noting how too much proprietary information related to products is leaked from lower tiers of the supply chain. Thus, the enhanced information sharing has to be contrasted with the importance for having robust information security practices.

In our conversation, CEO de Crespigny focused on the information-led, risk-based approach that various ISF members have assimilated together, based on their experiences. ISF has created what is termed a Supply Chain Information Risk Assurance Process, an audit mechanism to help companies identify and manage information risk among suppliers.  Although we have not, thus far, had the opportunity to review the methodology behind this process, it has been designed to be predicated toward identifying and monitoring suppliers with the potential for highest information risk.  It has further been formulated to assimilate into existing procurement and supply contract practices.

The report and methodology is available at no-cost to ISF members, and for what was described as a reasonable fee for non-members.

Readers may want to assess this new methodology for addressing information security needs.

Bob Ferrari

This week Dutch authorities are in the process of recalling upwards of 100,000 pounds of meat sold as beef across Europe because its exact source cannot be established and it may contain horse meat.  This announcement comes as the latest development in a far-reaching set of incidents across Europe that alleges that horse meat has been mixed in with other meats and sold as beef across the continent without informing consumers. The scandal led to recalls of products ranging from frozen lasagna to Ikea’s Swedish meatballs.

According to statements from the Netherlands Food and Consumer Product Safety Authority, the recall involves meat purchased from two Dutch trading companies and affects 132 firms within the Netherlands with a 70 additional firms across Europe.  The food authority said in a statement that because the exact source of the meat cannot be traced “its safety cannot be guaranteed.” The statement added that Dutch authorities have “no concrete indications that there is a risk to public health.”

The recall covers meat dating back to January 1, 2011, up until February 15 this year, when the companies at the heart of the recall were placed under heightened scrutiny. Obviously, given this wide berth of production, much of the subject meat has already been consumed. A spokesperson of the Netherlands safety agency indicated to The Associated Press in a telephone interview: “If meat has an unclear source then the law — the general food law — says it is no longer fit for human or animal food“.

Supply Chain Matters was struck by the above statement from the health agency that the exact source of the meat cannot be determined. That could imply that the subject beef trading companies could not verify the sourcing links to its beef products, or that the overall beef production supply chain in Europe has motivations to substitute horsemeat as a profit incentive, in lieu of the lack of adequate checks. In either case, it is from our lens, a supply chain problem needing root cause resolution.

Usually, food recall incidents manifest themselves in specific incidents of contamination, lack of hygiene or other issues related to production, transport or storage.  This latest series of ongoing product recalls involving suspicion of horsemeat mixed into supplies of meat for human consumption is turning out to be one of supply chain sourcing, supplier tracing and quality monitoring controls.  It is yet another sign of a breakdown in basic controls with the implication of adding additional risk to food brands and all other members of the supply chain.

We often cite elements of supply chain risk from a value-chain process breakdown lens.  When such risk stems from the presence of required controls within the supplier sourcing process, it should be alarming concern for all food procurement teams. We again cite our commentary published in mid-February that amplified traceability as a key to food safety. As investigations related to the European horse meat scandal continue to unfold and run their course, companies may again discover that traceability and conformance extends to the lowest tiers of the supply chain.

It is not about a primary supplier attesting to product conformity, but the supplier to that primary supplier. The rub often comes when negotiating supply contracts, when the customer refuses to acknowledge the need for added costs to insure product traceability and quality conformance.

Heed the warning signs as they continue to unfold.

Bob Ferrari