Ethical Outsourcing – A Case Study
Note: To receive full credit, your paper must include an analysis of both of the following articles. Failure to include both of them will result in partial credit.
Levi Strauss Expands Ethical Sourcing Program to Offer Low-Cost Loans to Offshore Vendors
Partnership with World Bank Arm Will Offer Even Lower Rates to Top Performers in Labor Practices, Safety and the Environment
By SCDigest Editorial Staff
Iconic blue jeans maker Levi Strauss & Co. is putting some financial muscle behind its on-going ethical sourcing plans, announcing a program in which it will partner with the World Bank to offer low cost financing to its vendors offshore.
The company announced that it would begin providing lower-cost loans to its 550 or suppliers worldwide, with those who perform best on a series of labor, safety and environmental measures receiving even lower interest rates. The special financial program was rolled out in conjunction with a private sector arm of the World Bank, called the International Finance Corporation.
Under the rules of the program, loan rates will be determined on a kind of sliding scale. As suppliers improve conditions for employees and improve environmental performance they will be rewarded with lower interest rates on for the loans, which will be provided through a special IFC facility.
The Levi’s program was developed after a series of deadly fires and other accidents at apparel factories in Bangladesh and Pakistan in 2012 and 2013, most notably the 2013 collapse of Rana Plaza factory building in Bangladesh, which left more than 1,100 dead across five companies operating in the facility.
This disaster prompted great scrutiny of international supply chains in the apparel sector, and led to separate programs by groups of largely European and then U.S. retailers and brand companies designed to promote safer working conditions at factories in the region. These programs planned to offer loans or other financial assistance to those suppliers to improve operating conditions – as well as promises of increased vendor inspections.
It is not clear how well those programs have in fact played out since then. Regardless, Levi’s is in a sense now also going it alone with a program which is designed to provide even greater incentives to improve conditions by offering better-performing contractors the chance to reduce their cost of capital.
Through the program with the IFC, Levi Strauss suppliers in general will have access to loans at lower rates than they could find in their home countries. But suppliers which score high marks on labor, safety and environmental standards will get a further discount of up to 50 basis points (.5%) on the interest charged.
The 2012-13 incidents, which also included a deadly fire in Pakistan that killed more than 100 workers as well as a series of smaller but still deadly problems at other apparel factories, exposed a lot of questionable practices in the soft goods supply chain.
Those included rampant sub-contracting, such that retailers and brand companies really lost track of what companies were making their garments in what factories, and ruthless demands for lower costs from apparel suppliers that they claimed left no money to invest in safer facilities and more generous labor practices.
For example, apparel dust and fibers are known as major fire hazards, yet many facilities in that region were found to have such dangerous debris throughout their factories. At the factory where the deadly Pakistani fire took place, many of the escape routes (doors and windows) were padlocked shut, trapping workers as the fire began to rage.
Since then, major retailers such as Walmart and others have apparently tightened up many of their vendor practices, such as forbidding initial suppliers from sub-contract out work from an order without informing Walmart of the move, or prohibiting sending such work to unapproved factories in Bangladesh or elsewhere. How well these rules are working is also not yet clear.
Levi’s is also banking on having longer-term supplier relationships in low-cost countries, rather than pursuing the “supplier of the moment” approach that had characterized the industry, with vendor selection based almost solely on price and the ability to deliver the quantities required.
Michael Kobori, Levi Strauss’ vice president of sustainability, said the company now relies on “fewer, more capable” vendors and adds that the company has had relationships going back an average of 10 years with its top suppliers. If the pilot with the IFC works, Kobori says Levi’s is committed to helping to expand it to the rest of the garment industry, not just its own suppliers, as part of a “global race to the top “in standards.
Levi’s has long claimed it has some of the strictest labor standards in the apparel industry, employing a number of full-time inspectors to visit factories around the world. It also is rare among apparel brands in publishing a full list of the factories and suppliers it contracts with.
Ethical Sourcing Program Attributes
Levi’s of course is far from the only company to be pursuing so-called “ethical sourcing programs,” but how to build such procurement capability is often not clear. Recently, the consultants at Capgemini published the model shown below illustrating the key “enablers” of strong ethical sourcing initiatives:
Ethical Sourcing Program Enablers
But of course, costs remain a major factor in any procurement exercise, at times making ethical sourcing programs a bit of a challenge. Capgemini argues that ethical sourcing can actually often result in lower sourcing costs, as volumes are typically consolidated across fewer vendors with more volume to leverage, while quality and service levels also improve.
There is also the belief – somewhat supported by the evidence – that consumers prefer to buy products that are derived from ethical sourcing programs, such that any cost increases should be more than compensated for by greater sales volumes, or higher price points to gain back any lost margin. This preference is said to be especially high among the so-called millennials generation.
However, the evidence for such buyer preferences to date are mostly based on consumers telling pollsters what they would prefer. Whether that actually translates into real purchase behavior is still a bit of an unknown.
Tragedy Results in New Sourcing Rules
Europe Leads Way While U.S. Retailers Pursue Different Path
By SCDigest Editorial Staff
In response to a series of disastrous factory fires in Bangladesh and, after declining to participate in a mostly European-led legally binding accord relative to worker safety in that country, Walmart announced its own program in 2013, committing to contracting immediately with a third-party auditing firm to inspect 279 factories the company uses in Bangladesh for fire and structural safety, and publish the results.
Walmart will force suppliers with deficiencies in their buildings to make repairs or risk being dropped from the company’s approved list of suppliers. While unlike the European agreement Walmart will not directly provide any funds for such structural or operational improvements, a company executive said that Walmart will absorb price increases in the cost of the goods it buys if suppliers need that increase to fund its investments.
Walmart says it has also just published a list of 250 factories in Bangladesh that the company has already de-certified as potential suppliers for safety related issues. The company is also setting up a hotline for apparel workers in Bangladesh to use to report any unsafe working or building conditions.
Just as with the deadly apparel factory in November 2012 in Pakistan, the tragic collapse of a building housing several apparel factories in Bangladesh the following April, which killed more than 1200 in one of the worst industrial accidents in history, has as SCDigest predicted led to what will be changes in apparel sourcing practices, though much faster than we would have imagined.
The fire in Pakistan killed some 112 workers there, and the factory was found to have been making garments for Walmart, Sears and other big-name retailers, even after it had been cited for unsafe conditions before the deadly blaze. Both Walmart and Sears said they were unaware production for their stores was being carried out at the facility, as it turns out the orders found their way there through what it has become clear are very murky sub-contract relationships in t
he Asian apparel industry.
That led Walmart a few months later to change a number of its sourcing rules, including barring any sub-contract work to manufacturers and facilities it has not approved, requiring inspectors for its tier one suppliers to be actual employees, not hired agents, and ending a sort of “three strikes and you out” violation policy to one where suppliers can be terminated for a single violation.
After the Bangladesh building disaster, in which workers were ordered back into the building after inspectors had ordered it evacuated after seeing cracks in the structure, changes are coming rapidly. Just a few days after the tragedy, Canada’s Loblaw’s chain and Europe’s Primark, which were each having apparel produced within the building, announced they would financially compensate the families of those killed and workers that have been injured.
A number of European retailers, including H&M, Inditex (parent of Zara), C&A, Carrefour, Marks & Spencer, Primark, PVH and perhaps others all agreed to sign what is being described as a legally-binding contract that requires retailers to help pay for fire safety and building improvements in the factories they use in Bangladesh. The accord was actually drafted in 2012, but got near instant momentum after the building collapse.
The six-page agreement, called the “Accord on Fire and Building Safety in Bangladesh,” was set to last five years, and stipulated that the retailers would not to hire manufacturers whose apparel factories fail to meet safety standards and refused to make improvements. For those that would make improvements, the signees will be committed to paying for necessary repairs and renovations – and that could certainly be a large expense.
The agreement also included an independent inspection program with public reports of all inspections, specifying, for example, that signees must inspect no fewer than 30% of the facilities of their tier one suppliers annually. PVH said that it would contribute $2.5 million to underwrite factory safety improvements as part of the plan.
How such costs would be split among various retailers and brands using an existing facility was unclear. Also unclear was how this would work in practice, as orders to apparel factories in Bangladesh and elsewhere are episodic and sometimes given for just a specific garment at a specific time.
The pact was negotiated by retailers with global worker-safety advocates, and overlapped with the Bangladeshi government’s announcements that it would raise the minimum wage for
garment-industry workers and make it easier for workers to unionize.
At the equivalent of $37 per month, Bangladesh has among the lowest minimum wage levels
in the world at present. Currently, Bangladesh factories must approve union formation at their operations, a rule that obviously means such efforts are usually futile.
The agreement did not encompass sourcing from Pakistan, Vietnam, Cambodia, countries in Africa and other low-cost sourcing options where conditions can also be dangerous for workers. That, apparently, will wait until some tragedy in one of those countries.
The irony of course is that these low wages and few regulations are what drove the wave of apparel sourcing to Bangladesh in the first place, sending its level of exports to $18 billion annually, or some 75% of its total exports. Would the new costs that will come from such accords and changes in government rules push retailers and brands to some of these other countries instead?
That was the real unknown in the moves. For almost two decades, the apparel sector had been known for rapidly moving sourcing locations based on labor costs, tariffs and other factors that drive total landed cost per unit. But, in its statement, H&M at least said it would “accept the price increase that might arise as a consequence of the salary revision.”
No U.S. brands or retailers were initially ready to sign on. Walmart did not immediately make any formal comments on the proposal. Gap said it wouldn’t sign the agreement in its current form because of language that makes it legally binding in U.S. courts. It put forward an amendment that calls for retailers to be publicly expelled from the group if they fail to comply with arbitration, according to a person familiar with the matter.
“The litigation landscape is different in the U.S. than in Europe,” said Bill Chandler, Gap’s vice president of global corporate affairs. “Gap Inc. is ready to sign on today with a modification to a single area – how disputes are resolved in the courts.”
However, Gap has promised $22 million in loans for factory improvements in the country. There is also reporting saying that U.S. retailers and brands were working with U.S. trade groups to develop their own accord to improve overseas workplace safety, beyond only Bangladesh.
To show how this game works, U.S. retailers were singled out for failure to announce they will sign the agreement in some quarters. “Gap calls itself a leader on social responsibility,” said Scott Nova, executive director of the Worker Rights Consortium. “The opposite is the case. Gap and Walmart are laggards.”
So, if you don’t sign a legally binding agreement within a few weeks of a major tragedy, the full
implications of which are unclear, you are criticized by international labor organizations and elsewhere. Some investor groups, such as the public employee pension funds in California and Illinois, have called on U.S. retailers, the stocks of many of which are owned in these state investment portfolios, to improve worker safety in low cost countries as well.
According to draft agreement involving U.S. retailers and brands, signatories would have 45 days to form a governing board and develop an implementation plan. The board would include three labor representatives, three retailer representatives and a chairman chosen by the U.N. International Labor Organization, meaning labor advocates will have a majority of the seats.
SCM 341 – Extra Credit Project #3 – Instructions – Case Study Analysis
Write a two-page paper (400-word minimum length) analyzing one of the case studies shown below, which are posted on the course Canvas site (Modules → Extra Credit Projects folder).
Case Study Title_______________________________________
▪ Automation Trends – A Case Study (three articles)
▪ Ethical Outsourcing – A Case Study (two articles)
▪ Implementing Lean – A Case Study (three articles)
The paper must discuss how topics in the case study’s article(s) relate to relevant or pertinent concepts discussed in Chapters 1-15 of the course textbook (note: definitions of terms are not concepts).
Analysis must cite at least 3 but no more than 4 textbook concepts. Long introductions, such as “in Chapter X of Stevenson textbook” and long quotations from the textbook will not count toward paper’s minimum length. Further, satisfactory completion of the extra credit project will require that concepts be cited in the analysis using the following format:
(Stevenson, Page ___)
Note: Page references using older editions of textbook are not acceptable.
Submission Deadline: See Syllabus
Formatting – Papers must be in Microsoft Word or pdf format, double-spaced with one-inch margins and use 12-point Times New Roman font. In addition, the following must be shown in the top, upper left-hand corner of paper but does not count toward 400-word minimum length:
▪ Student Name
▪ Course and Section Number
▪ Title of Case Study
Notes:
1. If paper is submitted without any textbook concept references or references are cited using
an older edition of the course textbook, the paper will receive no extra credit points.
2. If paper is not the required length, not submitted in the required format, or submitted without properly
formatted textbook references; the number of extra credit points awarded will be reduced by 50%.
3. If one or more of the textbook concept references cited in the analysis are not relevant or pertinent to the content of the case study article(s), the number of extra credit points awarded may be reduced.
4. To receive any consideration for extra credit points, all papers must be uploaded to the course Canvas site (Assignments → Extra Credit Project 3) by the due date shown in the syllabus.
5. Projects will be reviewed by the instructor for compliance with these instructions, and, if found to
be lacking, students may be given an opportunity to revise and resubmit their projects for full credit.
If you have any questions or concerns, please stop by during office hours or contact me by e-mail.
Bob O’Donnell, Lecturer Operations & Supply Chain Management UW Oshkosh College of Business
Sage Hall Room 1418 E-mail: odonnelr@uwosh.edu
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