Audits are failing – brands should cut out waste so suppliers can pay their workers a living wage

18/6/19 - Anne Manschot, Sustainability Consultant at Enact Sustainable Strategies

Low prices and cost-cutting business models are harming labour rights, argues Anne Manschot

This blog is part of our series on Beyond Social Auditing.

I was wrapping up a session on supply chain management with a group of business leaders from various Asian countries. It was an inspirational group: intelligent, ambitious, with a palpable drive to make a change. They had participated with great interest, and cared deeply about the topics discussed.

At the end, a young business leader – let’s call her Banhi – asked: How can we be expected to follow all these requirements and pay for multiple audits per year, if our clients are not willing to pay us a proper price?

My reply was a reflection on the ways a brand can help suppliers generate more profit. By cutting costs for example, or through more efficient business practices. Brands such as Nike or Philips have been known to help their suppliers with these kind of improvements in their factory lines with promising results.

While I was giving her my answer, however, I realized that it simply does not suffice. I imagined Banhi thinking: Why does the supplier have to change their business practices if they do not receive a high enough price to make a profit? Is it not up to the buyer to bridge that gap instead? And how can we be sure that the buyers will not insist on decreasing the price further as soon as we have found a way to become more efficient?

In 2016, the International Labour Organization (ILO) held a global survey with nearly 1,500 suppliers looking at how supply chain mechanisms impact decent work and rights. The results were shocking. On average, only 25 percent of buyers were willing to adjust their prices to reflect an increase in minimum wage for workers.

More recently, Human Rights Watch published a report on how brands’ sourcing and purchasing practices can play a huge part in causing labour abuses in apparel factories. These reports show that the sustainability objectives of brands – living wages in their supply chains – are often a far cry from their daily purchasing practices.

And yet the audits brands require from suppliers to determine their performance with regard to social and labour standards fail to take into account the brands’ own behaviour in interaction with suppliers.

There is a growing power imbalance between buyers and suppliers. Manufacturers are increasingly put under financial pressure and margins are unmanageably small. The ILO study also showed that 52 percent of suppliers accept orders below production cost. In countries with less secure economies, that percentage is even higher.

Worryingly, 46 percent of suppliers in developing countries indicated they were producing below cost price because of ‘buyers threats’. And if suppliers are having a hard time keeping their heads above water financially, how can they pay their workers a proper wage and compensate overtime?

Banhi was right. It is only fair to ask buyers to pay a higher price, so that suppliers can cover costs. Currently, best case scenario is brands training manufacturers on more efficient business practices. But is this really where the problem lies?

The problem is a much more complex and systemic one. Brands are constantly trying to cut costs by asking suppliers to produce for a lower fee. At the same time, our economic model is based on overproduction and continuous growth. In the textile industry for instance, where this is particularly visible, apparel brands prefer to over- rather than underestimate future sales to avoid losing profit and place large orders as the price per item goes down.

Yet only one third of all clothes produced are bought by consumers for a full price. Another third is sold in a sale or outlet, and a third of all clothes produced are not sold at all. The unsold clothes are thrown away in either landfills or burnt (part of ‘normal’ fast-fashion business practice, as recently reported in relation to Burberry).

Perhaps my answer to Banhi should have been a lengthier reflection on the unsustainable business practices in which she is forced to operate. It does not seem logical – or lean – to create so much waste, and it should not make business sense either. Instead, business models should be built to match supply and demand, not to overproduce in such unsustainable numbers. If these cost savings could flow back into company supply chains, perhaps there would be less price pressure on suppliers, which often comes at the expense of workers.

Only by paying a proper price for their products can we expect suppliers to sustainably invest in their workers and the future of their business. This means deviating from price as the main (or only) driver in negotiations with suppliers, building on a relationship and bringing your own buying practices in line with your Corporate Social Responsibility promises.

Anne Manschot is Sustainability Consultant at Enact Sustainable Strategies