Introduction
Background
Buyer–Supplier Relationships and Labour Issues: Towards a New Coercive Model
Method
Period | November 2014–June 2016 |
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Types | Face-to-face (2), skype (4), phone (3), written (2) |
Duration (range) | 30–90 min |
Firms | |
Products served | Apparel, footwear, home products, food, luxury fashion |
Types | Public (3), private (3) |
Number of interviewees | 9 |
Designations of interviewees | Director of sustainable business, head of sustainable business, head of responsible sourcing, former manager of international distribution, CSR program manager, former ethical sourcing coordinator, CSR manager, ethical trading team |
Country | UK, Denmark, Hong Kong |
Number of employees (range) | 10,000–80,000 |
Firm revenue (range) | $2000 million–$10 billion |
Non-profit enterprise | |
Description | Pursuing transparency across supply chain by implementing technologies |
Number of interviewees | 1 |
Designation of interviewee | Director/founder |
Multi-stakeholder initiative | |
Description | Providing a forum for firms, trade unions, and NGOs to share best practices |
Number of interviewees | 1 |
Designations of interviewee | China representative |
Company ID | Type | Origin | Ownership |
---|---|---|---|
Company A | Multinational retailer | UK | Public |
Company B | Retailer | UK | Public |
Company C | Luxury brand | UK | Public |
Company D | Fashion brand | UK | Private |
Company E | Retailer | Denmark | Private |
Company F | Garment manufacturing supplier | Hong Kong | Private |
Data source | Details |
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Interviews | 11 interviews with current/former CSR practitioners of different organisations including retail companies, NGOs, and a supplier, conducted face-to-face, by Skype, telephone and written communication. Further details can be found in Table 1 |
Corporate reports | 35 reports published by the companies interviewed between 2000 and 2016, e.g. CSR reports, sustainability reports, human rights reports, codes of conduct |
Company websites | CSR, ethical trading and partnership information available on the websites of the companies interviewed |
Published news articles and scholarly articles | 469 articles and commentaries published by the media 2000–2016, accessed from the FACTIVA database and Google searches/Google Scholar |
Company ID | Type | Origin | Ownership | Designations of interviewees |
---|---|---|---|---|
Company G | Garment material supplier | India | Private | Director of Procurement and CSR |
Company H | Garment material supplier | US | Private | Director of Sales and CSR |
Company I | Garment material supplier | Bangladesh | Private (family owned) | Director of Procurement and CSR |
Company J | Garment material supplier | India/Sri Lanka | Private | CEO |
Company K | Garment material supplier | India | Private (family owned) | Director of Business Development |
Company L | Garment material supplier | India | Private | CEO |
Analysis and Findings
Drivers for Collaborative Governance
Governance types | ||||
---|---|---|---|---|
Captive | Relational | Modular | Collaborative | |
Characteristics | ||||
Power asymmetry | High (B > Ss) | Low (B ≈ S) | Low (Bs ≤ Ss) | High (Bs ≥ S) |
Opportunities | High compliance | High cooperation | Low switching costs | High compliance |
Challenges | Opportunistic behaviours of suppliers | Difficult to develop and maintain | Low motivations for suppliers to comply | Difficult to reach consensus among buyers |
Applicability of standards and programmes | ||||
Corporate e.g. NIKE corporate code of conduct | High | High | Low | – |
Global e.g. SA8000, GRI, UN global compact | High | High | Low-medium | Medium |
Supplier-/issue-specific | – | High | – | High |
Power Asymmetry
The analysis of secondary data reveals that some of the firms in the study have as few as 200 suppliers and others nearly 700 (2016 CSR report, Company A; 2016 CSR report, Company D). The suppliers are dispersed around the globe, from 29 to 41 countries. Given that some big suppliers own multiple factories, the number of factory sites that require audits and monitoring increases exponentially. For example, one of the firms in our study had around 200 suppliers using 800 factory sites (2016 CSR report, Company D) and another had 662 suppliers and used 1965 factory sites (2016 CSR report, Company B). At the same time, the number of suppliers used is increasing over time. These figures do not include sub-suppliers, and the numbers will dramatically increase when taking sub-suppliers into account. According to our analysis of firms’ reports, most of the firms do not fully complete annual audits for individual factory sites. Company C, working with the smallest number of factories, claims it completed 100% audits in 2015 (2016 CSR report, Company D), while the firm with the largest number of suppliers recorded 49% completion in the same year (2016 CSR report, Company A). Our analysis of the reports demonstrates how unlikely it is for firms to communicate with every single supplier and convince them to responsibly run their factories when they are not able to complete one-off audits.I think we need to have minimum standards. But that will never be enough to drive the transformation that we want to see… And what we found really successful is that we find ways to inspire our suppliers so that they believe this is good for their business.
In principle, relational governance based on a cooperative relationship can reduce transaction costs and enhance value outcomes (Atrek et al. 2014; Dyer 1997; Dyer and Singh 1998; Uzzi 1997). Mutual trust and/or commitment is required for cooperation between a buyer and a supplier (Morgan and Hunt 1994). Most of the interviewees confirmed that their firms have policies to develop and help suppliers to enhance working conditions in their factories. They try to build trusting relationships by ensuring suppliers that they will not abandon the relationship, asking for commitment from suppliers in return. When they become aware of issues such as child labour, unethical behaviour or illegal discrimination, and safety violations, they give the factories time and, if necessary, resources to address them. Once there is evidence that suppliers are willing to make an effort to improve, the brands try to support them. A CSR program manager of Company B described their approach:Social auditing is very corruptive in China. So the idea is really to go beyond social auditing and to have really workers’ engagement and invest money on capacity building instead of just monitoring repetitively and meaninglessly.
Similarly, the director of sustainable business of Company A noted:What we have to do is to send them a clear message that we are going to work with them. We have local teams. We are not going to charge them for all the advice and support. We do free training every month. In China, we do age verification, management systems, working hour training, all screening, every single month, in three different locations. We provide the support, the advice, the expertise, the knowledge.
On a similar note, a former ethical sourcing coordinator of Company C reported:Our policy is not to just walk away from suppliers. I think there’s different situations, when we check on the suppliers on board, we recognize that they will take some time to get to the standard that we want…. But as long as we can see evidence of improvement and that they share the same set of values and the same aspiration to get to the standard, we will continue to work with them because we believe that’s the most responsible approach.
Relational governance is probably the best and ideal way to address labour issues. A brand and a supplier make attempt to work together and cooperate on a basis of mutual trust and commitment. However, this is almost exclusively possible in a relationship where both parties are highly dependent on each other. In the garment retail industry, where manufacturing requires few brand-specific skills, most suppliers serve multiple buyers, and at the same time brands are likely to source products from multiple suppliers. Therefore, rather than long-term relationships, we mostly find arm’s-length relationships, in which either the buyer or the supplier is less dependent on the relationship, or neither party is particularly reliant on the relationship.We continuously work with them and talk to them face-to-face or on the phone to help them to achieve those things. It’s not like we impose a policy on them. But we actually work with them all the time so they can improve themselves.
Under this kind of scenario, pressure might even give the supplier an incentive to leave the relationship, as noted by the director of sustainable business of Company A:I think where it is typically challenging is where you have no leverage. So if you buy very, very little from the supplier, it’s at the very beginning of the relationship, and maybe you have been buying there for a couple of weeks, it’s therefore very difficult to influence that organisation to make change happen.
The last scenario where neither party is dependent on a relationship, which makes market governance come into play, is not discussed as a governance mode in the garment industry by Gereffi et al. 2005) but in fact common in practice. And in such relationships, addressing labour issues is rarely prioritised. When an issue is detected, the easiest and simplest option for a buyer firm is to exit the relationship. Considering the low level of dependence, finding a new supplier that has the capacity to produce the same goods is not likely to be problematic. But, as we pointed out earlier, it is highly likely that an alternative supplier’s operations will have similar issues. Hence, the buyer firm has an incentive to try and find a way to address the issue and keep current relationships. However, a supplier’s low level of dependence significantly reduces the supplier’s incentive to comply and increases the likelihood that the supplier will exit the relationship.… they [suppliers] will probably not want to supply us anyways because more and more suppliers can choose who they sell products to.
In Bangladesh, our top three suppliers are quite big. They have grown with [our organisation]. So we are a very large customer and we have been collaborating with them ever since we started going into Bangladesh. So here we have a lot of leverage. And we are not demanding or asking them to do specific things. We are having an open and honest and equal dialogue about how to improve things.
The same applies to suppliers as well. Company F in our study, a Hong Kong-based supplier, remarks in its sustainability report that it collaborates only with key clients (2016 Sustainability report, Company F). In the same sense, the interviews with suppliers also confirmed that the suppliers tend to more actively engage in the requirements from bigger buyer than from smaller ones (Company I, J, K).I think key suppliers, normally, they appear to be good also at CSR.
Similarly, one of our interviewees, a former ethical sourcing coordinator of Company C, stressed the difficulty of applying power:The challenges are though [our firm] like many retailers has very few sites where we are the only or a very significant customer. In most sites we are one of many customers….
For these firms overcoming power asymmetry and enforcing practices on suppliers can only happen if buyers using the same suppliers come together to collaborate, to increase the level of suppliers’ dependence, and consequently exert leverage over them.We are just a tiny company so we have to work with so many different brands to achieve some common goal.
Information Asymmetry
Physical distance generates problems even when a brand has power over a supplier. Most interviewees expressed concerns about short-burst audits and said they distrusted them, as they are considered to be little more than box-ticking exercises, with limited understanding of suppliers’ day-to-day activities. The China representative of the NGO said:Sometimes we want to visit the place and it’s too far and we don’t have enough budget, so we cannot go and talk to them. So it can lead to communication breakdown because we cannot communicate with them. It’s too far. We cannot see them and we cannot see the farms and actual factories.’
In addition to suppliers withholding information, interviewees reported that cultural issues lay behind some of the problems with information asymmetry. Most suppliers are based in Asian countries where people are more hesitant to bring bad news, and in order to save face tend not to discuss what went wrong and what caused failure at suppliers’ factories. The China representative of a NGO said:Audits will always be a snapshot of the day and it is not a tool for improvement, it is a tool for control. Not only are audits incapable of capturing actual practices, but also the results are sometimes not trustworthy for deeply rooted, country-specific factors.
Data also suggest that buyers and suppliers both suffer from audit fatigue. Constrained by limited resources, buyer firms have to conduct audits on multiple suppliers’ operations and at the same time suppliers have to go through several buyer audits. This creates additional costs at both ends. Individuals involved in audits are often bogged down with paper work, with little insight into the real working conditions of suppliers. Through collaborative governance, firms can access information that other firms have on labour practices in a shared supply base, which saves costs for participating firms. The CSR programme manager of Company B explains that collaborative governance could have an impact on reducing the number and frequency of excessive and unnecessary audits while increasing the effectiveness of them:…[T]hat makes it more difficult to try and find causes and therefore come up with good solutions. So these are some of the challenges especially around issues around safety or worker conditions. … We recommend [our] members not to do the social auditing repetitively. … [A]uditing is very corrupted in China.
Why are we all having our own audits? Why are some factories being audited 10–15 times a year? But the auditors, they have a checklist where 95% of the questions are the same. Why not have system where we all trust one type of audit and then leave the factories in peace to develop, instead of just taking days out of the calendar for audits so many times a year?…It is about sharing. It’s the key
Implementation
Tasks once performed by buyer firms are now allocated to NGOs. For instance, firms in our study partner with one NGO to carry out employee surveys at suppliers’ factories. One of the interviewees explained that her organisation uses the services of the NGO whenever there is a need to obtain information directly from workers, to avoid workers being forced into cooperation or being manipulated by factory owners. The NGO has developed a platform to approach and contact workers outside factories, using text messages or landlines at home, to obtain a realistic picture of working conditions. Data are also collected via questionnaires sent via mobile phones provided by the NGO that are not accessible by suppliers’ management. This may alleviate employees’ concerns about retaliation from their employers. The director of the NGO argued that the brands that sign up for this service are those that are most dedicated to resolving issues. This service helps these brands to identify issues and put into place appropriate measures to address them, before they lead to major incidents.We will work with other brands. So we will find out if other brands are using the supplier as well. And then we will try to have a meeting with other brands and the supplier together. And then we will also ask an NGO to join because they are the third party and they can give some fair comments and they know a lot about that specific issue.
They need to bring together all the brands sourcing from the same factory to deliver that message and use that leverage to influence their suppliers. So they need some kind of common action and consistency on issues. … It’s much stronger than only for example a small brand to deliver a single message to a single supplier. It’s really to maximize the leverage of the whole industry to influence suppliers in a country.
Implications
In their 2017 annual report, SEDEX highlights the significant achievement in terms of the increased identification and sharing of information on risky practices of suppliers (Sedex 2017). Yet, SEDEX is about more than just sharing information. Using the information available through the SEDEX platform, firms can initiate collaboration as they now know who else is using the same suppliers. Again, the head of responsible sourcing of Company A explained the usefulness of SEDEX:‘We’ve got a problem of audit duplication, let’s invite couple of other key retailers to help us how we address that’. And that’s what led us to the formation of SEDEX.
Fair factories clearinghouse (FFC) works in a similar way but is driven by US retailers. FFC has focused on developing sophisticated methods to monitor and manage compliance and ultimately aims to use the combined leverage to enhance practices in the shared supply base.If it’s an expensive change, it’s not easy to influence that if the expensive change is going to be significantly more than the profit they are going to make on making the product. So that’s why we work with the organisations like SEDEX where you can get other purchasers who are also purchasing from that same site to perhaps influence the owner to make the change.
Similarly, the CSR programme manager of Company B and the head of sustainable business of Company A told us:If a coalition that is representing a large part of the country’s export goes to the government of course they can’t and will not just act exactly as industry is telling them but it has of course some influence on how they will make decisions in the future. … We have co-signed letters to the Bangladeshi government. I know the delegations have gone there also with brand representatives, and the minimum wage has been raised. I think 60% or something. Of course then everything else also gets more expensive. House rent, food, everything. But it has an influence, of course it has that.
If you look at collaboration, as brands, who has economic power? The brands. We do. We have the money; we have the resource; we are the catalyst to make this happen. If we come together, strategically, collaboratively. How many billions do you think the brands source from the countries? You think they don’t have influence, leverage? Of course, they do.
Table 5 enables a comparison between the different governance types that exist in the garment industry and draws on the work of Gereffi et al. (2005). Gereffi et al. (2005) describe three types of bilateral governance; we describe each of these and contrast them with collaborate governance as found in our exploratory study above. Under captive governance, focal firms can use their own codes of conduct and/or adopt global standards established by reputable organisations. Due to the power dynamic favouring buyers, the level of compliance with standards and policies is likely to be high, although there still is a chance that suppliers will act in an opportunistic way, taking advantage of physical distance and infrequent audits.We learn together, we increasingly work together, … so together we are stronger. … What I am saying is things can change. If you really want to you can change. What it requires is brands come together….
Challenges
The issue with confidentiality could also be a problem between firms and NGOs in cases where NGOs are invited to join, considering that they have fundamentally different agendas (Rivera-Santos and Rufín 2010). In order for firms to be open to NGOs about their problems with suppliers, there should be a belief that such information will not be used to attack them (Rivera-Santos and Rufín 2010; Rondinelli and London 2003). At the same time, for NGOs to participate, they should believe that involvement will not harm their reputation (Rondinelli and London, 2003). Thus, mutual trust among participating organisations is crucial for the success of collaborative governance.Furthermore “a chain is only as strong as its weakest link.” Differences in the levels of motivation and expectation of buyers joining the coalition pose another major challenge. Those at the higher end with large margins are willing to tolerate an increase in labour costs, while those with low margins are more sensitive to increases in the cost of labour. These differences tend to drive firms in the coalition toward the lower standards as such different levels of commitments from parties in a relationship could cause lowered productivity of the alliance (Rondinelli and London 2003). A CSR programme manager of Company B observed:And actually the difficult thing is with other businesses, we cannot share everything with each other. There’s always this question, ‘How much should we share with other brands?’ It creates difficulty in achieving a common goal of trying to be more sustainable or environmentally friendly, or more ethical. So that’s the challenge.
When it comes to the governance of supplier practices, the collective coercive approach helps to push through uniform regulations and standards, which reduces suppliers’ ability to resist buyer firms’ demands, but at the same time heightens suppliers’ perceived sense of unfairness. Thus, coercion has the potential to provoke invisible resistance from suppliers. For instance, because of fear of retaliation or termination of contracts, instead of engaging openly in discussions of buyer firms’ demands that would benefit both parties, suppliers may revert to well-documented window-dressing strategies. Lastly, issues related to sub-suppliers are not explicitly addressed in the collaborative governance model. Even suppliers in our interviews which agree that collaborative governance works, find controlling sub-suppliers challenging. Most interviewees state that they are required by buyers to ask sub-suppliers to meet the same standards but do not monitor them due to the lack of coordination and resources. This calls for further research to examine the real impact of the emerging approach on labour practices at sub-suppliers.Because you’ve got 10 companies in a room and five of them want to do something good, three of them say, ‘Okay, whatever’, and one of them only wants to do this much. You can only do as much as the one that says ‘I wanna do this much.’ So they only do what the lowest wants.