Needed: A New Way to Manage Risk in Low Cost Countries

Nowhere are disruptions more prevalent than in Low Cost Countries (LCC’s), which have become the focal point for outsourced contract manufacturing for major apparel brands such as Nike, Under Armour, Gap, Apple, and others. As organizations have expanded their supply chains globally, they have moved to outsourced manufacturing that reduces cost, but which also exposes their brand to greater risk. “Instead of brand versus brand or store versus store, it is now suppliers—brand—store versus suppliers—brand—store, or supply chain versus supply chain,” as Lambert and Cooper[1] highlighted in a seminal research article in 2000. This shift has led to increased division of labor across the supply chain concentrating on core business activities, leading to outsourcing of processes that can be done more efficiently by suppliers and suppliers’ suppliers in any country in the world. Faced with stiff price competition in their home markets, the apparel industry was one of the first to adopt the outsourced supply chain concept (Wieland and Handfield, 2013; 2014). By deploying the “fast fashion” business model, the apparel industry began to outsource garment manufacture to suppliers and subcontractors in low-cost countries, such as China, India, Vietnam, Malaysia, Pakistan, and Bangladesh. This has allowed global brands to create extremely responsive supply chains and bring lower priced apparel to store shelves. Further, the time to design and delivery of new garments to the market was reduced from more than one year to just a few weeks. More efficient processes, cheaper products, and happier consumers – a winning combination.

But these highly efficient supply chains had a downside that executives at first chose to ignore. By chasing cheap labor, Western retailers were putting tremendous cost pressure on suppliers who, in turn, were willing to minimize capital investments to keep costs low. Adapting what was considered to be common local standards, many suppliers from low-cost countries realized that to compete on price, they decided to forgo investments and labor practices that would dodge Western labor codes. For example, in Bangladesh, mostly women and often children are exposed to risks from lacking safety standards in garment factories. And this poses a major risk to apparel brands, who do not want to be seen as exploiting labor and forcing unsafe working conditions.

The most obvious way to create social responsibility might be just to avoid sourcing markets with low social standards. However, cutting off imports from developing countries will usually not help people in these countries. In some cases it was shown that wages and working conditions in sweatshops are superior to the workers’ prior employment wages (Clark and Powell, 2012). A recent article (Chu, 2012) noted that low cost countries all have the same problems that factories in Bangladesh do. But as any buying agent who has visited Bangladesh knows, things aren’t much better when you visit factories in other parts of Asia, including Myanmar, Pakistan, China, Indonesia, or India. The same unsafe working conditions prevail, and you are just as likely to encounter the problems with capacity and subcontracting that were discovered in Bangladesh. It appears that apparel companies, in particular, are not about to stop sourcing from Low Cost Countries, and that the need for building greater supply chain resilience in the face of these conditions is required.

But monitoring risk and improving factory working conditions is easier said than done. Although management research on Corporate Social Responsibility has proliferated in recent years, and most companies have adopted CSR codes of conduct, comprehensive reviews of current states in Low Cost Country factories suggests that “CSR policies have neither prevented nor could they in themselves prevent the death and injurity of workers in this particular place and era” (Ross, 2016). Companies often emphasize that they audit the factories where these accidents occur have no relationship to the actual occurrence of incidents, and that companies need to move away from checklist monitoring to contractual obligations (Esbenshade, 2016).   And the major risks such as Rana Plaza are infrequent, but there are often daily “issues” that occur such as work stoppages, union protests, and other issues that pop up on a frequent basis. A company cannot monitor “all” risks and/or issues at once, so a “cone of plausibility” approach is needed to be able to focus on key issues that require monitoring, which could escalate and become full blown risks. It is also important to track external risks in countries identified as having a higher probability of incidents. Often companies rely on a qualitative or “gut heavy” process to identify plausible risks. The creation of a quantitative process by which the risks can be identified and amalgamated into a risk management index, would improve the ability of companies to more accurately identify possible supply disruption risks.  This is a project that several of our graduate students are working on, and we hope to be discovering these insights soon.

[1] Lambert, D.M. and Cooper, M.C. (2000): Issues in Supply Chain Management. Industrial Marketing Management 29, 65–83.

Ross, R. 2016. “The Twilight of CSR: Life and Death Illuminated by Fire”, pp. 70-94, Achieving Workers’ Rights in the Global Economy. Edited by Richard Appelbaum and Nelson Lichtenstein, London: ILR Press.