• Strategy
  • CFO Magazine

The Price of a Cheap Suit

Companies spend millions to assess overseas suppliers. So why are they still missing so many problems?

It’s 10:00 p.m., and Charlie Kernaghan is driving around the garment district in Dhaka, Bangladesh. It’s well past quitting time for the fabric cutters and seamstresses who started work in the factories at 8 o’clock that morning. But the workers aren’t coming out of the gray, decaying buildings, even though they have already worked for 14 hours. (A six-day, 60-hour workweek is the maximum allowable under Bangladeshi law.) Soon factory managers roll black crepe paper over the windows to conceal the workers toiling inside. By midnight, as work continues, the temperature hovers in the 90s outside and is even hotter inside the factories, forcing the managers to roll the paper back up. They’re convinced that no one could be watching at such a late hour. But Kernaghan, director of the National Labor Committee, an antisweatshop organization based in New York, is there to observe them. “It’s easy to see what’s going on,” he says. “Ask anyone in the neighborhood and they will tell you.”

What’s going on is that the workers, who are making clothes that will end up on the racks of large U.S. retailers, including Wal-Mart Stores Inc., are being forced to work extraordinarily long shifts. “If [their employer] is on a deadline, they will work until two or three in the morning and they’ll do it for two or three days in a row,” explains Kernaghan. Long shifts aren’t the only infractions by the apparel factory owners and managers in Bangladesh: “Meager pay, unsanitary working conditions, and forced pregnancy tests (expectant mothers are often fired to avoid maternity pay) are all common practices in the factories,” he adds.

No company wants to be associated with such a working environment. Apart from the moral issues inherent in the use of sweatshop labor, the business cost of the kind of exposé Kernaghan can produce — he famously brought TV personality Kathie Lee Gifford to tears and led a crew from “Dateline NBC” to the Bangladesh factory described above — can be substantial. Such exposés can cost billions of dollars in damage to brands, lost customers, and lost market capital from subsequent stock-price declines. Shares of Nike Inc. tumbled through the late 1990s, for example, as a stream of reports emerged about poor working conditions at Nike supplier factories in Vietnam and China, and college students organized boycotts of Nike goods.

But management of this supply-chain issue is, at best, a work in progress. True, in the past decade, scores of large retailers and apparel makers have developed codes of conduct that prohibit inhumane labor practices by the factories that manufacture their goods. The codes cover everything from wages to overtime practices to safe working conditions.

Companies also spend millions each year to monitor their suppliers’ factories to make sure that the codes are being enforced. Wal-Mart says that it conducted more than 12,500 audits of supplier factories last year.

The trouble with such audits is that they go only so far. Leading companies like Nike and Gap Inc. have been candid about workplace problems. In its 2004 Corporate Responsibility Report, issued in April, Nike revealed that 27 percent of the 497 factories making Nike apparel scored a C or D, denoting serious code-of-conduct violations. And in Gap’s 2004 Social Responsibility Report, president and CEO Paul Pressler noted that the retailer had taken important steps toward safer conditions and better treatment for overseas workers. But he added that “social responsibility issues across the industry remain immensely complex.”

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