• 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?

Critics say some inspectors, bent on not uncovering problems, happily buy the ruses. In fact, Anne Lally, a worker advocate and consultant to the not-for-profit Fair Labor Association, claims that some unscrupulous corporations instruct their suppliers on how to cook the books so they can deceive other, more-stringent buyers that contract with the same factory. Why? Corrections at a facility could be costly to everyone, explains Lally. “The truth is expensive,” she notes, “because then you might have to fix it.”

Code of Conduct

Still, even the harshest corporate critics admit that U.S. businesses have made some strides in improving conditions for overseas workers. “Child labor is the third rail [for U.S. companies]. On that issue, they have really drawn the line,” says Kernaghan. He says it is also rare to see systemic violence, sexual harassment, or forced contraception. “There’s more pressure to have control over contract suppliers. If you sell it, or it has your name on it, you’re responsible,” he adds.

In part, that change can be traced to a meeting in a seventh-floor office in San Francisco in 1991. At the meeting, Levi Strauss’s board of directors voted to adopt a code of conduct for suppliers — the first of its kind at a major U.S. corporation. A year later, the company put in place a monitoring system to make sure its suppliers were adhering to the code. Early on, Levi’s relied on quality-control inspectors to ensure suppliers were cleaving to the new code. But management quickly learned that the quality-control personnel had no training in spotting workplace violations. “Those initial efforts were very much a learning process,” says Kobori.

Today, Levi’s employs 20 full-time inspectors to assess conditions in some 400 factories under contract in countries including Mexico, the Dominican Republic, India, China, and Turkey. “We shoot for 100 percent of the direct contractors,” says Kobori. The company also requires inspections by Levi’s-approved monitors of another 250 suppliers making goods that will be licensed to carry a Levi Strauss or Dockers brand name. The assessors, as Levi’s likes to call them, conduct thorough inspections of the facilities, looking for safety and health violations. They also speak to managers and inspect the books and other documentation like time cards and payroll to make sure that overtime and wage rules are being enforced. The company then conducts interviews with the workers. More recently, Levi’s assessors have attempted to speak to workers outside the factory. And Levi’s is trying to conduct more surprise visits.

Kobori says suppliers are checked out before they can sign on to make goods for Levi’s and are inspected at least once a year, more often if problems are found. “Suppliers must remedy [problems] immediately,” he adds. “If they don’t, we will reduce our orders with them.”

Critics applaud Levi’s policy of attempting to fix problems rather than parting with offending factories. When companies pull out, factories can go under, leaving workers without jobs. “Our goal is to improve working conditions,” says Kobori. “We give suppliers every opportunity to improve.”

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