• 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?

Not all companies do. For some suppliers in Dhaka, it’s easier to shut down a factory and open another one somewhere else. Other overseas suppliers argue that sweatshop factories exist in all countries — even the United States. They also argue that although pay in their facilities may be bad, it is better than nothing.

The Buddy System

Currently, most companies that monitor suppliers do their own audits, a practice that can lead to a fair amount of overlap at individual factories. “It’s silly for a factory to get 40 different audits,” says Caitlin Morris, compliance director at Nike. Inspectors say it’s not unusual to walk into a factory in Bangladesh or China and see five or six different codes on the wall. Sometimes, a fire extinguisher will be constantly moved up and down the wall to satisfy different safety codes from different companies sourcing at the same factory. “The hope is to get to a model where brands are able to work cooperatively,” says Morris.

Toward that end, a group of companies, including Nike, Gap, and Patagonia Inc., are working with a handful of worker-rights groups to develop a common set of labor standards, as well as a shared monitoring system. The idea: with agreed-upon standards and best practices, buyers and suppliers can rely on one set of audits. The program, called the Joint Initiative on Corporate Accountability and Workers’ Rights, began a pilot program in April in Turkey, a center for apparel manufacturing. If successful, the initiative might eventually lead to the first commonly accepted global labor standards.

Anne Lally, who is currently in Istanbul working on the project for the Fair Labor Association, says the goal is not only to learn where rights groups are duplicating one another’s efforts, “but also [to learn] where they are different — and with that knowledge, work more cooperatively in the future.” Such cooperation would likely make the monitoring process cheaper. It would also improve the reliability of audits, since the data would come from independent sources — a crucial point for many shareholder-rights groups.

Some companies are already moving to more-independent monitoring. Levi’s, for one, works with nongovernmental agencies to improve its overseas monitoring process. Similarly, Nike works with Lally’s organization, which monitors about 5 percent of the company’s factories independently.

Hiring for-profit, third-party groups to monitor supplier facilities can be more problematic. Some labor advocates charge that such investigators tell buyers what they want to hear to retain their business. They also claim that even well-meaning inspectors can be fooled by creative factory owners.

Indeed, PricewaterhouseCoopers exited the supply-chain monitoring business. One of the problems for audit firms, say observers, is that there is no certification process for individual monitors. “There’s no equivalent of a CPA,” says Lally. “It’s a serious problem, with people out there functioning [as monitors] without any training.”

Independent operators can be expensive, too. Ron Martin, compliance director at Lee Jeans maker VF Corp., says that third-party audits can easily cost $1,200 to $1,500 apiece, which can add up, considering VF’s 1,500 active contractors. The company relies heavily on its own audits. “We don’t want our products to be made in places where people are being treated unethically,” says Martin. “We see social compliance in the supply chain as an investment in the brand.”

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