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The Price of a Cheap Suit

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

What Will You Pay For?

With some suppliers reluctant to adhere to codes of conduct, a few corporations are looking to see how they can change their own operations. Nike, for example, is working to eradicate some of the causes of abusive employer behavior. One example: the apparel maker recently put together an internal overtime task force to look at ways the company might be unwittingly exacerbating the problem of long shifts. “We are looking at how we can improve our internal business practices to lessen the factors that contribute to excessive overtime,” says compliance director Morris.

It’s a start, say worker-rights advocates. Still, some believe the real problem is that enforcing supplier codes of conduct runs contrary to other pressures buyers put on factories — namely, price, turnaround time, and quality. Indeed, Kernaghan argues that Wal-Mart puts so much pressure on price that suppliers can’t possibly afford to improve conditions. So instead, they lie. “The message is, ‘There is 99 percent focus on price, and after that we’ll talk about the other stuff,’” he says. Kernaghan claims that one executive from a rival retailer told him flat out, “We’re not going to do any more than Wal-Mart does.”

Certainly, Wal-Mart is a favorite target of critics who say the retail giant is a laggard in developing effective monitoring. As proof, they point to a lawsuit filed in June by a former Wal-Mart inspector who claims he was fired for refusing to certify supplier factories in Central America. The suit claims that “the factory certification process was designed only to create the impression that Wal-Mart was producing its goods under humane working conditions when, in fact, working conditions at the factories were terrible and violated the rules and regulations of Wal-Mart.”

The company denies the allegations, and its management states it is serious about monitoring its contractors. “It’s a priority for us,” says Rajan Kalamalanathan, director of compliance for Wal-Mart’s global procurement division. Executives at the retailer won’t reveal how much the company spends on monitoring, but according to Kalamalanathan, “it does cost quite a bit.” He says the retailer is shifting to more unannounced inspections — up from 8 percent of all inspections last year to around 20 percent this year. And he disputes accusations that the company’s well-documented focus on price forces suppliers to cut corners. Says Kalamalanathan, “When we have suppliers say, ‘It’s going to cost me,’ we say, ‘Do it.’”

In the end, wiping out sweatshop labor might cost everybody, including corporations, shareholders, and customers. But easing cost pressures may be the only way to ensure that suppliers can afford to operate safe and profitable factories. “If you are serious about a code of conduct, it’s going to cost you a little bit,” says the Worker Rights Consortium’s Nova. “The good news is, it’s not that much. A tremendous amount of good can be done without upsetting the economic calculus.”

Joseph McCafferty is departments editor at CFO.

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