About Indirect Sourcing
The Flaw in the System: Indirect Sourcing in the Garment Industry
The reason for this lies in the system of the garment production industry, or, to be more accurate, in the length of the supply chain and its lack of transparency.
The brands/retailers cannot simply raise the garment workers’ wages – this can only be done directly by the individual factories themselves. But those suppliers work for different clients (brands/retailers), with whom they very often are not even in direct contact (the placement of orders is handled by purchasing agents). Therefore, they cannot know the exact priorities of the clients, and instead have to guess on the most obvious priority (although it may not be the only one): profit. Also, suppliers may take an order slightly too big for them in order to maximize the degree of capacity utilization, and then source out a part of it to sub-contractors – again, via intermediaries. This practice of indirect sourcing is also due to the high time pressure in the industry: If any part is late, orders get split up and shares of the production are outsourced in order to finish in time. This further undermines any efforts to create transparency.
To summarize, the price sensitivity lies not with the brands/retailers (they wouldn’t necessarily have to pay for an eventual wage increase from their own margins anyway), neither with the end consumers (who would actually pay) – but with the purchasing agents (brokers/intermediary).
This causes a price war between the suppliers. So, even though the ones who would in the end carry the additional costs of higher wages would be willing to do so, the market cannot regulate itself to create this mutually desired outcome.
And where market cannot regulate itself, the underlying system is dysfunctional – what is needed is a mechanism to 1) fix the problems and 2) fix the system.
Here, Prof. Muhammad Yunus has made a simple, but powerful, proposition for relieving the most pressing problems.
The Garment Workers’ Welfare Trust
Nobel Laureate Prof. Muhammad Yunus (the Bangladeshi professor in economics who is known for introducing the system of micro credits with his Grameen Bank) proposed after the Rana Plaza accident an easy way to fix garment workers’ salaries in this broken system:
“With just a little effort only we can achieve a huge impact in the lives of those so-called “slave labours.” My proposal relates to the little effort. I ask whether a consumer in a shopping mall would feel upset if he is asked to pay $35.50 instead of $35 for the item of clothing. My answer is: No, he will not even notice the little change. If we could create a “Grameen (or Brac) Garment Workers Welfare Trust” in Bangladesh with that additional $0.50, then we could resolve most of the problems faced by the workers — their physical safety, social safety, individual safety, work environment, pensions, healthcare, housing, their children’s health, education, childcare, retirement, old age, travel could all be taken care of through this Trust.”
This proposal circumvents the main problem, the long supply chain, by having retailers collect the money (the 50 cents are calculated as 10% of the production costs) and forward it to the garment workers’ welfare trust.
It is a great proposal, which unfortunately didn’t gain the deserved and necessary attention and reactions from the brands/retailers. The reason for this is that it contains too many other challenges for them:
The majority of products in question is made for brands/retailers, who generate profits by quantity, fewer for those with high margins. Those first ones would have difficulties to pay the additional 50 cents from their margins, so they have to charge the customers (as proposed).
In that case they might have difficulties to advance the money. If not all can advance the money, it would lead to problems in ensuring that the 50 cents actually benefit the “right” garment workers (the garment workers in the factory that produced the particular items).
The brands/retailers with low margins have very price sensitive customers. They cannot raise the prices just like that, they would have to fear that the competition wouldn’t drag along and that suddenly they would be the only ones with higher prices.
Therefore they would explain what and who the money is for. This would draw attention on the production conditions, something they don’t want their customers to have in mind while shopping.
By charging an additional 10% of the production costs (or: 50 Cents in average) they first have to disclose them, which could damage the perceptions of the particular brand (especially for those with higher margins).
The customers, willing as they may be to pay the little premium, would still be hard to convince why they have to pay “themselves” for the workers whose salary should be covered by the product’s price, especially when the retailers themselves are the ones who collect the money.
These challenges explain why no brand or retailer has adopted the proposal so far. Unfortunately, even if some did, it wouldn’t be enough. As mentioned, it does circumvent the main problem (which would work if everybody did agree to it), but it doesn’t solve it: The workers would depend on that trust of voluntary contributions.
So, the proposal does provide a useful approach for part one of the mechanism (fixing the biggest problems), but has no impact for part two (fixing the system itself). Yet, what is needed in the long run IS a change in the system.
 The listed issues are what a living wage should be able to cover (Clean Clothes Campaign).