Sustainable ‘costing’ can empower factory owners | The Daily Star
12:00 AM, January 14, 2020 / LAST MODIFIED: 12:00 AM, January 14, 2020

Sustainable ‘costing’ can empower factory owners

We hear a lot about the concept of sustainability from an environmental and social standpoint. But what about sustainable business? Is the current customer-supplier model sustainable in the long term with respect to the global apparel industry?

I would argue that, certainly with reference to Bangladesh, it is inherently unstable. Before I continue, I want to stress here that this is not an ‘anti-brand’ article which claims that suppliers are squeezed too hard and unfairly. My view generally on prices paid by brands is that these are dictated by global market forces, and there is a general over-supply in the market at the current time, which is why prices have been driven down.

But while I believe in the power of the market, I also think there are times when the market needs a helping hand in order to operate more effectively and to achieve more socially desirable outcomes.

I am talking here about the issue of wages paid to garment workers and, also, sustainability. Is enough of a margin currently being built into the negotiation process to ensure that garment workers receive a fair wage—or even a minimum wage? And is enough being built in to cover the costs of sustainable production? At the present time there are huge question marks about these issues. I hear stories of factories taking orders at a loss, or orders where everything is trimmed right to the bone.

This is unsustainable and such businesses will struggle to survive in the long term. It also helps nobody—neither factories nor brands.

The problem here is not necessarily that brands are driving too hard a bargain. Rather, it is the nature of the negotiation process which, in many cases, is inherently flawed. At present, brands often calculate the retail value of a product, and then use projected retail figures to determine the FOB/CMT price that the brand seeks to pay.

However, this ‘top-down’ way of negotiation often fails to take into account the ‘true’ cost of production, including paying decent wages, investing in safety, sustainability and so on. Conversely, bottom-up costing, a process whereby labour and other input costs are used to determine the FOB/CMT price, is rarely practiced.

The result of this is that, in many cases, FOB prices paid by brands are not sufficient to cover minimum wage benchmarks in production countries.

And yet, it need not be this way. There are a number of costing tools which enable minimum wage and other costs to be factored into the negotiation process. It would be a progressive step, I believe, if more of the industry moved towards this method of determining prices.

One of these tools was developed by the Fair Wear Foundation (FWF). The FWF costing tool tries to create greater transparency and precision in determining the labour component of cost price negotiations. This method uses actual wage data to calculate how much it would cost to cover a certain level of wages (minimum wages or higher). The calculator enables suppliers and buyers to determine the cost of one minute of labour in a factory, taking into account factory-specific variables such as workforce composition, bonuses and insurance and actual overtime hours. Knowing the price of one minute and multiplying that with the number of sewing minutes required to make a garment will provide the actual labour costs for a product concerned. When wages go up, for instance because of a rise in the legal minimum wage, the tool allows one to calculate the effect such an increase has on the manufacturing (CMT or FOB) price of garments.

This same method could also be applied in other areas in order to ‘build in’ extra costs associated with, for instance, factory safety or sustainability. To offer the example of a new sprinkler system, one would simply take the monthly costs (e.g. the monthly depreciation on a new sprinkler system), divide it by the monthly sewing capacity and multiply this with the number of minutes needed to sew a certain product.

The beauty of this tool is that it gives the factory transparent and verifiable arguments to justify a certain FOB price during negotiations with buyers. It therefore improves a factory owner’s bargaining position, providing a compelling—and fair!—reason for brands to pay a certain price.

But brands also benefit as those committed to ensuring that workers producing their garments are paid at least the legal minimum wage now get to see a clear link between wages and prices.

The other benefit of this tool is that it could potentially help us move away from an adversarial approach to price and cost negotiations, building trust on both sides. ‘Open book’ costing has actually been talked about for many years, but tools such as this take it to another level, providing previously unseen levels of transparency.

Contrary to what many people might think, I believe most brands are reasonable and want to pay prices that ensure their suppliers can treat their workers fairly and pay them a decent wage, as well as cover other issues such as environmental compliance and factory safety.

But they do need clear information to do that, and tools such as this may provide it—ensuring that all parties know exactly where they stand in the negotiation process, and that there can be no hidden agendas.

It’s a win-win.

 

Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE). He can be reached at mostafiz@denimexpert.com

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