Key engagement areas in 2019

Purchasing practices

Identifying wage trends over time

Disclosure

Other key engagement areas in 2019

A key enabling factor in advancing improved supply chain wages are responsible purchasing practices. Through responsible purchasing practices, buyers ensure that there is no undue pressure put on the supplier in terms of working conditions more broadly, and thereby also the average wages ultimately paid for regular working hours. They may also leverage certain purchasing practices tools, such as open labour costing, to assess whether the labour cost component of a garment has been calculated appropriately.

Lead times
Short lead times and a lack of transparency as to how short lead times are managed remains an issue in the garment and footwear industry. A ‘lead time’ is the time between a buyer (a garment brand) lodges an order with the supplier and the moment the final product is delivered to the brand. High-performing brands such as Nike or Inditex base their current business models on highly flexible, short lead times of 2-5 weeks. Provided the supplier does not have sufficient capacity at that particular time to absorb the extra work created by a short-term order, this may lead to workers working excessive overtime, unauthorized subcontracting, and other issues that may lead to labour rights violations. Brands are often not adequately transparent about how they deal with short lead times from a labour rights perspective, and how they ensure that their suppliers are always well-equipped to deal with short delivery times.

Timely payments to suppliers
Besides lead times, another issue falling within the scope of responsible purchasing practices are timely payments. For example, Primark pays its suppliers within 30 days. Information that Primark obtained from the rest of the garment industry indicates Primark is one of the few retailers on the UK high street to offer these terms. Most offer terms of 60-90 days, with 120 days not being uncommon. Longer payment terms have a direct impact upon the factories’ ability to meet overheads and pay workers’ salaries. They can also necessitate additional costs for the supplier where costs of labour, fabric, and energy increase.

Long-term supplier relationships
Finally, if wages do increase because of government regulation or collective bargaining, brands should commit not to leave a factory or a country only because labour costs rise. This cannot be automatically presumed. For example, H&M has openly pledged to follow these principles. Other garment brands should substantiate their claims that labour costs are not the defining factor behind where orders are being allocated and make similar commitments.

One way to ensure responsible purchasing practices is by having long-term, collaborative relationships with suppliers. This further necessitates the consolidation of garment brands’ supply chains, whereby brands should aim to rely on a smaller number of suppliers who are outperforming others in terms of social sustainability and who are willing to invest in their workforce. These suppliers should in turn be allocated greater proportion of the garment brand’s total volume sourced. Long-term, collaborative supplier relationships are therefore an ‘enabling factor’ in advancing living wage.

Costing mechanisms and pricing
The mechanisms that garment & footwear brands use to calculate the cost for which they purchase a garment from their suppliers remain a black box for external stakeholders, including investors. Increasingly more brands indicate they use open costing in their relationship with their suppliers. Such an open costing model specifies different components of the price and it gives the buyer an insight into whether suppliers have arrived at a reasonable costing estimation of the different components. Whilst H&M committed to never negotiate down the labour cost component of the buying price, it is unclear whether – and if so, how – brands use costing transparency to assess the ‘adequacy’ of the labour cost component.

Open costing is thereby a good start, but certainly not an end game. Alongside our investee companies, we will make sure to explore the ways brands could leverage their insights into labour costs to ensure that the labour needed to produce a garment has been adequately calculated. Concrete insights into the labour minute cost and unit labour cost would go a long way and they might even enable the brands to develop a pricing model that accounts for the cost of providing a living wage. The ACT collaboration is already looking into a sector-wide tooling to achieve the latter.

Provided a company takes steps to integrate the cost of providing a living wage, we would also expect pricing transparency towards consumers. Brands should consider indicating what the ‘sustainability premium’ of the final shelf product entails, and by that empower consumers to make more conscious purchasing choices.

Setting up appropriate wage management and wage-setting systems
Brands such as GAP or H&M indicate the fundamental necessity to ensure that suppliers operate with appropriate, traceable wage management systems. In H&M’s view, one of the fundamental purposes of such systems is to ensure that workers working the same job receive the same wages. This also implies the need to introduce appropriate wage-setting systems. Workers should be paid for their skills, performance, effectiveness, and efficiency.
GAP aims to ensure that its suppliers will have digital payment mechanisms in place in all of its factories by 2020. For that, workers first need to have bank accounts or be provided with mobile wallets to send and receive money. Thereby, GAP works the Gates Foundation and the United Nations to help workers get ‘formally banked’ and to be ultimately able to access a range of possible ancillary benefits. The project also involves “figuring out which financial instruments could be made available to workers” and contributing to the development of these financial products.

Going forward, we would like to find out how widespread the problem of inadequate wage management and wage-setting systems is and how different brands are handling it.

We do not see many examples of companies actually gathering data that show the wage gap between minimum or prevailing wages and living wage estimates. If companies gather such data, they are not transparent about the concrete outcomes of such data gathering exercises.

In addition, even companies in the ‘maturing’ stage struggle to connect the many different influences, including their own interventions, to any identified growth in the wages paid by their suppliers. This lack of understanding of wage trends over time and companies’ own influence on these trends – if any – remains an issue and, although undoubtedly a challenging exercise, we will require improved data collection and more transparency on this going forward.

Although the average standard of disclosure in the garment and footwear sector is notably improving, the data that is reported often remains inadequate in the level of detail provided. For example, we expect that companies are able to indicate concrete, detailed, and quantitative information regarding the results of their social audits, trends in excessive overtime and freedom of association (at least on a country level), as well as the number and content of collective bargaining agreements that apply to the companies’ supply chain workers.

We believe that the collection and interpretation of such data is essential to enable progress toward the payment of a living wage. Increased transparency is needed to ensure the integration of the living wage policy or statement in the heart of the business and to show progress or explain its lack on the ground.

• Trends in working hours and excessive overtime
• Supplier capacity building and the question of giving ownership back to suppliers
• Promoting social dialogue and workers’ voice, including through training
• Government engagement and lobbying for more robust minimum wages and minimum wage setting mechanisms
• Advancing consumer awareness, for example, through the use of Fairtrade