It said it was common for manufacturers to agree to a price with buyers when an order is booked only to have buyers return weeks later, after raw materials for the order have already been purchased, demanding a price reduction.
Global brands were creating unfair economic pressure on factory owners, who responded to the exploitation by reducing wages and benefits for their workers, a report said.
The report by the New York University Stern Center for Business and Human Rights, which coincides with the 10th anniversary of the Rana Plaza factory collapse, said safety in the export-oriented readymade garment sector has improved, but exploitative purchasing practices by major global apparel brands plagued Bangladeshi manufacturers.
At the same time, the sector’s workers, who are low-paid, are suffering far more than the entrepreneurs due to such practices.
“The purchasing practices of global buyers have remained onerous and, in some ways, have grown worse in the wake of the pandemic,” the report titled “A Broken Partnership: How Clothing Brands Exploit Suppliers and Harm Workers – And What Can Be Done About It” said.
Talking with The Business Standard, BGMEA former president Dr Rubana Huq said, “The report from Stern evokes thoughts about where we stand with our buyers, ten years after the tragedy.
“The sector needs collaboration from all sides, brands and unions both. The time for finger pointing has to come to an end. Blame doesn’t lead towards progress; it just handicaps innovation,” she said.
“Unless the brands, unions and industry work hand in hand, the real success that revolves around the people who work there will be undermined and shortchanged,” said Rubana, a visiting fellow at the Stern School of Business at New York University.
The NYU Stern Center aims to draw attention to the persistent problem of apparel purchasing practices.
The Rana Plaza collapse – a watershed in Bangladesh’s readymade garments sector – in April 2013 killed more than 1,100 people.
It led to several reforms in the RMG sector, including the Accord on Fire and Building Safety in Bangladesh, a legally binding agreement between brands and trade unions to ensure a safe working environment.
Discount ultimatums, and passing the buck abound
The NYU Stern report mentioned that major brands and retailers regularly push for drastic discounts after an order price has been confirmed, even after production has commenced.
Drawing on interviews with factory owners and workers, the report said many buyers also use seasonal variations in orders, currency fluctuations, and global economic crises, such as the instability associated with the Russian invasion of Ukraine, as reasons for discount demands.
The report added that each of these practices places a substantial financial burden on suppliers with knock-on effects on their workforce.
“Several of the workers we interviewed in January 2023 expressed deep frustration with the low wages they are being paid. One said, ‘it is almost impossible to live on Tk8,000,’ or about $75 a month, which is the legally required minimum wage in Bangladesh.”
It said it was common for manufacturers to agree to a price with buyers when an order is booked only to have buyers return weeks later, after raw materials for the order have already been purchased, demanding a price reduction.
“In these situations, several suppliers told us that they felt obligated to agree to the cost reductions demanded by their buyers, fearful they would otherwise lose business with important customers.”
The report also mentioned that in 2022 buyers turned to suppliers for “help” when they felt the pinch of last year’s challenging economic climate.
“In one example cited by several suppliers, buyers asked for discounts because the euro had declined in value while the US dollar had become stronger—developments that had hurt buyers’ businesses.”
Buyers are also passing costs on to suppliers that they would usually absorb, added the NYU Stern report.
“Thirty-four manufacturers had to take a 10% discount, according to one supplier we talked to. They had ‘no choice,’ the supplier said.”
Suppliers rarely take legal action against buyers who engage in tactics like this, even when a contract is in place, the report said.
In their study, researchers at the University of Aberdeen found that not a single factory among the 1,000 they surveyed had taken action alleging that a buyer engaged in unfair practices. Most factory owners are afraid they would lose business if they went to court, the report mentioned.
Buyers have also charged suppliers for “dead freight,” the term used for the penalty a shipper incurs for underutilised space in a shipping container.
According to suppliers, buyers use seasonal slowdowns to exploit factories operating below capacity, demanding a “seasonal discount.”
“Many of us have invested in huge factories and have added [production] lines,” a supplier said. “Therefore we can’t afford to have empty spaces as we will have to pay salaries to our workers, accept all the utility bills, and shoulder the burden of bank liabilities.”
High-pressure negotiations
High-pressure negotiation tactics can be further exacerbated by buyers’ methods to negotiate a price with suppliers, such as “open costing.”
This approach entails suppliers providing an itemised description of their manufacturing process, including all materials, wages, overhead, and markup.
“Open costing turned price negotiations into an auction. Buyers are collecting open-costing from different factories,” one supplier said.
“We also need to become better negotiators with the brands, which also will reduce our reliance on buying houses who we now are paying to negotiate for us. We also need to move more into the [consumer] market, selling our products directly to global customers.”
Delaying delivery and withholding payment before the pandemic, payment timelines set by buyers were already challenging for suppliers, averaging 43 days after shipment, according to one study.
“During the pandemic, timelines increased. If brands didn’t cancel orders altogether, they extended the payment deadline to 90 or even 180 days. We heard from suppliers that such terms have become normalized.
In 2022, buyers adopted “delivery deferral,” an approach to delay or withhold payment. Several suppliers told the NYU Stern research team that, after placing orders, buyers demanded that suppliers delay the shipment of finished goods beyond the agreed-upon delivery schedule, with payment due only upon delivery.
“Without payments coming in from buyers, banks create forced loan accounts against us and pay our suppliers,” one factory owner said. “We incur an extra debt with sharp interest. That kills our [profit] margin.”
Recommendations made
Among several recommendations, the NYU Stern report suggested that buyers use open costing fairly and transparently.
It also recommended that brands and retailers cease delaying order delivery and commit to payment timelines taking raw material purchases into account.
It further asked to improve transparency and communications with third-party agents and reconcile commitments to factory safety and worker wellbeing with the commercial terms negotiated with manufacturers.
The NYU Stern report suggested corporate buyers recognise that a projection or booking is as good as a contract for many suppliers.
The NYU Stern research was based on confidential, closed-door meetings and factory visits with representatives of 28 Bangladeshi manufacturers, as well as several video conferences and discussions with a group of about 20 workers.
