Subcontracting in the Supply Chain

In December 2014 the Bangladesh Garment Manufacturers Export Association (BGMEA) hosted a summit focused on safety and sustainability in the garment industry. Coming less than two years after the collapse of Rana Plaza, the recognition by garment manufacturers of the importance of worker safety to the long-term success of the industry was heartening.

Numerous speakers referred to the practice of indirect sourcing—where Bangladeshi manufacturers subcontract production to smaller, unregistered factories—as a threat to worker safety. The Center’s April 2014 report, Business as Usual is Not an Option,” identified indirect sourcing as a challenge to the long-term sustainability of the garment industry. It is a positive development that some industry leaders want to tackle indirect sourcing as part of an effort to place the industry on a more sustainable footing.

A significant number of Western brands and retailers formally ban what they term unauthorized subcontracting. They assert that by policing the operations of their principal suppliers in  authorized factories they will significantly  improve working conditions in their supply chains and avoid a repeat of Rana Plaza. In reality, virtually all of these global brands and retailers are the beneficiaries of a system in which subcontracting is central to the very inexpensive business model of production. Without subcontracting these companies simply could not manufacture the volume of products they are getting from Bangladesh at the price in which they are purchasing these products. Thus eliminating these subcontracting relationships is neither economically feasible nor desirable.

Role of Subcontracting in the Business Model:

Subcontracting is essential to the business model of Bangladeshi garment manufacturers because it allows larger manufacturers to respond to fluctuating order size, last minute design changes, and delays created by the severely challenged infrastructure in Bangladesh. A ban on subcontracting is practical only if buyers guarantee manufacturers a steady flow of orders throughout the year and adequate lead time to insure against infrastructure-related delays. The realities of the marketplace make these commitments virtually impossible.

The more likely outcome of banning subcontracting is that the practice will persist, just further underground. Driving indirect sourcing underground could worsen protection for workers’ safety and rights. Lack of supply chain transparency is a key factor in threats to workers, and shifting production further underground decreases transparency.

Protecting Jobs:

Eliminating subcontracting would hurt those operating small and medium sized factories and their workers. Small and medium sized enterprises are not in position to directly contract with Western brands and retailers because they lack the access to capital needed to support export production. These companies depend on subcontracting for their lives. Eliminating subcontracting will drive this array of small manufacturers out of business.

On a recent trip to Bangladesh, I met with owners of small businesses of this sort, who mortgaged their property and financial futures to open manufacturing lines, and whose businesses were threatened or already shuttered by a crackdown on subcontracting. The disruption is worse for their workers, who depend on their salaries for survival.  The only thing worse for a Bangladeshi worker than an unsafe job, is no job at all.

 

Vijay Padmanabhan is a Visiting Scholar with the Center. He is on sabbatical from Vanderbilt University Law School.