People's Newsroom


By exposing the vulnerability of procurement partners, the weakness of contracts, and the risks of a concentrated supplier footprint, the crisis accelerated many of the changes that companies were already making to rebalance their supply chain. To mitigate future ruptures, Business players should move away from transactional relationships in favor of deeper partnerships that bring greater agility and accountability.

For years, there have been calls for closer partnerships between brands and suppliers. However, progress has been frustratingly slow, evidenced by the fact that before Covid-19 the prevailing relationship between Business companies and suppliers was transactional in nature and short-term in scope. Now, change is finally afoot. As underlying tensions in the supplier relationships painfully rose to the surface during the pandemic, brands were jolted into the realization that their supply chains need to be more resilient. A growing number of executives recognized that nurturing closer relationships is one way to do this while helping to meet their sustainability obligations and support the Business industry’s transformation to a more flexible demand-focused supply chain. In a survey, some 73 percent of the sourcing community expected the trend towards deeper partnerships to accelerate over the coming year.

Brands must break down and break through the adversarial bargaining that is focused on the price of finished goods out of the factory and needs to collaborate and cooperate on the components of finished goods in order to create flexibility, which in turn creates value that can be shared among the partners. Amid store closures, plunging Business sales, and bankruptcies, 2020 was the year in which the fragile nature of buyer and supplier relationships was laid bare. It all began in the first few months of the year, as lockdowns in China, the world’s largest producer of apparel and raw materials, caused deliveries to be delayed. This sent ripples across the globe. As a result, brands focused on China-based manufacturing scrambled to accelerate diversification strategies and then still faced capacity issues due to the dependence of many Asian sourcing markets on raw materials and textile inputs from China. As the pandemic spread around the globe, temporary lockdowns followed in other regions. Supply chains became stretched, leading larger-scale suppliers and sourcing agents with multi-country footprints to gain an advantage.

Going forward, we expect Business brands will seek to more permanently diversify their geographic sourcing footprint, as well as support priority suppliers with longer-term volume commitments and work more closely with them to align on strategy Later in the year, cancellations, delayed or reduced payments and contract renegotiations put a spotlight on the continuing power imbalance in the value chain. In a survey from April 2020, around three-quarters of sourcing executives reported canceling orders during the first wave of the pandemic, while just one in five paid for more than 75 percent of orders as agreed, and 41 percent renegotiated supplier contract terms. Not surprisingly, nearly half of sourcing executives expected many of their suppliers to face financial distress this year. Examples of supply chain pressure have proliferated around the world. Italy’s artisanal luxury suppliers saw orders drop by around 40 percent early in 2020, with many avoiding furloughs only by switching to the production of personal protective equipment.

In Honduras and El Salvador in Central America, apparel exports to the US tumbled by over 90 percent year-on-year in April, and in Mexico, they fell by more than 65 percent. By March, western Business brands had reportedly canceled $2.8 billion of orders from Bangladeshi suppliers, impacting the livelihoods of 1.2 million workers. Reports in August suggested some 9 percent of Bangladeshi garment factories had closed permanently because of the pandemic, and nearly a third of the remainder doubted whether they would be able to resume normal operations. Still, despite many factories shutting permanently, just 17 percent of Business companies said they will co-invest in suppliers to secure future capacity. Many brands initially reacted slowly to the impact on suppliers and workers of cancellations and payment delays, with many claiming contracts were invalidated by force majeure. The industry response became more nuanced as the year progressed.

However, as more factories closed and public pressure mounted (supported by campaigning organisation blacklists) more brands during the northern hemisphere summer said they would indeed honor their contracts. As time progressed Business sourcing executives put more focus on coming out of the crisis together and on strengthening the resilience of their supply chain. We have to [help build better] social protection systems… in countries where there’s a lot of production for more collective, industry-wide agreements between employers, workers, unions, and governments, as there are in some parts of the world. Though the power imbalance in the Business supply chain is unlikely to be resolved any time soon, the voice of suppliers is getting louder, reaching consumers globally. Many suppliers are demanding a relationship based on mutual respect, fairer treatment, a reasonable share of value, and better adherence to contracts. Suppliers in all industry segments are speaking up, from mass-market suppliers in Bangladesh to Indian artisans working for the international luxury houses. Some are threatening embargoes when brands do not pay their bills, applying rating systems and leveraging tools such as HSBC’s Serai to conduct financial health checks on brands.

Looking forward, we expect to see more suppliers — especially the stronger ones — put their buyers’ financials, payment histories, and purchasing behaviors under intense scrutiny. However, most suppliers concede that brands and retailers continue to have the upper hand. Nevertheless, a growing number of suppliers are taking measures to compel brands to honor contracts as well as questioning payment terms and the financial risks suppliers are asked to take. Some brands are responding. H&M, for example, has joined other players who isolate their labor costs and ring-fence them in price negotiations in order to protect worker wages. Meanwhile, governments are moving in that direction too, as more lawmakers around the globe look to move Business companies away from voluntary initiatives toward taking legal responsibility for their supply chains. As brands reinvent their supply chain relationships, they are also likely to take the opportunity to make positive moves on sustainability and human rights.

The time is seeing hyper-acceleration on several fronts: from sales volatility and overstock to online market share and sustainability demands by both consumers and investors. As such, there is rising pressure on Business companies to speed up the transformation of purchasing practices and sourcing relationships. Brands need to cater to a less predictable, multi-channel environment, enabling them to source smaller batches and react faster to in-season trends. Strategic suppliers with longer-term relationships will also take on more responsibilities — including co-design and quality control — to speed up the product development process. Some 76 percent of sourcing executives in a survey said that the need for flexibility and speed will accelerate further in the coming year, as brands place greater emphasis on full-price sell-through and sell-out margins. Deeper partnerships are likely to be a precondition of successful execution, in which suppliers have more transparency on brands’ strategies, sales data, and forecasts, and in which binding commitments are made to secure open-to-buy capacity.

In addition, strategic partnerships or co-investments can help suppliers invest in new machinery, semi-automation, technology, and R&D. These will help companies increase productivity and optimize inventory management in a more volatile market, as well as reduce their environmental impact. We also see more players moving from broad-based sustainability visions to concrete targets and timelines to operationalize their strategies. In summary, we expect Business brands to reduce transactional or non-committal relationships in favor of medium- to longer-term volume commitments and strategic alignment with suppliers. Empowered suppliers will likely help brands boost margins and improve consumer perceptions of the industry through increased efficiency and improved sustainability. Rather than focusing on order management, traditional negotiations, and compliance, the sourcing function will play a key role in sustaining relationships and communicating with preferred partners. For digitized, agile product development, brands will also need to forge closer relationships between their design and merchandising functions and suppliers.

At the margins, we will see investment in the upstream value chain. This will drive sustainability and support the implementation of new technologies to boost productivity and enable on-demand manufacturing. When the pandemic hit western markets in March 2020, many large brands responded by canceling orders and refusing to pay for completed goods. The impact on the supply chain was instant and, in some cases, devastating. Not only did the crisis place the livelihoods of millions of garment workers in jeopardy, it also revealed long-standing inequities in the relationship between Business buyers in the west and its manufacturers in sourcing hubs across the developing world. Many months later, the effects are still rippling through the supply chain. Though orders have stabilized, volumes are down significantly, and the future remains highly uncertain. Still, amid the disruption, there are opportunities to pursue exciting new business models.

There’s been a huge amount of attention on the fact that a lot of buyers canceled or delayed orders when the pandemic first hit. Were you surprised at how the industry reacted, and do you see a need to rewrite the relationship between suppliers and buyers going forward? One can’t really wrap my head around how some companies think that it’s okay to not honor these commitments and make these payments, because the effects of that are real. People will lose their jobs, people will starve. There’s going to be a lot of real suffering, not just company stocks going down. People use the word “partnership,” but it’s still [fundamentally] a buyer-supplier relationship, and the payment terms are what they are. [On the other hand], if there can actually be clarity and commitment to say, “We’ll give you this many orders, we’ll forecast it this far ahead, and these are the things that will determine if we continue giving you orders or growing them,” and [buyers] stick to that, and it’s not just [based on] price or the kind of factors that they’ve relied on in the past, but it’s more holistic, [then] I feel like that is a good step in the right direction. That seems realistic also.

At Good Business Lab they have a slogan that’s “worker well-being is good business.” We all have always believed that, but now we think Covid has forced [other] people to believe it. If, for example, you don’t take steps to ensure your factory is a safe working place and there’s a spike in cases, you could risk having your factory shut down or people quitting. The consequences of not investing in your workers are much higher now than before, but at the same time, think a lot of sustainability programs are harder to do. We’re a big implementer of in-person training, so now we’re forced to rethink how to do that because not all our factories have spaces where you could bring a cohort of people together to run a session like that. That was probably the biggest crisis. We had never had to deal with that type of situation before.

No one on the top management would have wanted our team members to behave in that way or to let that situation happen, but because the factories are essentially running as their own businesses, each head of a factory is almost like the CEO of the unit. Because of that decentralized approach, not all the information flows to the top. It taught us a lot about the risk of this decentralized approach. Since then, we’ve invested a lot in building worker-management communication systems, engaging with unions, and being more aware. [Still] it feels like Covid has in some sense revealed the brands and customers who truly value sustainability; the ones who despite the crisis are going to continue investing in it, and the ones who maybe don’t as much.  

Back to top button