Designing and Sustaining Socially Responsible Global Supply Chains: Lessons from Bangladesh

In November 2012, a fire in the Tazreen Fashions factory in Dhaka, Bangladesh, killed at least 112 workers. Five months later, in April 2013, Rana Plaza, an eight-story building in Dhaka, Bangladesh, that housed multiple garment factories and other commercial establishments, collapsed resulting in the deaths of more than 1100 people and injuring nearly 2500 people. These horrid events brought to light the stark reality of substandard working conditions in supplier factories of name-brand retail firms from North America and Europe, and earned such factories the label “sweatshops.”

Until a few years ago, firms in developed countries that sourced from factories in developing countries could ignore issues such as unsafe working conditions, and instead label them as “supplier problems.” Today, with the widespread negative publicity generated by media reports of deadly accidents, it is no longer possible for Western retailers to pass the buck to suppliers. Instead, these retailers now face threats of consumer backlash and reputational damage. For example, in the aforementioned case of the 2013 Rana Plaza building collapse, public response was swift and unprecedented. Consumers, worker advocacy groups, governments, and concerned citizens expressed outrage at the persistent lack of oversight and concern over unsafe working conditions in Bangladeshi ready-made garment (RMG) supplier factories.

Bangladesh plays a critical role in the global supply chain of ready-made garments, as the third largest exporter to the U.S. and the second largest overall exporter in the world. Bangladesh’s sustained efforts over the last three decades to develop its RMG industry has resulted in unprecedented (and unregulated) industry growth with more than 5000 supplier factories located primarily in two of its most densely populated cities: Dhaka, the capital, and Chittagong, a major port city. The back-to-back tragedies within a span of five months in supplier factories in Bangladesh presented a unique opportunity for North American and European retailers to demonstrate corporate social responsibility by tackling the problem of unsafe working conditions in supplier factories in developing countries.

The paper co-authored by Liu, Mishra, Goldstein and Sinha (MSOM) is motivated by the following questions: Are the name-brand retail firms from developed countries truly making an effort to improve the working conditions in supplier factories in developing countries? Do the contractual agreements between the retail firms and supplier factories acknowledge the working condition risks? Does evidence of unsafe working conditions deter firms from contracting with the factories?

The empirical setting of the paper is factories in the Bangladesh RMG industry that supply to North American and European retailers. Following the Rana Plaza building collapse in Dhaka in April 2013, these retailers adopted an innovative approach to improving the working conditions of supplier factories by forming consortiums. The consortium of North American retailers is the Alliance for Bangladesh Worker Safety (Alliance). The consortium of European retailers is the Accord on Fire and Building Safety in Bangladesh (Accord). Alliance and Accord established working condition standards in the Bangladesh RMG industry by educating supplier factories through inspections and training, and by providing financial support to the factories for carrying out corrective actions. Further, the consortiums made a commitment to improving awareness of working condition standards in supplier factories among retailers and other stakeholders by making safety inspection reports transparent and visible to the public. Since their formation in 2013, the two consortiums have inspected a majority of supplier factories in the Bangladesh RMG industry and have released detailed inspection reports on their working condition risks.

The empirical analysis in the study is conducted using data on inspection reports from 936 supplier factories. The working condition risks in supplier factories are categorized into three types:

  • Structural risk: Associated with the structural integrity of buildings and protection from danger to life from building collapse.
  • Electrical risk: Associated with the compliance of buildings to electrical safety requirements and protection from danger to life from electrical hazards.
  • Fire risk: Associated with the compliance of buildings to fire safety requirements and protection from danger to life from effects of fire including smoke, heat, and toxic gases created during a fire.

The results of the data analysis indicate that retailers are becoming mindful of the working condition risks in a supplier factory. Specifically, an increase in working condition risks is associated with a decrease in supplier trustworthiness, measured as the number of retailers who have contracted with a supplier factory. However, these relationships vary with the type of the risk. Among the three types of working condition risks, fire and electrical risks are significant in reducing supplier trustworthiness, while structural risk has a marginal effect. The negative associations between working condition risks and supplier trustworthiness are moderated by the size of the supplier factory; the negative associations are significantly attenuated for larger-sized supplier factories compared to smaller-sized factories. These findings, taken together, provide nuanced insights into the marketplace implications of working condition risks in supplier factories, and highlight the sensitivity of the retailer-supplier relationship to such risks.

The study findings have actionable implications for retailers, suppliers, and consortiums. From a retailer’s perspective, sustained participation in industry-wide consortiums (such as Alliance and Accord) committed to improving worker safety in supplier factories sends a clear signal to suppliers about the importance of maintaining acceptable safety standards in their factories. This, in turn, reduces the potential for supply chain disruptions and reputational losses that can occur due to safety hazards. At the same time, retailer participation in consortium efforts establishes a level-playing field where they compete with each other without compromising the safety of workers in supplier factories. From a supplier’s perspective, the study findings demonstrate that improving factory working conditions can reduce retailer concerns about related risks and translate into greater potential for contracting with retailers. Finally, from a consortium’s standpoint, the study reveals that the structural integrity of a factory building may be more difficult to assess than the electrical and fire risks, and inspections will need to account for this shortcoming. 

 

Reference

Liu X, Mishra A, Goldstein S, Sinha K K (2018). Toward Improving Factory Working Conditions in Developing Countries: An Empirical Analysis of Bangladesh Ready-Made Garment Factories. Manufacturing & Service Operations Management (forthcoming).

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