Does your supply chain want to reduce unauthorized subcontracting? Then think beyond price

The modern supply chain is global, complex, and frequently opaque. Apparel brands, retailers, and industrial companies increasingly depend on outsourced manufacturing, which in turn relies on layers of subcontractors—often without the knowledge or approval of the buyer. What’s worse, these unauthorized subcontractors are more likely to operate unsafe workplaces and use unfair labor practices.

The 2013 collapse of Rana Plaza in Bangladesh drew worldwide attention to the problem of unauthorized subcontracting. More than a thousand apparel workers died in the building, where clothing was made for several prominent apparel brands, many claiming that they hadn’t placed orders in those factories. Many more instances abound making it a worldwide problem. 

Large retailers and fashion companies have taken steps to improve conditions at their suppliers through codes of conduct, regular audits, and requirements that plants adhere to international health and safety rules. But if they want to demonstrate their commitment to the well-being of the people who make their products, they’ll need to get a grip on the problem of unauthorized subcontracting.

To better understand the problem, Felipe Caro, Leonard Lane and Anna Sáez de Tejada Cuenca analyze in “Can Brands Claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains” orders placed by a large supply-chain intermediary located in Asia that matches retailers with suppliers in developing countries. The middleman maintained a list of authorized factories, and after Rana Plaza kept records of orders that went to subcontractors not on the authorized list. In the study, more than a third of the 32,000 orders—placed by 30 brands with 226 apparel factories—involved an unauthorized supplier.

As expected, the study shows that price pressure increases the chance of unauthorized subcontracting. If the factory is paid a price below its historical average for a given product category, the probability of unauthorized subcontracting increases by 5-8%. This effect supports the long-held belief that suppliers are trying to "cut corners". However important, the study discovers that price might not be the main driver.

Unauthorized subcontracting happens in batches. The chance of unauthorized subcontracting happening almost doubles if the previous order by the same supplier was also subcontracted. Why? One of the main reasons is high factory utilization. Indeed, in periods of higher utilization, unauthorized subcontracting increases by up to 97%!

The study also finds that, counter to common intuition, rush orders are not necessarily riskier. In fact, the chance of unauthorized subcontracting is 58% higher for orders with a lead time greater than two months. How is this possible? A short lead time is a proxy for fashion products, as opposed to basics. Basic items, e.g., a plain color pullover, are designed in collections with long planning cycles. These items are less sophisticated and easier to farm out to informal (and sometimes makeshift) factories.

Unauthorized subcontracting can be tackled using analytics and big data. High accuracy levels can be expected. In the study, a simple predictive model correctly anticipated unauthorized subcontracting behavior for over 83% of the orders in out-of-sample tests. Simple linear models are just a proof of concept. Gathering more data and applying advanced machine learning techniques such as deep learning can only do better.

In the post-COVID era, supply chain visibility (i.e, knowing where your products are being made) will become even more necessary and prominent. Hence, supply chains that tackle unauthorized subcontracting will come out of the pandemic stronger and more resilient.

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Caro, F, Lane L, Sáez De Tejada Cuenca A (2021). Can Brands Claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains. Management Science 67(4) 2010-2028.