By Tracy Knippenburg Gillis, Tracy.KnippenburgGillis@Marsh.com
The Rana Plaza building collapse in Savar, Bangladesh on April 24 that killed roughly 1,000 garment workers exposed a serious risk to the safety of workers in low-wage countries and to the reputations and bottom lines of retailers dependent on outsourced global supply chains.
Retailers and their suppliers should seize this event as a catalyst to more fully identify and understand their risk exposures, reform and strengthen workforce safety practices, and improve supply chain and reputational resiliency.
Bangladeshi labor conditions
With one of the lowest minimum hourly wages, outsourcing to Bangladesh is affordable and attractive to retailers facing tight margins and heavy competition. However, the potential risks associated with poor working conditions and workplace accidents, which have persisted in Bangladesh even after 20 years of reform actions, is significant. Bangladesh ranked as the world’s eighth-worst country for industrial working conditions in 2012.
International standards, protocols, and regulations have focused on awareness and oversight to improve garment manufacturing working conditions. However, in the aftermath of Rana Plaza, new measures have been advocated.
European retailers and labor unions reached a formal accord on July 8, pledging $60 million over five years to conduct more rigorous safety inspections, become more transparent in disclosing poor working conditions, and pay for regular upkeep at factory sites. Shortly thereafter, a group of North American retailers committed $42 million for worker safety, including inspections, an anonymous reporting hotline for workers, and more than $100 million in loans and other financing to help correct safety problems. While there are differences in approach and the level of binding authority, these initiatives could help retailers meet stakeholder expectations and provide greater protections for Bangladeshi workers.
Understanding the risk
The Rana Plaza tragedy highlighted three categories of risk for retailers and their suppliers: reputational, compliance, and supply chain/business continuity risk.
1. Reputational risk
Brand damage is a serious reputational risk given the fickle and highly competitive apparel market. Younger customers typically are more sensitive to social responsibility issues. They also have many options and few barriers to changing brand loyalty.
Following the tragedy, despite not outsourcing directly to the Rana Plaza factory, many of the world’s largest retailers and suppliers experienced widespread negative attention regarding their sourcing of textile goods from Bangladesh.
With the increasing complexity and layers of today’s supply chains, retailers need to carefully consider potential risks, particularly where they may have little direct control, before they arise. Contemplating them for the first time when a problem arises may be too late in customers’ eyes.
2. Compliance risk
Compliance programs have been an important part of the retail industry’s response to safety concerns in Bangladesh, The Rana Plaza tragedy, however, suggests that a major overhaul is needed.
At-risk facilities have often been overlooked by standardized audits such as the Business Social Compliance Initiative (BSCI) system. In addition, factory owners' can easily skew the results as they are often aware of impending audits and provide key inputs for auditors' assessments. As such, worker safety benchmarks are often misreported or ignored.
Retailers are advised to introduce a more standardized, meaningful audit process less prone to manipulation. This could include an expanded audit checklist, more frequent unannounced inspections, a detailed factory rating system, and greater worker engagement.
Retailers also may want to consider establishing a baseline requirement assessment that can be applied when evaluating existing or new operations – their own or their suppliers. This assessment should focus on life and fire safety standards and building codes, an area where emerging markets have lagged behind more mature markets.
3. Supply chain risk
As a primary apparel supplier, Bangladesh is the central sourcing location for the retail industry's largest consumer markets. The long and complex supply chains leading there and back are susceptible to oversight-related human tragedies and natural hazard-related production and logistics disruptions, which can increase business costs and affect corporate social responsibility perceptions.
Retailers should seek to engender a universal culture of safety throughout their supply chains in order to maintain an ethical working environment. This can be accomplished through well-written contracts with non-compliance penalties and formal, multi-step signing processes to ensure that relevant standards are sufficiently met.
Managing the risk
In the aftermath of Rana Plaza, retailers and suppliers still face serious reputation and supply chain risks and therefore should consider the following:
Make an informed risk decision: Although the moral aspects are straightforward, the decision to keep sourcing from Bangladesh is more nuanced and complicated. Retailers should take a broad view of their risks, including reputational, supply chain, political, and workforce health and safety. Active monitoring and data analysis with a strong methodology should factor significantly in creating the business case for any risk decision.
Work to improve working conditions in Bangladesh: Retailers, as well as the Bangladeshi government, can regain consumer and international stakeholder trust by improving working conditions through regulatory reform and industry initiatives as well as renewed audit processes.
Improve crisis response and compliance frameworks: As a matter of reputational and supplier resiliency, retailers must enhance their response and resiliency programs and capabilities, and should reform and strengthen audit processes and procedures. They should also collect and analyze data about corporate compliance, regulatory compliance, supply chain risk, corporate response readiness programs, and reputational risk so that their risk profile is clearly understood and the information acted on appropriately to prevent, manage, or respond to a significant labor/safety issue.
Respond timely and appropriately during a crisis: Today's interconnected marketplace enables crises to emerge and grow very quickly, or happen suddenly and catastrophically. Retailers must gain visibility and understand causes and impacts quickly or face serious reputational damage. Even those not immediately impacted can suffer by virtue of being associated with an affected supplier or the environment.
Improving supply chain and reputational risk resiliency in Bangladesh and other supplier countries should be a top priority for retail organizations. Solutions should be based on an understanding of the multidisciplinary risks that emerge from sourcing in a low-wage country. The cost of not taking action or of failing to conduct the appropriate risk due diligence is too great.
Tracy Knippenburg Gillis, global reputational risk and crisis management leader, Marsh Risk Consulting, a global leader in insurance broking and risk management, teams with its clients to define, design, and deliver innovative industry-specific solutions that help them protect their future and thrive. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies. Tracy can be contacted at Tracy.KnippenburgGillis@Marsh.com.