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Sourcing shift:

moving away from China

· Sourcing,Asia,China

With the increasing costs, the factories shutting down and the raging trade war, the temptation is great for importers and manufacturers to phase out of China. On the top of that, surrounding countries also demonstrate some specific expertise such as Bangladesh with garment confection and India with organic cotton, making China a less indisputable choice. If moving away seems like a strategical thing to do, are there aspects beyond the price and expertise to consider in order to take the right decision?

Understanding the local context and challenging the habits

There are certainly good things we must concede to China. Within the recent decades, the local infrastructures, production capacity and quality have greatly improved, not mentioning the consolidation of the supply chain. There has also been an unprecedented push from the government to standardize and cleanup manufacturing sector. It enables China to be subsequently less risky than other countries in terms of media exposure, service disruption and hazards for stakeholders.

Why is that?

China sets 16 years old, the end of the compulsory education, as the minimum legal age to work. In other countries, it can be significantly lower such as 14 years old in Ethiopia or India and 12 years-old in Bangladesh for light works. So here you might want to ask yourself:

“Do I want children as young as 12 years old working in my supply chain?”

If the answer is “No”, it becomes your responsibility to draw a line for your suppliers. This is not simply about requiring them not to employ children, which might often end-up in them hiding the truth from you. But about making sure that they are willing to challenge what might be considered as usual practices and find a remediation to causes. Good examples exist such as factories building Kindergarten for working parents or supporting tuition fees for poor families.

Another very current issue you might face is modern slavery which mainly impact immigrant populations. Whereas in China migrations only happen internally, in Malaysia by example, factories are crowded with foreign workers coming from surrounding countries. They arrive under special contracts that greatly restrict their freedom such as joining a worker’s union or having relationships with locals. Furthermore, as the national regulation allows it, it has become a norm for many immigrants to work 72 hours per week, way above the national standard of 48 hours. In some factories, workers, even end up working more than 85 hours a week.

“Does a 72-hours-week sound like a problem to the management or is it business as usual?”

As a client it is important to go beyond just social audit findings, engage the dialogue to understand the real state of mind of the management and their willingness to work on reducing working hours through collaborative solutions.

Having less stringent social and environmental regulatory standards, of course directly reflects on production costs, and therefore purchasing prices. But what are the hidden costs?

Spotting the hidden costs and long-term consequences

Looser standards can bring severe drawbacks in terms of quality and service disruption.

Let’s take the example of production accidents such as factories burn down or blast. Beyond just the social aspect, it is a major cause of service disruption due to factories shut down. Despite the recent incidents in 2019, China managed to reduce the causalities by more than half in 8 years, thanks to training and supervision reinforcement. Whereas in India the non-compliance to safety norms and the under-equipped fire services, has led to an alarming increase of almost 20% of factory fires between 2014 and 2015, with 622 cases reported.

In the absence of an official training program or a thorough supervision from authorities, the responsibility falls on you to ensure that the factory is safe. Do management and employees understand the risks? Do they implement good fire prevention practices? Are they trained for firefighting?

Sand buckets for fire fighting  in India

Another issue to consider is the minimum wage, in China it usually enables to cover the basic needs of the local workers. But in several countries where we ran projects, it was unfortunately not the case such as in India or Morocco. Last year in Bangladesh workers even went up to demonstrate to request a raise on the legal minimum wage, which had been frozen for 5 years.

Oxfam report ‘Made in poverty’ published in the beginning of February illustrates well this reality of workers unable to go through the month and reduced to asking loans to afford food.

Beyond the risk of service disruption created by the strikes, having workers living in poverty as many consequences on the supply chain. Being overwhelmed by their life situation, they are not focused at work and less productive. Chances are also that they will jump pretty quickly from one job to another wherever they can get the best salary. A turnover that affects the overall quality of the products, due to the lack of properly trained workers on the chain.

In short, let’s just be realistic about the fact that risks exist everywhere. Thus, before taking the decision to shift country for a price reason, you should consider the productivity, infrastructures, quality… using a Total Cost Ownership approach. Whatever the level of your suppliers at start, the most important is that they are willing to improve and support you to mitigate the risks and seize the opportunities. It is about ensuring that the management of the factory is competent, understand the risks and is forward-thinking to help maintain the prices and innovate. To do so, it takes more than just filling a check list, it requires to establish a transparent dialogue with the management and the workers on a regular basis and of course mutual efforts and understanding from both procurement and manufacturing side.

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