Lessons Learned

Bangladesh’s low-cost production capability has turned the South Asian nation into one of the world’s largest clothing exporters. In 2012 alone, the country’s textile exports topped $20 billion – including, as the Government of Canada reports, $1.1 billion to this country – and represented about 80% of its total annual exports.

With one of the world’s lowest minimum hourly wages, the outsourcing of garment production to Bangladesh is affordable and attractive to companies facing tight margins and heavy competition. These low wages help maintain low prices for Western consumers, and stable and profitable margins for producers and retailers.

Despite significant progress over the last 20 years to improve working conditions, the April 24 collapse of the Rana Plaza – in which more than 1,100 workers tragically lost their lives and many more were injured – served as a wake-up call to the manufacturing industry, governments and consumers alike. And it has led companies and their insurers to take a renewed look at how to protect against the risks of operating complex global supply chains and how to insure against those risks.

MANAGING THE RISKS

The globalization of supply chains adds higher degrees of complexity than ever before, including the reliance on more tiers of suppliers, which can add more vulnerability to the system when events occur. Many companies expect their suppliers to manage risk to the same degree that they do; some may put clauses in contracts with direct suppliers requiring that similar risk management protocols be put into place. Fewer, however, understand or apply this rule beyond first-tier suppliers, which may be located in countries that have different operational structures and practices.

In the months since the Bangladesh tragedy, governments and the garment industry have taken steps to address how business is conducted in Bangladesh and elsewhere, and have taken additional measures to help improve working conditions and prevent similar incidents from happening in the future.

The Bangladesh government moved to guarantee labour rights while simultaneously stepping up inspections of the estimated 5,000 garment factories in the country. But the process is difficult, and slow.

The New York Times reported in a July 2 article that the Bangladesh government is not certain precisely how many factories operate in the country, or their locations. Often, building plans do not match the actual structure, if the plans exist at all.

This is complicated further by a severe lack of qualified inspectors – it has been reported that the capital city of Dhaka, for instance, has 40 inspectors charged with inspecting as many as one million structures in the city.

Other governments have taken action as well. In late June, the United States government suspended some of the trade benefits previously provided under the Generalized System of Preferences (GSP), raising duties on a range of consumer items (though not garments, which did not receive reduced duty rates).

The European Union (EU) is said to be considering trade sanctions as well.

On July 10, 17 North American apparel retailers joined forces to develop and launch an alliance, Bangladesh Worker Safety Initiative – a five-year binding effort to improve safety in the Bangladeshi garment factories. The North American alliance includes inspection and safety standards programs for almost 500 factories within the year. It also includes efforts to create consistent inspection standards and empower workers to report unsafe conditions.

Similarly, a number of largely European unions and retailers signed the Accord on Fire and Building Safety in Bangladesh, including the world’s largest retailer, Inditex. The European accord is designed to improve fire and building safety in Bangladesh. The group is creating a team of inspectors that will be sent in to evaluate fire, electrical, structural and worker safety in those factories producing goods for the group’s members. 

THE FUTURE

From companies in industries ranging from automotive to technology to retail, the ability to consistently deliver products and services quickly, reliably and at low cost is essential to their value proposition to customers and shareholders. Given the increasing role that third-party manufacturers in low-cost production countries play in feeding demands for affordable consumer goods, it is unrealistic to think that manufacturers will – or can – cease outsourcing to countries like Bangladesh all together.

The issues at work in the Rana Plaza collapse go back decades. Likewise, wholesale change in places such as Bangladesh will take years to fully accomplish. While governments play a critical role in this process by instituting new health and safety standards for workers, companies themselves must take a leading role in enforcing operational changes among their suppliers.

What can companies do today to minimize operational, financial, insurance and reputational risks, and safeguard human and physical assets?

Know the risks, and plan for them

Company leadership is faced with an increasing array of threats to its company’s operations. Completely eliminating risk is not possible, but understanding and planning for the risks – what they are, what impacts and consequences they could cause, and understanding what the company can do to prepare and protect itself before it happens – will enable leadership to better manage against inevitable disruptions and potential crises.

Organizations should take a broad view of all the risks they face, as well as their consequences. The health and safety of workers and surrounding communities should certainly be examined. But also consider the non-physical risks, including reputational, political, supply chain and so forth.

Keep in mind that these issues are not static; they evolve and change over time. Continual monitoring and assessment of both conditions on the ground, as well as perceptions from stakeholders (e.g., customers, investors, government regulators, insurers, etc.), must take place. Armed with a clear view of the risks, consequences and what the worst-case scenario could look like, companies can make sound decisions on whether or not to locate or maintain operations in a given area.

And more important, once sourcing decisions are made, companies can put the proper response, continuity and crisis management plans in place that will provide prompt visibility to problems, and employ immediate response and effective continuity and crisis management as needed.

Improve crisis response and compliance frameworks

Manufacturers must review, and if necessary enhance, their response and resiliency programs and capabilities, as well as their audit processes and procedures. Enhanced programs on corporate and regulatory compliance, supply chain risk management, corporate preparedness and response programs, and reputational risk are necessary to clearly effectively manage, respond to or, ideally, prevent potential threats to the health and safety of human and physical assets, operations, reputation and the bottom line.

Respond in a timely and appropriate way in a crisis

As has been seen with the Rana Plaza event, what happens in one part of the world has the potential to have an impact elsewhere in today’s interconnected marketplace. Even those not immediately affected can suffer by virtue of doing business in the affected environment or with an affected organization.

Problems need to be identified, and their causes and impacts understood quickly. The timeliness and the appropriateness of a company’s response can have a dramatic effect on how it is perceived by customers, shareholders and regulators.

The Rana Plaza event was extreme – and preventable. While initial steps have been taken to help ensure that the tragic scene is not replayed in Bangladesh or elsewhere, more needs to be done. Manufacturers need to take this time to fully identify their risk exposures, revisit and strengthen workforce safety practices, enhance internal crisis preparedness and enhance resiliency processes for themselves and their suppliers at every level.

The cost of not taking action or failing to conduct the appropriate risk due diligence, and taking the necessary steps to mitigate them, is too great.