Sharing the Burden of Financial Risk
On this episode of Unspun Kim van der Weerd, co-host of Manufactured podcast, joins Catherine, Lauren, and Danielle to discuss how the unequal distribution of financial risk shapes the relationship between brands and suppliers.
Kim sometimes describes herself as a “student of human rights turned garment factory manager turned sustainable fashion critic.” While she always had an interest in the global political economy and supply chains, she wanted to learn more about what this looks like from the manufacturer's perspective. This led to her moving to Cambodia to find a job in a garment factory, where she worked as a general manager. During her time there, she experienced first hand what the distribution of decision-making power and financial risk between brands and suppliers looks like. Often, it can be largely skewed to benefit brands, and the onus of compliance is placed on the supplier.
Minimizing Financial Risk While Maximizing Profit
“THE BIGGEST REASON THAT BRANDS DON’T DO THEIR OWN PRODUCTION IS BECAUSE THEY ARE LOOKING TO MINIMIZE THEIR FINANCIAL RISK.”
When asked why brands outsource production, answers will vary from cheap wages to advances in communication systems and logistics. And though these all play a role in the decision to outsource, Kim explains that the main reason this system is in place is so brands can minimize their financial risk. Outsourcing production allows for brands not to have inventory on their books or garment workers on their payroll and pass the financial risks onto suppliers. Minimizing financial risk is also tied to the unequal distribution of power throughout supply chains. And while there are mechanisms in place like responsible purchasing practices to try to address this inequity, Kim points out that these solutions are only getting at the symptoms of the problem.
“I FEEL LIKE PURCHASING PRACTICES ARE THE CONSEQUENCE. THEY’RE THE RESULT OF AN UNEQUAL DISTRIBUTION OF FINANCIAL RISK [...] AND A LOT OF THE TIME WHEN WE TALK ABOUT PURCHASING PRACTICES WE’RE TALKING ABOUT HOW WE CHANGE THE SYMPTOMS BUT WE’RE NOT FUNDAMENTALLY CHANGING THE INCENTIVES.”
Kim points out that sharing financial risk isn’t only good for manufacturers—it makes good business sense for brands. We saw during the pandemic that brands had too much inventory with supply chain partners, many of whom were heavily impacted during this time. She argues that this overproduction (excess inventory) is a result of brands having little financial responsibility for that inventory.
As a factory, managing the balance between orders and the capacity to ensure one’s bottom line is in the black—on very tight margins—is a huge challenge. Often, suppliers have little information about the orders they’re going to receive, yet have to purchase raw materials and make staffing decisions months before those orders are finalized. Put simply: manufacturers will not know their cost per piece sold when they start producing an order for a customer. The way to manage this uncertainty is to have a production capacity that’s easily expandable and contractible. This incentivizes manufacturers to subcontract, keep wages low, put employees on short-term contracts, and push poor terms with raw materials suppliers. All of which eventually leads to non-compliance with brand codes of conduct, longer and more complex supply chains, and ultimately more reputational risk for brands.
Having a Vested Interest in Supply Chain Partners
The solutions Kim points to in both our conversation and her recent article, “We Need to Stop Citing Long, Complex, Supply Chains as a Reason for Fashion’s Sustainability Woes,” are not found in getting a grip on the supply chain (the industry’s current wave of transparency and supply chain mapping) – this merely leads to more finger-pointing to a lack of supplier ownership and fraud. Where the collective conversation and efforts must progress is asking Kim’s pointed question, “How is it possible that we don’t know who our suppliers are in the first place?”
Join us in exploring the answers to this question and more like, “why do we put the onus of compliance and financial risk on suppliers in the first place?” in our latest episode of Unspun.