Does better labor standard pay?

- Linking labor standard compliance and supplier

competitiveness -

Chikako OkaChika.Oka@rhul.ac.uk

Royal Holloway University of London

QuestionWhat do supplier factories gain from better labor standard compliance?

→ Enhanced productivity?

→ Attract and retain buyers?

Buyer Survey in Cambodia

14 major buyers (45 % of garment export) in 2008

All buyers check compliance of potential suppliers before placing orders

All buyers rank compliance performance of suppliers mainly to identify poor performers

Half of buyers explicitly warn suppliers about the consequence of non-compliance, but

Cancellation of orders is a rare event

Pre-order sorting vs. Post-order monitoring

Place Orders

Post-order Monitoring

Not Acceptable

Pre-order Sorting

Acceptable

Different Buyer Types

Reputation-conscious buyers→ Join Multi-Stakeholder Initiatives like FLA, ETI, and BFC

Quality vs. Quantity/Cost-driven buyers→ Specialty Retailers emphasize quality→ Mass Merchandisers emphasize quantity & cost

Buyer-Supplier Matching Process

Sourcing Criteria Stage I Stage II Stage III

Mode of Transaction

Direct Indirect

Sorting In Out

Duration of Relationship

Long Short

Price Quality Delivery Labor/other Standards

Potential Link between compliance and competitiveness

Attract new

buyers

Attract buyers with higher margins

Supplier’s Competitiveness

Supplier’s labor standard

compliance

Form a long-term relationship

Compliance Rate of New Suppliers

by Buyer Type

85

90

95

100

2007 2008 2009 2010

Specialty

Mass

Industry average

Others

Empirical Strategies and findings

Buyer # = f (labor compliance, controls) → ∆ in compliance not significantly related to #

Labor compliance = f (buyer type, controls)→ New suppliers of reputation-conscious buyers have much higher levels of compliance

Prob (long relationship) = f (buyer type, labor compliance, controls)

→ Better complying suppliers esp. of specialty retailers tend to be in long-term relationship

Key Findings

1. Supplier compliance figures prominently in the buyer’s decision at the pre-order sorting stage

2. Labor compliance is a necessary, NOT a sufficient condition to attract reputation-conscious buyers

3. Having better compliance and reputation-conscious specialty retailers increases the chance of staying in a long-term relationship

Title: Does better labor standard compliance pay?Name of presenter: Chikako OkaEmail: Chika.Oka@rhul.ac.uk

Recommendations

Buyers: Use leverage at the pre-order stageBuyers: Give carrots to encourage compliance

Suppliers: Get a combination of sourcing criteria right, not just compliance

Suppliers: Realize that better compliance can bring long-term benefits

Policy makers: collaborate with researchers and disseminate informationTitle: Does better labor standard

compliance pay?Name of presenter: Chikako OkaEmail: Chika.Oka@rhul.ac.uk