Towards Sustainable Labour Costing in the Global Apparel Industry:

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Towards Sustainable Labour Costing in the

Global Apparel Industry:

Some evidence from UK Fashion Retail

Abstract

This paper focuses on a specific feature of buying behavior in the UK fashion retail industry:the negotiation of a manufacturing price (CMT cost) with suppliers which does not separatelyitemize labour cost. This practice, tacitly supported by both buyers and suppliers, is examinedagainst the backdrop of ongoing wage defaulting and import price deflation in the globalapparel industry. Whilst wage non compliance cannot be solely explained by this buyingpractice, since other commercial practices and factors may have an equal if not greater impacton a supplier’s liquidity/ability to pay on time and in full, the case is nevertheless made thatan absence of labour costing must inevitably have an effect on the capacity of a factory todeliver an order at a negotiated price and to meet compliance benchmarks at the same time.The paper attempts to construct a formula for sustainable labour pricing at the buyer endusing industrial engineering principles which appear to have been lost in the truncation ofbuying firms caused by international sourcing. The methodology, which can be used tocalculate a living wage, has implications for international buying practice but its success willdepend ultimately on the extent to which the core principles of freedom of association andcollective bargaining are respected within the sector.

Key words: CMT, labour costing, work study, living wage, social compliance, trade unions.

Professor Doug MillerSchool of DesignUniversity of NorthumbriaCentral Campus East 2Newcastle upon TyneNE1 8STUnited Kingdom

Email: [email protected]

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‘In all buying, consider first, what condition of existence you cause in the production

of what you buy; secondly, whether the sum you have paid is just to the producer, and

in due proportion lodged in his hand’1

John Ruskin

In recent years campaign groups have repeatedly focused in the UK on the issue of a livingwage for apparel workers in the supply chain of high street fashion retailers (Labour Behindthe Label 2006, 2007, 2008, 2009; War on Want 2008, 2009). This has been echoedelsewhere (International Textile Garment and Leather Workers Federation ITGLWF 2009;Merk 2009, United Students Against Sweatshops Designated Supplier Programme2 ; (Playfair2008). However, there is an equally chronic and more immediate issue of wage noncompliance in both the buying and supplying countries of the sector. In the USA, ‘wagetheft’ , as some have termed it (Bobo 2008; Dirnbach 2009; Worker Rights Consortium2010), has taken on chronic proportions with 43% of apparel workers in what is left of amanufacturing industry being underpaid their legal minimum entitlement, and 71% notreceiving payment of overtime (Bernhardt et.al. 2008). In the supply chains of the USA andthe EU the situation also gives cause for concern. A recent survey drawing on audit dataprovided by the US based multi-stakeholder Initiative – the Fair Labor Association, revealedthat 58% of the supplier facilities audited were underpaying wages and 68% reporteddifficulties in paying overtime (Vaughan-Whitehead 2009:13).

Whilst wage defaulting can take on a number of forms and has a number of causes(Impactt/Traidcraft 2009; Dirnbach 2010), a central demand from the campaign groups, hasremained the issue of pricing. (Labour Behind the Label 2009:5; the Asia Floor WageCampaign - Merk 2009: 60; the Playfair Campaign 2008: 30-34). In one of his last statementsNeil Kearney, General Secretary of the ITGLWF, articulated this demand more precisely:

‘A sustainable system would see the employer being responsible for thepayment of a living wage and the buyer being responsible for making thepayment of a living wage a contractual obligation, paying prices that enable thesupplier to fulfill that obligation, and supporting suppliers in bearing the risk ofpaying higher wages for instance by providing greater stability in orders. Thisshould not be an issue given the fact that wages make up such a small fractionof retail prices.’ 3

In a recent set of benchmarks on purchasing practices, the UK Ethical Trading Initiativecalled on its member companies to ensure that the terms of their agreements with suppliers onprices, lead times and quantities are consistent with the ability of the supplier to observe theprovisions of the Base Code (Ethical Trading Initiative 2010). Most of the work undertakenby the ETI on purchasing practices with its member firms has, however, thus far left the area

1 John Ruskin 1860 Unto This Last, Essays from the Cornhill Magazine reprinted as Unto This Last in 18622 http://www.workersrights.org/dsp.asp (last accessed 16.3. 2010)3 ITGLWF response to Transfair’s proposal to pilot Fair Trade Certified apparel for the US market. 4.2.2010.

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of pricing untouched (ETI 2007). Pricing and, more specifically, the costing of labour withinthis buying practice, has remained somewhat of a ‘black box’. This paper seeks to lift the lidon this process in an attempt to examine how sourcing departments might implement thebasis for both wage compliance and the payment of a living wage in their supply chains.

Four questions concern us at the outset. Firstly, how is labour currently costed in theindustry? Secondly, is there a relationship between this practice and social compliance?Thirdly, how might current practice be improved? Fourthly, what are the necessarypreconditions for the implementation of a sustainable apparel pricing system in an outsourcedmulti buyer make to order system of production? Such questions pose a series of researchchallenges. Costing sits at the heart of competition and is one buyer practice which remains acommercially sensitive area. Since the investigation was concerned with costing methodsrather than actual pricing it was possible to overcome the initial reticence on the part of asmall sample of 7 high street fashion companies to determine their current practice in costinglabour in price negotiations with suppliers. CSR staff were sent a survey questionnaire and insome cases there was a follow up telephone interview. Personal acquaintance was a crucialfactor in eliciting a response on what is still deemed to be a very sensitive area. Morequalitative data was acquired from leading experts in the sector and some former practitioners(buyers). In terms of supplier behaviour there was greater dependence on the existingliterature and it is clear that this is an under researched area. In order to generate a model,actual costing data was necessary and for this the value chain work undertaken in Cambodiaby Nathan Associates and Werner International (2007) and extensive communication withstaff at General Sewing Data was invaluable. Inevitably, this paper draws some tentativeconclusions on questions which require much more in depth study and piloting. It is hopedthat it can provoke a debate and offer some guidance for retailers to re-evaluate their costingpractices.

Costing garments and costing labour in the Global Apparel industry.

The Buyer end

Costing can be described as the process of estimating and then determining the total cost ofproducing a garment, including the cost of materials, labour and general expenses of indirectcosts (Brown and Rice 2001). Historically, labour cost in garment manufacture has beendetermined by multiplying the estimated amount of time taken to complete a garment byeither an individual or a group of workers by the actual labour cost which is either theminimum wage or the prevailing wage (minimum wage plus additional wage elementsexisting at the factory in question) expressed as a minute value. Payment systems wouldeither be based on remuneration by the ‘piece’ or on the basis of ‘time saved’. The estimatedamount of time taken to complete a garment has always been a ‘contested terrain’ in theindustry (Edwards 1979; Edwards & Scullion 1982; Boggis 2001) going right to the heart ofthe twin compliance issues of wages and hours for workers, and to the issue of capacity,efficiency and ultimately profit for management.

In the hey-day of branded manufacturing, companies developed their own in house industrialengineering expertise to calculate labour cost, and three approaches emerged to determine a‘standard time’ for assembling a garment: – bespoke time study, historical estimates, andwhat is known as PTS or pre-determined time standards. Bespoke time and motions study,i.e. the application of a range of ‘techniques designed to establish the time for a qualified

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worker to carry out a task at a defined rate of working’ (Kanawaty 1992 243) can only becarried out in factory with new styles made in the sampling department by an experiencedmachinist, and the standard time and production target eventually established once assemblyhad actually commenced. A second method, preferred by those companies unable to invest inindustrial engineering focussed on approximations of labour time based on historical data.The third approach – PTS is based on methods time measurement, (MTM) whereby basichuman motions are used to build up the time for a job at a defined level of performance (ibid:381) under defined conditions. This approach deconstructs a garment into its constituentparts, identifies the manual labour operations required to complete these components, anduses methods analysis to pre determine manufacturing standard times and production targets.So-called standard minute values (SMVs) (the US term is Standard Allowed Minutes orSAMs) are externally calculated from a database empirically determined for the range ofmanual operations necessary to assemble a particular product.

All three forms of work measurement for arriving at a standard time would normally makeprovision for relaxation, contingency and special allowances, particularly in factories whereincentive schemes were negotiated by trade unions (Carew 1987:155). Generally, theprinciple was established that piecework bonus would be plus 33% of the basic minimum ratefor the achievement of 100 performance.4 Traditionally then, on piecework systems, the BaseRate or Minimum Fall Back Rate* would be set at 75 performance.

So what has been the impact of international outsourcing on the practice of costing, andlabour costing in particular? A handful of branded manufacturers - Levi Strauss & Co andTriumph International for example have retained in house industrial engineering expertise,but as the process of international outsourcing transformed the nature of the industry andbrands, retailers and supermarkets have entered the global apparel market and establishedbuying functions, their lack of experience in the production process is evidenced by theiroverall approach to the negotiation of a garment contract price. For global buyers, thetraditional approach has been to consider the costs which make up the Freight on Board(FOB) or ex factory price5: fabric, trim, packaging and the manufacturing cost often referredto as CM (cut make) or CMT (cut make and trim cost). CMT is a term used to describe thedirect and indirect labour assembly costs, factory overhead and supplier profit. From what isknown, the direct and indirect labour cost, often referred to as the ‘make’ element, is onlyrarely quoted as a separate item.

In the case of a brand, where the focus is likely to be on quality of fabric and, where the priceof the fabric (itself a matter of negotiation between the textile supplier and the buyer) will beproscribed to the supplier and identified as such in the commercial contract, sourcingcompanies focus much more in the negotiation with a supplier factory on the CMT element inthe price. As David Birnbaum has commented, this breakdown of FOB into fabric + CMTcame about when garment importers moved from "buying" to "sourcing":

When garment buyers relied on the factory to provide the complete product, they wereinterested in the lowest FOB price. However, this changed when importers began to

4 Interview with Derek Cattell – former NUTGW/GMB full time officer and works study tutor. See also Article13 of the Ladies Apparel Contractors’ Association and the United Better Dress Manufacturers’ Association andthe International Ladies Garment Workers Union (Forerunner of UNITE) 1989-1991 p.12 See also Section 15sub section 5b of the regional framework agreement for the Textile and Clothing industry of BadenWuerttemberg 1984-to date (which provides for a 15% minimum production bonus vis a vis non PBR worker).5 Some buyers prefer to CIF (Carriage, Insurance, Freight in addition to the FOB or LDP – landed duty paid.)

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"source" garments, i.e. break the garment down into a series of material and processes.As the process of sourcing developed under the Quota system, the importer began tonegotiate the fabric directly with the textile mill leaving the factory to simply buy thematerial from the designated mill at a previously agreed price. (Birnbaum 2008: 17)

This has left CMT as the only area where the importer/buyer negotiated with the factory.Here is what one UK industry practitioner has to say:

Most companies negotiate using historic data….Example you made that shirt forUS$2.00 - make this one for US$1.90. Very little science goes into the negotiation& certainly 90% of companies that work this way will not give a toss on what thelabour rates are in the factory, as long as the external audits do not put them underthe country laws of paying the “minimum wage”6

This appears to be borne out by a survey of leading high street fashion retailers and brandowners undertaken during the first quarter of 2010. The results are reproduced in Table 1below:

6 Email correspondence with Derek Boyden

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Table 1: Labour Costing practice in selected UK High Street Retailers

Company A B C D E F G

Marketsegment

Fashion retail Women’s fashion Fashion retail Fashion andFashion accessories

Casualwear Retailer Fashion retailer

Is CMT brokendown

No No No No Yes No

Open bookcosting

Moving slowlyto this in somecases .

No No No Yes but CSRnot totally clearas to its extent

Yes – moving towardsthis but still no infoprovided by supplier onmargins

Yes

Calculation oflabour cost

No No No No Yes aspired No

PMT used No Yes in some CMTfactories but data isnot supplied

Productionengineers inowned factory

No No own workstudy in hubs

yes No

Which system isused e.g. GSD

GSD

Dialogue withproductionengineerswhere known

None None Some in a keysupplier country

None

Yes In pilots None

Any dialoguewith these onlabour costs

No No, discussions takeplace with the salesperson or factorymanager.

No Yes No

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With the exception of one retailer, which was attempting to break its CMT costs down intodirect labour, social costs, factory overhead and factory margin, most respondents were notengaging in any labour costing per se, nor was there any dialogue between buyers andproduction engineers in supplier companies where they existed.

The Supplier end

There is no authoritative study on the extent of industrial engineering in the supplier countriesof the world’s apparel industry. One investigation which took a critical look at productionmanagement in apparel manufacturers in Commonwealth countries, found that almosteverywhere, production management and industrial engineering capabilities needed to beupgraded (Lezama et.al. 2004:164) and that with the exception of the majority of factoriessurveyed in Sri Lanka, most suppliers in South Africa, Bangladesh and Mauritius reported theuse of time studies to determine the standard minute value (SMV) in order to evaluate directlabour costs rather than benchmark against external PTS standards, (2004: 115). InCambodia, a USAID study on competitiveness of the apparel sector discovered that nofactories were generating their own standard times (2005:21). Crucially, whilst a companylike GSD (Corporate) Ltd. which specialises in PTS, can report an increase in the number ofmanufacturing clients which are turning to predetermined time studies to generate theirSMVs, the number of brands and retailers which have embraced this approach to informlabour costing and garment pricing is currently negligible - a situation consistent with thesurvey data reported above.7 Against this backdrop suppliers who maybe using more‘rigorous’ forms of labour costing, are happy to negotiate a ball park CMT price, lest theydisclose sensitive costing data to the buyers. As a former international buyer and supplierhas commented:

Larger manufacturing groups have their own production engineers who will knowthe precise labour minute values on their garments but may not disclose this to thebuyer because they may seek to push this down so they will resist trying to giveall the information to the buyers, or will not give the correct information8

Some buyers have resorted to the one-sided practice of requiring that their suppliers ‘opentheir books’ during price negotiations, a practice which some observers see as naked powerplay in an attempt to drive prices down. (Lamming et.al. op.cit: 558) In such circumstances, itis argued, suppliers may have no other option but to ‘hedge’ by distorting their figures.Consequently FOB and CMT negotiations can remain somewhat of a crude ‘cat and mouse’exercise, (Lamming et. al 2005; SOMO 2003) as buyers continue to drive the market (Gereffi1999) and their purchasing practices are based on target margins.

Here is what the General Secretary of the Garment Manufacturers of Cambodia (GMAC) hasto say:

The buyers nowadays come to us with the specifications of the garments theywant produced.......what generally happens is that the factories are given a CMTprice as a lump sum value and the factories are left to manage it as they like. Inthis case, there is some haggling and negotiations about providing a longerstandard time in order to get a higher CMT price. In most cases however, there is

7 Interview with Paul Timson Managing Director of GSD (Corporate) Ltd.8 Interview with Sean Chiles

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just a negotiation to obtain a higher CMT price without much reference to thestandard times. ... We are left to manage our own costs and the buyers generallyadopt a take it or leave it attitude when it comes to the price they provide to us. 9

Suppliers may thus end up selling to a buyer at a cost that is later found to be unachievable,the consequence of which may be either a reduced wage bill or profit margin or both and anunachievable delivery schedule based on the existing available capacity. This in turn can leadto low wages and excessive overtime – the former to protect reduced profit, the latter toensure that delivery is made on time, regardless of the social consequences of long workinghours. Others will have the work undertaken in another factory –a move likely to constitute abreach of the commercial contract or code of conduct provision.

Here is what one industry expert has to say:

Traditionally, the discussion between buyer and supplier has been about “cost”,but without accurate assessment of time, cost cannot be accurately quantified.Additionally, without accurate time standards, production output and efficienciescannot be effectively assessed and delivery schedules are therefore all butimpossible to judge10.

Towards Sustainable Labour Costing - Making human labour as important as fabric

If buyers are serious about the commitments they undertake in their codes of conduct, thenthere is a responsibility to ensure that provision is made in the FOB or CMT price to coverthe prevailing wage and moreover a living wage labour cost. In the same way that fabric canbe costed out, and rendered as a dedicated and contractual cost item in the price negotiationof every garment bought, so too is it possible to ring fence the cost of labour in a pricenegotiation. It is necessary therefore to consider the processes by which such an exercisecould be undertaken.

If a buyer is to engage in sustainable labour costing then some form of, and thereforefamiliarisation with PTS will be necessary, particularly where there is no existing in houseindustrial engineering expertise. Companies such as GSD have standard minute valuescalculated for garment basic styles and new styles would need to be added to the centraldatabase as these are worked out in conjunction with a specific supplier. Figure 2 belowshows a costing sheet containing standard minute values for the labour input required for astandard 5 pocket western style jean. The remaining data fields would need to be enteredfollowing dialogue with the respective fabric suppliers and the assembly factory in question.GSD refer to this process as ‘fact based negotiation’11. In this example, the SMV for thedifferent sets of operations required to assemble a pair of jeans totals 20.737 minutes. Thistime however is synthetic in that it relates to the average or ‘virtual’ factory environmentbased an extensive sample of processes, physical environment, equipment and technology,and workers’ remuneration observed in a range of manufacturing organizations. Earlysupplier assessments prior to establishing a commercial relationship ought to yield sufficientinformation to enable an assessment of a factory’s ability to achieve PTS standards.

9 Email correspondence with Ken Loo, General Secretary of the Garment Manufacturers Association ofCambodia 7.12.200910 Paul Timson, General Sewing Data11 Interview with Paul Timson, GSD

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Figure 2: Costing – SMV for a 5 pocket western Style Jean

Courtesy GSD

A critical variable in all of this is the level of factory efficiency: that is the number of piecesassembled in the time available in the hour, taking into consideration any “downtime.” It isimportant to note that in work study parlance, ‘efficiency’ and ultimately productivity (theamount of output per unit of input (labour, equipment, and capital), is the responsibility offactory production management and not the worker. (Bheda 20002:8) There are widevariations of efficiency and varying interpretations of efficiency across the industry. The twosuccessive USAID Reports on Factory Competitiveness in Cambodia for example revealedvariations in factory efficiency of between 35% - 80% of international standard times(2005:28; Nathan Associates, Werner International 2007). Adjustments to the SMV forvariations in efficiency can be calculated using the following formula:

(SMV/Efficiency) x 100

So, for example, for a 5 pocket western style jean

Process Standard Minute Value @ 80% factoryefficiency

*@35% factoryefficiency

Total 20.737 25.921 59.248

Case Study: Towards a Living Wage in Cambodia

Cambodia is a particularly instructive case. In 1999 the US-Cambodia Bilateral TextileAgreement linked quota access in the US market to factories' compliance with international labourstandards, as monitored by ILO sponsored ‘Better Factories Programme’ (now the ILO/IFC Better

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Work Initiative). The Cambodian apparel industry has proved resilient in the wake of the removal ofQuota in 2004/8 but workers in the sector have baulked at the declaration this summer of a newmonthly minimum wage of $61, engaging in a series of strikes12 to force the government and theemployers to increase the NMW to a living wage target of $93

13. Since the internationalcompetitiveness of a sector can appear to be compromised by a substantial hike in the NMW, (Miller2009) the responsibility for a wage increase must be shared by those buyers who choose to sourcefrom the country. An increase can only be achieved in any systematic ongoing way through the FOBwhich in turn means that a calculation will be required for each style ordered. Let us consider how thismight unfold in placing an order for the above western style jean Cambodia, were a buyer to make aneffort to address the living wage.

Example: Western 5 pocket jean made in Cambodia

Working on the basis of a 26 day month, the number of minutes a worker would haveavailable equals

26 days x 8 hours x 60 = 12480 minutes per month

The buyer must establish the existing prevailing wage and pay elements in the supply factoryin question in Cambodia. Using data from the USAID Cambodian study (Nathan Associatesand Werner International op.cit) we see that as at 2007, the average cost of labour was $78.97including hourly rate and benefits, and overtime. See Table 4 below. However, in order toarrive at the basic earnings, it is necessary to subtract the overtime figure from the total toarrive at a standard remuneration figure for a basic week/month. In this case there is noincentive scheme, but other elements (attendance allowance, a seniority bonus and holidaypay) which make up the wage and would need to be factored into the calculation where theyexist.

$78.97 – $16.29 = $62.68 (monthly minimum)

Thus for the factory to be in a position to meet its current obligations under a buyer code ofconduct, the unit labour cost would need to be:

62.68/12480 = 0.005 (US$ cents) x 25.921 @ 80% efficiency = 13cents

62.68/12480 = 0.005 (US$ cents) x 59.248 @ 35% efficiency = 29.9 cents

12 www.just-style.com Cambodia: Talks to resolve pay dispute make slow progress http://www.just-style.com/news/talks-to-resolve-pay-dispute-make-slow-progress_id109061.aspx last accessed 4.10.201013 Chandararot K. & Dannet L. 2009 Living Wage Survey for Cambodia’s Garment Industry, CambodiaInstitute of Development Study/Friedrich Ebert Foundation/ITGLWF-TWARO (Asia Region) p.25

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Table 4: Wage breakdown in a Cambodian factory

MonthlyBase

Rate(US$)

Days/Month Hours/YearDaily Hourly

a) Base Rate 50.00 26 2496 1.92 0.240

Attendance Pay 5.00- -

0.19 0.024

Seniority Pay 4.00- -

0.15 0.019

b) Base rate w/attendance and seniority 59.00 26 2,496 2.27 0.284

Holidays (23 days per year) - -1.9 -184 0.18 0.023

Vacation (18 days per year) - -1.5 -144 0.14 0.018

c) Adjusted for vacation and holiday 59.00 22.6 2,168 2.61 0.327

Overtime (1.5 x base rate x 2 hours 16.29 5.6 542 0.05 0.007

d)Average Monthly Pay with overtime 75.29 28.2 2,710 2.67 0.333

Holidays 11.5 x 2 x base rate 3.69 1.0 92 0.04 0.005

e)Total including holiday compensation 78.97 29.2 2,802 2.71 0.338

Source: Nathan Associates/Werner International 2007

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Ring fencing the labour cost would thus force the supplier to address the issue of how thefactory is operating since the basic minimum wage would be the same regardless of factoryefficiency.

What are the cost implications of moving to a living wage? If the monthly living wage figureof $93 is divided by the available worker minutes in a month, one arrives at a figure of:

$93/12480 = .75 cent per minute14

If this figure is then multiplied by the number of minutes required to make the garment @agreed efficiency, then the unit labour cost would be

e.g. 20.737 minutes x .75 @ 80% efficiency = 19.3 cents and 44 cents at 35%efficiency.

To this would need to be added a percentage for social costs where such are paid, to arrive ata labour cost per garment which equated to a living wage. Significantly, the magnitude of thelabour cost to both a buyer and supplier would hinge on the level of efficiency in the factoryand not upon the level of wages switching the attention back on to the issue - long recognisedby stakeholders- of the need for effective management and management systems in supplierfactories.

Impacts

Sustainable labour costing would require a change in existing practice which involves aseparate itemisation of the full unit labour cost in any commercial contract between buyer andsupplier as a non negotiable item alongside fabric. What would be the implications of such aninitiative e for price, compliance, and the buyer-supplier relationship? A critical impactquestion for both the sourcing company and the supplier relates to the means by which anincrease in the unit labour cost is to be funded. Assuming adoption of the policy of ring-fencing the labour cost component of the FOB, the buyer would have at least five (notmutually exclusive) options here. Firstly, they could pass the increase on to the consumerthrough a marginal increase in the retail price (Pollin et.al 2004)15. Secondly, they couldabsorb the increase and take a hit on margin. Thirdly, they could absorb the increase but seekto pay for this through supply chain efficiencies rather than squeeze profit (ETI PurchasingPractices 2007). Fourthly, they could insist on the supplier absorbing the increase in whichcase the factory management would have to absorb a reduction in profit to cover theincreased labour cost. Fifthly, they could work with the supplier to increase productivity andefficiency to improve throughput and, by committing increased volume, enable the supplierto absorb this extra cost through factory efficiencies. Some UK fashion retailers e.g. Marksand Spencer (ETI Wages Action Forum Notes Jan. 21 2010.) and New Look (New LookWages Project Update January 2010) are already moving down this productivity path, and

14 rounded to the nearest decimal point15

There is some debate how marginal this increase would be. As Table 6 shows this would vary between 1 and3% in Bangladesh on certain garment categories. However, percentage add-ons as the garment passes throughintermediary stages before landed duty paid stage might inflate the FOB. (Miller and Williams 2009).

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New Look has marginally increased its unit price by 4 cents to assist one of their strategicsuppliers to achieve this16.

Since there will be an inevitable discrepancy between SMV and factory efficiency, moving tosustainable labour costing will require more transparency in buyer/supplier transactions.What is effectively ‘open book costing’ will require integrity measures on the part of buyerssuch as price increases, long term supply agreements and the offer of productivity expertisewhere available. A productivity/efficiency enhancement programme coupled to the deliveryof a living wage ought to accelerate a process already underway in some parts of the globalindustry of consolidation and upgrading of machines, methods and materials most certainly inthose companies on their way to full package.

16 Letter to ActionAid dated 19.01 2010

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Table 6: Impact of a Living Wage increase on FOB on selected garments made in Cambodia (allowing for efficiency)

17 Industry figures18 Courtesy GSD19 Figure in brackets @ 35% efficiency)20 Figure rounded up and excluding overtime

Garment Style FOB$17

SMV18 @ 80%efficiency

@35%efficiency

Currentminimum

wage

Unit labour cost tocover current

Minimum Wage plusadd-ons

NMW/12480 x SMVin $ @ 80% efficiency

CurrentLiving Wage

demand(Monthly)

Living Wage Unitlabour cost

FormulaLW/12480 x SMV in $

@80% efficiency19

AdditionalCost to

buyer ofcosting ina livingwage

Men’s Polo 2.05 15.323 19.15 43.78 $6320 9.6 cents (22 cents @35% efficiency) $93 14.27 cents(32.62

cents)5 -10cents

Men’s FormalShirt

9.58 22.091 27.6 63.117 $63 13.9 cents(31 cents@ 35% efficiency) $93 20.5 cents(47 cents) 6 -16

centsMen’s western 5

pocket jean11.63. 20.737 25.9 59.248 $63 13 cents (29.9 cents

@ 35% efficiency) $93 19.3 cents (44 cents) 6.3 -14cents

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Towards a new buyer incentive scheme

Ring fencing labour cost will require a significant adjustment on the part of buyingdepartments and probably a greater role for merchandisers. Software systems will need to beput in place to enable swift inputs of SMVs, factory efficiencies and local remunerationpackages. One challenge is likely to be the impact of fast fashion retailing on the number ofSKUs and changing styles but as buyers engage with PTS companies which in turn areengaging with workers and their organisations to determine new SMVs for new garment styleso the compendium of SMVs can be expanded21. To take the Polo shirt as an example, theSMV of 15.323 quoted in Table 6 above is for a basic polo shirt whereas a heavily styledgarment with an intricate neck construction and considerable topstitching would carry anSMV of 20.587.22 However in the same way that buyers and merchandisers have to keeptrack of material costs, so too should they maintain and update a database of minute valuesand labour costs for the factories in their respective sourcing countries.

Ethically conscious sourcing companies could drive this development with a newbuyer/merchandiser incentive scheme with an initial bonus awarded for ring fencing a livingwage figure into a commercial contract but payable only on receipt of such verification dataconfirming that workers were not only being paid a minimum but also a living wage.

What will clearly facilitate this process will be the existence and implementation ofcompatible work measurement and time analysis systems by both a buyer and supplier in thesame chain so that predicted SMVs by buyers could be verified using the same tools formeasuring efficiencies in factory. GSD appears to be the PTS provider which is most knownby Brands/Retailers in the UK at the present time and would offer a common language, andthereby a technique, for the ethical establishment of auditable time/cost benchmarks whichhopefully would form the basis of more transparent and achievable production targets,payment schemes and production planning in the future. Significantly, Marks and Spencerwhich has been working with GSD with its model factories in Bangladesh has announced inits Plan A commitments for 2010 to 2015:

Implement a process to ensure our clothing suppliers are able to pay workers afair living wage in the least developed countries we source from, starting withBangladesh, India and Sri Lanka by 2015. We will achieve this by ensuring thatthe cost prices we pay to our suppliers are adequate to pay a fair living wage andby rolling out our ethical model factory programme to ensure the cost pricebenefits are paid to workers.

However, successful implementation will depend crucially on worker involvement and it is tothis point that we now must turn.

A Route Map?

If we assume that those companies which are committed to delivering a living wageestablish and ‘ring fence’ a sustainable labour cost in the pricing of a garment, how would

21In Australia, where the retailers negotiated a Homeworkers’ Code of Practice with the Textile, Clothing and

Footwear Union of Australia in 2008 and received Government backing to promote the Code, the parties to theAgreement are using a jointly agreed Product Sewing Time Manual as a reference point to ensure that the thosehomeworkers in clothing and footwear in Australia are not cheated out of their wage entitlements22 Figures provided courtesy of GSD Corporate Ltd.

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anyone know that this had been passed on by the supplier given the privacy of commercialrelationships between buyer and vendor? Most certainly for the fashion retailers in the UKsurveyed in this paper which are keen to escape the moral gaze, one would expect a publicdeclaration that a company was indeed now paying a living wage as per the procedureoutlined above. Moreover a disclosure to this effect with specified amounts would need to bemade to the workforces in question. This could be done periodically or on an annual basis,and constitute part of the ‘pot’ from which any pay improvements could be financed bycollective bargaining where trade unions exist.

However, in non union environments it is difficult to envisage how sustainable labour costingcan work without the issue of efficiency (systems of production management and workplaceindustrial relations) being addressed by collective bargaining, where a workplace union hasaccess to the technical expertise of an outside trade union. Where unions do not exist, buyersand factory management should publically reiterate the guarantee of non victimisation in theevent of joining a trade union in line with the freedom of association and collectivebargaining statements of principle found in the respective codes of conduct of fashionretailers addressed in this paper (ITGLWF 2010). Workers and worker representatives willrequire access to expertise on productivity bargaining in clothing manufacture from aworker/trade union perspective. A challenge for the trade unions in the developed (buying)countries will be to harness the learnings made under collective bargaining prior to theaccelerated migration of production under the Multi Fibre Arrangement and to disseminatethese across the supply chain before they are lost as full time officers and workplace unionrepresentatives retire. Democratically elected workers or employee committees will not beprivy to this expertise and moreover will fail to satisfy freedom of association if they areprevented from affiliating with the broader trade union movement.

One potential stumbling block remains. Where sustainably costed transactions are isolatedoccurrences in a multiple buyer make-to-order environment, how would the principles ofequity and fairness prevail when only certain workers on lines dedicated to ‘sustainablycosted’ apparel would theoretically have access to a ‘living wage’? (See Miller & Williams2009). Providing workers can rotate on such work, annual negotiations or distributions of theliving wage bonus could thus apply to the whole factory.

Conclusions

On the evidence presented in this paper, it would appear that there is an absence of preciselabour costing on the part of buyers and widespread variation in the ways in which labour ispriced at the supply end in the global apparel industry. In an environment where both buyerand supplier aim for target profit margins, pay and working conditions (and with that, socialcompliance), are left compromised leading to potential code violations in other areas.Although the absence of labour costing at the buyer end can be explained in part by theoutsourcing of manufacturing, it is possible to reinstate elements of the function ofproduction management at buyer level in an effort to address this issue. When allowance ismade for factory efficiency, incentive, and any existing local factory payment system, it ispossible to calculate a labour minute value for any garment, which also incorporates a livingwage element. Such ‘fact based negotiation’ must involve a shared understanding on the partof a sourcing company, its supplier, and the supplier’s workforce of agreed standard minutevalues for garment styles and components and an assessment of the factory’s efficiency. It ispossible to determine and ‘ring fence’ the agreed labour cost and to make this an explicit partof the commercial contract between the buyer and the supplier, in the same way that fabric is

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itemised in CMT negotiations. Such an initiative will require a high degree of transparencyand openness between sourcing companies and their suppliers, and is likely to succeed in thefirst instance in those manufacturers which are considered to be strategic partners by theirsourcing companies. Since sustainable labour costing is likely to lead to a more intensiveassessment of factory productivity, efficiency, and production incentives on the part ofsuppliers, worker involvement in this process is crucial. However, the continuing blind spotin relation to freedom of association and collective bargaining across much the industry doesnot augur well for the implementation of such an initiative

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