Purchasing practices: go beyond pay to deliver real benefits

Purchasing practices have been specifically highlighted in the OECD Guidance for Garment and Footwear as a key risk factor in the fashion sector and companies are asked to “prevent contribution to harm through responsible purchasing practices”.*

The OECD here is hitting the nail on the head. Poor purchasing practices exacerbate poor jobs for workers, limit the ability of factories to invest in the workplace and fundamentally undermine responsible sourcing and sustainability activities.**

However, too often, improving purchasing practices is narrowly interpreted to mean brands providing more money to suppliers with whom they have contractual relationships. This is incorrect and needs to be challenged: purchasing practices covers a wide range of activities that don’t necessarily (and often shouldn’t) require more money to be spent.

Price increases only deliver beneficial outcomes as part of a wider strategy

We will use a case the Kumi human rights consulting team has experienced to illustrate this. A medium-sized luxury fashion brand was struggling to convince their suppliers that workers should be paid at least local minimum wages. The solution, as requested by suppliers, was an initial flat price increase. Wages didn’t increase in many of the suppliers (and in some, the additional money just disappeared).

However, the company had anticipated this may happen and had already thought of the next steps: regularly visiting suppliers to monitor workers’ pay and hours data, developing personal relationships with managers and workers, providing incentives for leading suppliers (such as productivity and efficiency training), and ensuring those suppliers that didn’t engage knew they risked pushed out of the chain.

Once it became clear to suppliers that the brand was in for the long haul and that designers and senior leadership were invested in the approach, the needle shifted and workers’ pay increased. This didn’t take very long; 12-18 months for the first big changes to be identified.

Further, additional benefits became clear as the programme progressed. Managers, supervisors and workers felt empowered by the fact the brand was willing to listen to their challenges and offer support and advice and were excited by the opportunities to develop their skills.

Improving purchasing practices without increasing costs

We recognise that not every brand may be able to roll out an approach as complex as the one cited above. However, every brand can (and should) deliver steps to understand, manage and mitigate harm being caused by the ways they are purchasing. These include:

  1. Building long-lasting supplier relationships that are not purely transactional in nature, in order to engage suppliers and achieve candid discussions around prices.
  2. Tracking of specific indicators (such as average lead time, numbers of orders changed etc.).
  3. Delivering assessments of internal teams’ ways of working to determine where improvements can be made and using the findings to change ways of working, including setting up red flag systems for purchasing teams, developing internal knowledge of the ripple effect of poor purchasing practices, and working with designers to ensure they understand how their decisions affect the supply chain.
  4. Developing pricing models to determine what the gap may be with a ‘fair price’ and then identifying non-financial ways the gap could be closed (i.e. through productivity improvement programmes, capacity building, etc.)
  5. Delivering capacity analyses at factories to understand true capacity and ensure that there is a monitoring system at company headquarters to track order placements.
  6. Making small changes to contracts and relationships with suppliers, such as reducing payment terms (a significant boost for company cash flows), agreeing final order placement dates or optimising the sourcing base to handle fluctuations in capacity.

If you’d like to know more about how Kumi can support you in strengthening your company’s approach to responsible sourcing and sustainable development, please get in touch.

*See p69 in the OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector.

**For reference here, we recommend Human Rights Watch’s report Paying for a Bus Ticket and Expecting to Fly and the work of Better Buying.

Photo credit: US Embassy, Phnom Penh