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Bangladesh factory collapse prompts retailers to take steps to reduce risks

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In the months since the collapse of the Rana Plaza factory building in Bangladesh, groups of apparel retailers in Europe and North America who sold products manufactured in the facility took somewhat different approaches in pacts intended to improve safety in Bangladeshi factories, though both plans can prove beneficial, supply chain experts say.

A flaw in both plans, however, is their focus solely on Bangladesh rather than including some of the other low-wage countries from which those companies source products, according to some of those same experts.

The April factory collapse killed 1,129 and led to reports of similar poor conditions at other Bangladeshi factories, prompting the retailers' response. The results were the Accord on Fire and Building Safety in Bangladesh, which had drawn a mostly European group of 85 companies as signatories as of late August, and the Alliance for Bangladesh Worker Safety, to which 17 North American retailers signed on.

The U.S. retailers' reluctance to join the European pact stemmed from the European accord's dispute resolution provision, which provides that disputes between parties under the agreement would be presented to a steering committee and that decisions of the steering committee could be appealed to a binding arbitration process, with arbitration awards enforceable in the signatory's domicile.

“That is what the American retailers didn't like,” said Andy Shanahan, director at Aon Fire Protection Engineering Corp. in Boston.

“I would say that the European strategy is strong and if the American one is followed up with, that should be beneficial,” Mr. Shanahan said.

Gary S. Lynch, managing director and global leader of risk intelligence and supply chain resiliency at Marsh Inc.'s risk consulting practice in New York, said the European accord's approach is very much in keeping with the E.U. approach to other risk-related regulation, citing Solvency II and the Basel bank supervision accords as examples.

“It always seems that when we have these challenges ... certainly the European approach tends to be more governance-oriented where there is a governance structure set up,” Mr. Lynch said. “It seems to be a common denominator of any kind of (European) risk regulation.”

The possibility of stronger market consequences than their North American counterparts might face also drove the details of the European plan, according to David J. Closs, John H. McConnell Chaired Professor of Business Administration in the Department of Supply Chain Management of the Eli Broad School of Business and the Eli Broad Graduate School of Management at Michigan State University in East Lansing, Mich.

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“The Europeans have a much stronger commitment to sustainability, and that's been true for several years,” with one aspect of those sustainability discussions centering around social responsibility, Mr. Closs said. “In the U.S., there isn't that strong a market push,” he said. “That being said, (in the U.S.) you have a much stronger legal system push,” leading many U.S. retailers to balk at the legally binding nature of the European pact.

Aside from the legally binding aspect of the European plan, both pacts are fairly similar, providing for inspections of Bangladeshi factories and mechanisms for making necessary improvements, experts say.

While he thinks the European and North American retailers' approaches to Bangladesh factory safety could be successful, Aon's Mr. Shanahan said, “I would say that if there are any problems, it's that they are focused on Bangladesh while there are other countries that have concerns.”

“There's a focus on Bangladesh while there could be and should be a focus on other low-cost countries,” said Andrew Hersh, a director at Aon Global Risk Consulting in New York. “The reason there's a focus on Bangladesh is retailers are concerned about their reputations.”

Reputation risk clearly was a factor on both sides of the Atlantic in addressing poor conditions at Bangladeshi suppliers' facilities, various experts said, and the catastrophe in Bangladesh heightened the issue of reputation risks in supply chains for many companies.

“What we're seeing within our client base of retailers globally is a trend toward increasing visibility and controls within their supply chains, especially with suppliers in low-cost countries,” Mr. Hersh said. A best-in-class retailer is considering the cost of risk as they evaluate suppliers in low-cost countries and “really looking at the top-line impact of reputational issues that can be caused by the lack of visibility into the operations of their low-cost suppliers,” he said.

“Clearly, they've seen the reputational fallout,” said Tom Teixeira, partner in Willis Group Holdings P.L.C.'s Willis Group Solutions consulting unit in London. “There's a need to manage reputational issues as well as the sustainability issues.”

Addressing those reputation and sustainability issues along the entire supply chain can be difficult, Mr. Teixeira said, but more companies are trying to do so. “The supply chain can go down to six tiers, and that can be a real challenge to understand what's going on, particularly beyond Tier 2,” he said.

“At Tier 6, you might have a manufacturer of a dye that's used in the manufacture of a shirt or belt,” Mr. Teixeira said. If that dye manufacturer is operating in an area of serious water pollution or water scarcity, it could cause reputational problems for the company whose products use that dye, he said.

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“I have heard some people say, "I look at the labels now and if it's made in Bangladesh I won't buy it,'” said Linda Conrad, director of strategic business risk for Zurich Global Corporate, a unit of Zurich Insurance Group Ltd. in New York. “I think the bigger issue is the reputation side of it.”

“I met with the risk manager of a very large company who didn't know that their products were made in that factory,” Ms. Conrad said, emphasizing the need for companies to achieve visibility further along the supply chain.

When such risks aren't properly managed, “they get completely out of hand and into society's hands,” Ms. Conrad said. “When that happens, all bets are off,” she said.