Strong, direct-sourcing relationships help control supply chain risks

One solution to supply chain risk management challenges posed by suppliers in Bangladesh that subcontract work to other manufacturers is direct, strategic sourcing in which companies form a long-term partnership with suppliers, according to a recent study.

In the April study “Business as Usual is Not an Option: Supply Chains and Sourcing after Rana Plaza,” by the Center for Business and Human Rights of the Stern School of Business of New York University, the authors noted a direct model leads to better working conditions by prioritizing transparency and long-term commitments in a mutually beneficial relationship between buyer and supplier.

The direct sourcing model is becoming common in footwear production and is spreading into the apparel sector, according to the report that was based on fact-finding missions in Bangladesh, a gathering last September with 60 “key players” in the garment industry, and interviews with 100 people in the sector in Bangladesh and the United States.

“In the broader supply chain, buyers adopting this approach tend to be those that are most concerned with brand reputation, quality, research and development, and stability in their supply chains,” according to the analysis.

Significant elements of such a direct sourcing model include:

• Long-term order forecasting in which the buyer provides the supplier with a multiyear perspective on expected order volume, and the buyer and supplier agree on quality, delivery and price expectations during the period.

• A longer-term commitment that gives the supplier the security to invest in technology, training and facilities to improve efficiency.

• Purpose-driven compliance monitoring in which suppliers audit their own performance against social and environmental metrics, which the buyer spot-checks using a collaborative approach to remediating shortcomings.

• Trust-based negotiations around unexpected challenges in which the buyer and supplier communicate transparently and work to correct the root causes of those problems.

• Buyers provide incentives for the working conditions and other outcomes they want, rewarding high-performing suppliers with longer-term contracts, higher order volumes and favorable pricing.

“Being willing to work on challenges in a long-term, strategic relationship between buyers and suppliers represents a different way of doing business, in Bangladesh and throughout the supply chain,” according to the report. “Subcontracting can be a healthy part of this model, as long as it is transparent and conducted with oversight from a combination of the "mother' factory, the buyer and the government.”