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Local Impact of Retailer-Driven Garment Supply Chains

Local Impact of Retailer-Driven Garment Supply Chains

A sample survey of the Bangalore-based suppliers of ready-made garments to Wal-Mart Stores and other corporate retailers, together with meetings with some of their workers suggests that, among other ways, these suppliers deal with the tendency of declining profit margins by paying abysmally low wages and obliging the workers to undertake unpaid overtime work. Indeed, cheap, skilled and docile labour is the main source of competitive advantage of such suppliers in large retailer-driven global commodity chains.

COMMENTARY

and Europe, but source them from India;

Local Impact of Retailer-Driven more such supply chains are expected. Indian brands are close on heel in creating

Garment Supply Chains their own supply chains. The list of clients of the Bangalore RG industry is impressive and includes many well known foreign

anuradha kalhan and Indian brands like Arrow, Allen Solly,

A sample survey of the Bangalorebased suppliers of ready-made garments to Wal-Mart Stores and other corporate retailers, together with meetings with some of their workers suggests that, among other ways, these suppliers deal with the tendency of declining profit margins by paying abysmally low wages and obliging the workers to undertake unpaid overtime work. Indeed, cheap, skilled and docile labour is the main source of competitive advantage of such suppliers in large retailer-driven global commodity chains.

Anuradha Kalhan (a_kalhan@rediffmail.com) teaches economics at Jai Hind College, Mumbai.

Economic & Political Weekly January 26, 2008

W
hat is the impact of global sourcing on the business strate gies, technology and practice of human resource management of local suppliers? To throw light on this question, we reflect on the organisation of manufacturing of ready-made garments (RG) for global supply-chains in the city of Bangalore.

Sourcing from Bangalore

Within India, the city of Bangalore is by far the fastest growing RG source with a robust fabric feed from textile centres like Coimbatore, Salem and Erode. There are about 1,800 to 2,000 garment units in Bangalore, which account for 30 per cent of the country’s apparel export pegged at Rs 400 billion ($ 8.5 billion).

The firms in the RG sector can be roughly ranked in three tiers. The very large scale firms are vertically integrated from yarn to retail operation and produce for their own or licensed foreign brands, e g, Raymond, Arvind and Century. Large and medium size factories are suppliers to well known Indian and foreign brands like Nike, Reebok, Adidas, Columbia, Wal-Mart, Marks and Spencer, Gap, Levis, and Polo. Many are capable of augmenting their workforce to two-three times the normal and also operating multiple shifts. The smaller factories either subcontract for large firms or manufacture for the local unbranded garment market. The Gokuldas group, owned by the Hindujas, is organised in over 50 units, while Texport, owned by the Goenkas, has over 29 units spread over Bangalore alone. The Leela group similarly has over 10 units.

Cotton garments lead in market share at 65 per cent while the blended follow at 35 per cent. Seventy per cent of the production is for domestic markets and the remaining 30 per cent for export, which is handled mainly by the organised large-scale sector producers. The leading American and European brands design their garments at their headquarters in America Wrangler, Van Heusen, Louis Phillipe, Park Avenue, Zodiac, Lee, Excalibur, Flying Machine, Ruf n Tuf, Newport, Peter England, Louis Straus, Stencil, Rod Lever, Raymond, Vimal, JohnMiller, Playboy, Chirag Din, Double Bull, Weekender, Lacoste, Benetton, Tussady, Scottish Weave, Cabal, Old Trafford, San Frisco, Byford, Tamarind, VIP, Rivolta, Lovable, Daisy Dee, Parx, Blackberry’s, Reebok, Gap, Mexx, Wills Lifestyle, Tommy Hilfinger, Nike, John Player, Westside, ITC, Wal-Mart brands, and so on.

A survey in 2005 found that most Indian and global apparel retailers, both organised and unorganised, now prefer to source their products in India. Many of the importers maintain a centralised merchandising office in India, appoint contract manufacturers for their own brand, and manage inventory for the other brands that they stock [Mukherjee et al 2005]. Contract manufacturers are producers who produce goods according to the specifications of the organised retailers and are sometimes provided material and technical support by the retailers. The producers mostly provide labour and expertise in tailoring, packaging and ready-for-retail services. The professionals at the central merchandising office of these retailers place orders as per product and brand specifications and negotiate for price, quality, delivery dates, and so on [Mukherjee et al 2005]. Growth of organised retailing is gradually eliminating all the wholesalers and intermediaries from the market. Global outsourcing with its prime focus on optimisation, flexibility, cost, and management of the vending and supply chain has gradually replaced manufacturing as a core economic activity. Manufacturing and the associated labour processes are becoming vulnerable to rapid relocation and just-in-time supply requirements of global retailers [Cisel and Smith 2005]. It now takes only three months to start up a new large-scale garment producing unit.

COMMENTARY

Big Indian textile firms have an established presence in the export market and are in the process of upgrading their production capacities to cater to higher global demand. Arvind Mills, one of world’s largest denim manufacturers, has set up an 18,000 pieces-a-day shirt factory in Bangalore and is in the process of opening another factory with a capacity to produce 20,000 jeans a day. India’s biggest textile manufacturer, Raymond has built a plant in Bangalore to turn out 1,370 suits a day [Mukherjee et al 2005].

Some prestigious foreign brands like Adidas, Reebok, Calvin Klein, Marks and Spencer and Next, have recently established their presence in Bangalore. Some of them came directly to Bangalore, while others like Adidas, Next and Marks and Spencer have shifted base from Delhi. Wal-Mart’s sourcing facilities in Bangalore maintain operations worth $ 1 billion, Tesco $ 700 million, and Marks and Spencer $ 130 million (The Economic Times, May 13, 2006).

The RG industry in the city is about 30 years old; the first big factory was set up by the Gokuldas group, which continues to be an important producer. Its rapid growth has been attributed to the pleasant climate, regarded essential for the industry, availability of fabric nearby, steady supply of cheap, non-unionised labour, and the generous tax incentives given by the state government. For instance, there is no stamp duty levied for land registered for garment production.

Employing approximately 0.75 million workers cyclically and seasonally in the RG industry, Bangalore is the most prominent point on the garment map of India. It is the leading production centre of branded garments for the domestic market and for exports.

The Survey

A random sample of factories were administered questionnaires, addressed to managements seeking information on the size of investments, years they had been supplying to Wal-Mart Stores (WMT) and other brand retailers, list of clients, quality assurance and timely delivery demanded by different clients. We also sought information on technology upgradation by the factories with regards to production techniques, packaging and use of information technology in logistics management, growth in volumes, employment, wages, profits, selling price, and so on. Firms supplying to Wal-Mart were identified and grouped so as to derive some inferences about the impact of a very large global retailer on the producers and workers in the supply chain. Its impact cannot be completely isolated and analysed because all suppliers in the sample sell to multiple retailers.

Factories were randomly chosen from mainly three industrial clusters of Yesvantpur industrial area (north-west Bangalore), Peenya (north-west and regarded as the largest industrial estate in Asia) and Bommanahalli (south-east). Also represented are factories in Whitefield, Dasarahalli, Banaswadi, Marathalli, Kodihalli, Garudacharpalya, Mamulpet and Kaggadaspura. The sample frame was constructed from the municipal records of garment factories. However, unwillingness of managements (particularly larger firms and those supplying to Wal-Mart) to give time and attention to the questionnaires forced us to change the strategy and accept responses from the factory managers who were willing to respond to our queries.

As it emerged, the 47 factories in our sample fall into two lower categories. Our survey does not include the first category very large vertically integrated types of producers. The second category consists of large to medium scale factories supplying directly to global and Indian brand retailers. The third category consists of smaller subcontractors supplying to the principal suppliers or catering to the unbranded local markets. These two types, located in the supply chains of global and national level retailers, are represented in the sample.

The random sample contained 47 factories supplying ready-made garments. Thirty-nine of them (81 per cent) were selling to large international retailer brands and corporate buyers in India other than Wal-Mart (hereafter this category is referred to as other corporate retailers, i e, OCR group), 37 (79 per cent) were supplying to lesser known brands/local markets/ unbranded/unorganised sector garment sellers (referred to as LM). The sample has 12 factories (26 per cent) supplying to WMT. Of these, two are supplying as subcontractors of principal suppliers of WMT. There is substantial overlap between suppliers to WMT and other international and Indian brands. The largest producers do not sell more than 40 per cent of their output to WMT and the rest is sold to other international and Indian brands (Table 1).

All the tables (Tables 1 to 10) are based on the survey data. From Table 1 it can be seen that other corporate retailers and local markets are the main buyers of RG from the sampled firms.

Business Practices

The distinctive features of the main/principal suppliers to WMT compared to the rest of the sample is that they are all largescale producers and 75 per cent of them had investments of more than Rs 20 crore. Eighty-four per cent are organised as private limited companies, all having investments above the highest category in our questionnaire, i e, more than Rs 20 crore (about $ 5 million). Eight per cent of the sample was composed of public limited companies,

Table 1: Distribution of Ready-made Garment Suppliers in the Sample

WMT OCR LM
Number of Suppliers to 12 38 37
Percentage of total suppliers (47) 26 81 79

WMT: Wal-Mart. OCR: Other Corporate Retailers. LM: Local Market Suppliers supply RMG to more than one category of retailers.

Table 2: Levels of Quality Assurance Demanded of Sampled Suppliers by Ready-made Garment Retailers

(Number of Sampled Suppliers)

Quality Assurance Demanded by Very Strict Strict Moderate

Wal-Mart (12) 10 2 0

OCR (38) 11 22 5

Table 3: Technology Upgraded by Sampled Suppliers to Different Categories of Retailers

(Number of Sampled Suppliers)

Suppliers to Total Packaging IT Production

Wal-Mart 12 11 11 12

OCR 38 1414 34

Table 4: Technology Upgrade by Firm Type of Sampled Suppliers

(Number of Sampled Suppliers)

Type Firm Total Packaging IT Production
Public Ltd 1 1 1 1
Private Ltd 21 12 13 20
Partnership/proprietorship 25 2 2 15

while 8 per cent were subcontractors. The oldest of them had been supplying RGs for 30 years and to WMT for 20 years.

Given their size and scale, 92 per cent of these factories have upgraded their

January 26, 2008 Economic & Political Weekly

COMMENTARY

technology in areas like packaging, use of IT in supply chain management, and production (Table 5). In production itself, 100 per cent have upgraded their technology, so as to cater to a growing global and domestic market. Technological upgradation was more extensive in the group of firms supplying to Wal-Mart (Table 3, p 20).

All of them, including those supplying to WMT, reported a growing volume of production. This however does not imply increased exposure to WMT. The single public-limited firm in the sample had upgraded in all three areas – production, packaging and IT. Private limited firms had undertaken more upgradation than partnerships or proprietorships (Table 4, p 20).

These factories also supply to a long list of retail brands and other corporate clients like Hennes & Mauritz (H&M), Polo, GAP, Zodiac, Camel, Indiana, Reliance, Westside, Nike, Levi, Benetton, Scullers, John Player, Reebok, Infosys, Wipro, Accenture and HP (the last four being IT companies who source uniforms and other garments from these factories). Some 41 per cent of them even supply to local markets. None of them on an average supply more than 18 per cent of their total produce to WMT. The average period over which these sampled factories had been supplying to WMT was about 9 years. Since factories that continue to supply to WMT do so because it helps them to achieve economies of scale (67 per cent of the sample reported increasing sales volumes to WMT, and 75 per cent reported increasing levels of production, indicating increasing sale to other buyers as well), while higher profit margins in production for Indian and other international clients helps them to shore up their total profits. Managers were in agreement about the fact that business with higher-end Indian and European brands was smaller in volumes but offered greater profit margins. Of the 35 factory managers who responded to questions of profit margins, 26 (74 per cent of the sample) said that profit margins with other corporate buyers were growing.

In all cases, quality control standards of other corporate retailers (OCRs) were higher than for local markets. Eighty-three per cent of the WMT suppliers described

Table 5: Distribution of Technology Upgrade by Level of Total Investment

(Number of Sampled Suppliers)

Rs Million Total Packaging IT Production

>200 9 9 9 9

100-200 1 0 1 1

50-100 2 2 1 2

10-50 14 4 4 12

1 – 10 21 1 1 12

Table 6: Price, Volume and Continuity in Selling to Wal-Mart and Other Corporate Retailers

(Number of Sampled Suppliers)

the quality assurance demanded by their client as very strict as compared to 29 per cent of the OCR suppliers (Table 2, p 20). WMT is acknowledged to cause high rates of rejection due to quality issues. Seventyfive per cent of their suppliers said that rejections due to quality rose over time. However, producers complained that WMT was asking them to use lower quality fabric as well and since the price paid by WMT was same or falling over time, maintaining quality standards was difficult.

Experience of selling to WMT shows that only 50 per cent of suppliers wanted to continue with WMT compared to 74 per cent for OCR (Table 6). As indicated in Table 6, even as the volume sold to WMT rose for the majority of the suppliers, selling price stayed the same or fell.

Workers: The Weakest Link

The survey also recorded the responses of 134 workers during February-May 2007. Workers were randomly chosen from 23 factories, mainly from three industrial clusters of Yesvantpur industrial area, Peenya, and Bommanahalli and slums around the same. The workers had to be accessed at their place of residence or outside factory gates since management do not give ready access to the factory floor shops to the surveyors. The workers were contacted at their place of residence – usu

all of them supply to multiple clients, the Selling Price to Rose Same Fell ally the slums close to the factory sites. business practices across clients can Wal-Mart 0 6 5 These workers were found to be employed

be compared.

Detailed questions regarding selling price, volume, and profit margins were ignored by a majority of respondents. Inferences were made from related questions like introduction of new production technology, quality assurance demanded, additional capital investments, etc.

Factories reported that profit margins with WMT tend to remain the same (67 per cent) or fall (33 per cent) over time; no factory reported rising profit margins with

OCR 9 2 0
Volume to
Wal-Mart 7 4 0
OCR 10 1 0
Want to continue biz with Yes No
Wal-Mart 6 6
Percentage 50
OCR 28 10
percentage 74

Questions regarding selling price and volume were not responded to by most of suppliers to OCR.

Table 7: Distributions of Sampled Workers by Employment Status

Employment Status Count Per Cent

in different garment factories, many of which are also producing for global brands. The survey of workers does give a fairly good indication of the HRM practices in the RG industry.

The workforce is young, the average age of the sample being 28 years, the younger being better educated. More than two-thirds described themselves as OBCs. Seventy-five per cent of the workforce is women. The sample proportion of female workers is higher than the industry ratio.

WMT. Given inflation and rising produc-Permanent 6 4.5 As per the claims of the Apparel Export

tion costs in India, maintaining profit Temporary 128 95.5 Promotion Council (AEPC), only 45 per

margins in business with WMT was increasingly difficult. On the other hand, rejection for late delivery (and consequently rising supplier cost) was reported by only 17 per cent of the sample, indicating

Contract 0 0

Table 8: Distribution of Sampled Workers by Years Spent in Current Employment and Status

Number of Years of Service Job Status 1 2 3 4 56

cent of the workforce is female. Their figures are on an all-India RG industry basis, while the sample is based in Bangalore city where the female component is much higher, reflecting a greater opportunity

perhaps improved supply chain manage-Permanent 4 2 and need to supplement the incomes of Temporary 57 41 20 4 3 3

ment by the WMT suppliers. Hence, the the family in an urban environment.

Economic & Political Weekly January 26, 2008

COMMENTARY

95.5 per cent of the workers described themselves as temporary and the remaining 4.5 per cent of them claimed to be permanent (Table 7, 21). However the distinction was not an official or distinct one, because, almost all (96 per cent) the sampled workers have a provident fund, and

Table 9: Distribution of employees state Sampled Workers by Years of

insurance (95 per

Current Employment

Years of Current Count Percentage cent), and receive Employment

bonus payments

1 61 45.5

and overtime.

2 43 32.0

Sixty-eight per

3 20 14.9

cent said they

4 4 2.9

had received

5 3 2.2

some training on

6 3 2.2

Average years of current employment the job. There = 1.9 years.

seems to be no

Table 10: Distribution of distinction in Sampled Workers by Change

other conditions

in Working Hours over Employment Span also, like work-

Working Hours/ Count Percentage

Day ing hours, the payment of over-

Same 63 47.0

time, or the com-

Increased 71 53.0

fort of a lunch break. Significantly, there was little difference even in the years of service (Table 8, p 21). Yet curiously this distinction between temporary and permanent is made by the workers when they describe their status in the company. Discussions with trade union leaders reveal that workers close to the management were typically made to feel permanent, while mechanics usually had a longer-term relation with the factory.

Human resource management practices in these factories are such that there is an unwritten understanding that dismissal without notice is a permanent reality. All the workers are permanently temporary. There are no strong unions to create a distinction between permanent and temporary workers. Further, there is such a poor rate of unionisation among the workers that dismissed workers can only hope to recover their provident fund dues from one employer to join another factory if they do not resist the dismissal.

Workers also reacted with high rates of absenteeism, turnover and frequent revisits to their villages, only to return in search of re-employment in the same or another factory. Since there is no paid leave whatsoever, seasonal journeys to the native village or illness are likely to result in a change of employer or break in service. Therefore, average years of current employment were 1.9 for the sampled workers. 45.5 per cent said that they had been in the current employment for less than one year and 92 per cent of them were in their current job three years or less (Table 9).

The permanent workers were not distinguished by their long years of service – none of them had more than two years in the current job (Table 8). There was no relationship between the years of service and wages in the current employment. All this is indicative of a very high turnover of workers in these factories. The reasons are not too difficult to discern. The average wage of the sampled workers was Rs 3,284 per month. In the management survey, the reported average wage paid, as claimed by managements, was 16 per cent higher than what the workers reported, at Rs 3,812 per month. The standard practice in the factories is to pay the legal minimum wage rate for unskilled labour as applicable. In Karnataka that is Rs 90 per day for unskilled workers; it was calculated and paid monthly, but for 26 days. Wages for the weekly holiday (Sunday) were duly deducted for temporary workers. Some annual increments were added every year but 61 per cent of the workers said that wages had not increased since they started working on the current job. Given that the workers do not/cannot stay in their jobs long enough to avail of a raise, the average wage remains low and close to the statutory minimum wage. 92 per cent of the workers were in the category of wages less than or equal to Rs 4,500. Since the bulk of the workers are tailors (54 per cent), which is a skilled occupation, this is indeed a low wage industry. The average wages were even lower (Rs 3,207) in factories supplying to Wal-Mart, which is a global bulk buyer as compared to the average wage of workers in companies not supplying to Wal-Mart (Rs 3,880). The rapid growth of the industry does not seem to have improved wages, but has increased the working hours. Fifty-three per cent of the workers reported an increase in working hours while only 47 per cent said their working hours had remained the same (Table 10).

Concluding Observations

  • (1) All the firms in the category that sold to retailers like WMT are large firms. Technologically, they had upgraded themselves in more than one area of their operations. They had also increased their scale of production. This is also true for the OCR category when compared to the LM category of suppliers. Thus, location in the supply chain of large retailers does have a scale and technology effect. It seems to give a thrust to the big players in the industry.
  • (2) In our sample, all suppliers to very large retailers like WMT seem to diversify their client portfolio and limit their exposure (and risk) to one single retail client as they expand their scale of production. This is to some extent different from the experience of some other “economically dependent” suppliers in other countries.
  • (3) There seems to be a reasonable variety of markets available to the local producers. As of now they are selling to foreign brands, to Indian brands and to a large unbranded/unorganised local market.
  • (4) Although the principal supplying factories feel the pressure of shrinking profit margins with WMT, they are able to pass on that pressure to (a) the unorganised workforce in the factories who earn a very low wage and can be made to do unpaid overtime work, or (b) recover profits from other higher-end garment procurers (OCR) in the global and Indian market.
  • (5) Cheap, skilled and docile labour is perhaps the single most important competitive advantage for the Indian factories in the garment supply chain.
  • (6) The long-term effects of corporate retail may soon produce the painful symptoms of “buyer power” and shrinking “authentic variety” of products already visible in the developed countries. As of now, only 2 per cent of retail in India is described as “organised” (a more appropriate term would be non-corporate or differently organised retail) but all that is changing very rapidly.
  • References

    Cisel, D H and B A Smith (2005): ‘The Impact of Supply Chain Management on Labour Standards: The Transition to Incessant Work’, The Journal of Economic Issues, Vol XXXIX, No 2, pp 429-37.

    Mukherjee, A and N Patel (2005): FDI in Retail Sector India, Indian Council for Research on International Economic Relations, Department of Consumer Affairs, Government of India, New Delhi.

    January 26, 2008 Economic & Political Weekly

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