Workplace Safety
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Cutting Out the Middlemen: A Solution to the Dangers of Low-Cost Production

Burgess COMMENTARY
I posted this on the original post:

Over the years I have done a lot of value chain analysis. Value chain analysis, when applied to the typical mass production apparel supply chain is just plain disgusting, and the mainstream corporate brands are obliged to use quite extreme measures to ensure that the human rights abuses embedded in the value chain are (1) hidden from consumers; and, (2) legally removed from the brand and their investors. Rule of law enables this ... which of course suits the brand marketers and their corporate owners.

I worked for some time in one of the countries with the lowest wage rates in the world ... they did not sell much directly to the USA, but they sold to intermediaries all of whom made margins on top of the original cost. Why do things that cost a $1 to make retail for $50? Economic theory can explain this ... but it business decision makers that have made this a reality, and it stinks.

Now that there is Big Data and Social Media, the stage is set for a paradigm shift in the information easily available to inform the public about the facts of the supply chain, including the tiny money that reaches the staff that do the work relative to the huge money that remains for the investors, brand owners and the end stage distributors and retailers.

I sometimes refer to the modern globalization era as the era of corporate colonialism ... with all the bad things of old imperial colonialism without any of the good. Corporate profits are doing very well ... but labor is in deep trouble and getting worse. This is not a sustainable situation, and the end result is not going to be good. But change is possible.

Peter Burgess TrueValueMetrics

Cutting Out the Middlemen: A Solution to the Dangers of Low-Cost Production

Image credit: KinderStuff

Sadly, for the second time in months, the world has turned its attention to one of the biggest low-cost producing countries for apparel, Bangladesh. In November, a raging fire in a garment factory in Bangladesh claimed more than 100 people’s lives and led to a countless number of injuries. And the collapse of the eight-story Rana Plaza factory in April, in which 1,127 people died, is the country's worst industrial accident to date.

Ongoing investigations shed light on the obvious: Factory owners and mostly American and European companies choose profit maximization over human lives. It’s clear that the drive for low costs has not kept pace with ethical standards in manufacturing conditions. Due to a large number of middlemen being involved, who all want to get their fair share, clothes often cost consumers around 8x the cost of production.

However, online-only brands are starting to revolutionize this vicious cycle of ever-cheaper production. By cutting out the middlemen, these companies are offering consumers a fair alternative to clothing manufactured under appalling labor conditions. Ultimately, this will lead to a shift in consumer behavior.

The production costs of most clothing items are only a fraction of what we pay for them in the store. Who gets all the money we spend when it is supposedly very cheap to produce in countries like Bangladesh?

Let’s break it down. The labor costs for a denim shirt made in the USA are around $7.47. The materials are estimated to cost $5.00. Together with $0.75 for industrial laundry, this adds up to an average cost of $13.22*. Typically, the wholesale price of this shirt will be about $25 and the MSRP will be $50-60. The vast majority of the value is captured by the markup that goes to the middleman, the retailer. Sometimes there is only one middleman, but often there are many.

Online-only, direct-to-consumer businesses are so successful because they cut out the middlemen who take the biggest piece of the pie. Imagine how much easier it is for an e-commerce company to pay fair wages and ensure better labor conditions. The pressure to produce only a couple of cents cheaper is not as strong because products can still be offered at competitive prices.

Even though an online-only concept is certainly not a universal remedy, it opens up a number of interesting opportunities. Western countries that have long complained about outsourcing, offshoring and job loss become attractive manufacturing centers again. The relocation of production back to the U.S. becomes feasible once more. This not only creates jobs, but also reduces CO2 emissions because products don’t have to be shipped around the globe to reach consumers. Early pioneers of this movement already offer organic products made in the USA and sell solely over the Internet. These products may be more expensive than those produced in developing countries, but they are most certainly more affordable than organic garments made in the USA and sold via regular retailers.

Most consumers are very price sensitive, so it is no surprise that the fashion industry attempts to produce cheaply. To change consumers’ behavior, we must learn about the nuisances in the garment industry. A change in demand would eventually lead to more humane working conditions. There are many organizations that focus on raising awareness. However, e-commerce brands might have the power to shift consumer behavior in a completely new direction. Responsible-minded entrepreneurs have the power to compete for potential costumers at affordable prices. By offering consumers better alternatives, we can drive low-cost manufacturing out of the market. We no longer have to hope for socially responsible consumers to buy better, more expensive products because we can supply the best items at affordable prices. KinderStuff, a baby fashion brand that manufactures responsibly in Germany and the USA, is taking sustainability a step further by taking back outgrown clothing and offering a discount on future purchases. The returned clothing can then be recycled, given to charity or even resold.

This new way of doing business is not limited to the clothing industry. It will not be a solution to all the problems; however, it has the potential to be an effective way of driving changes in consumer behavior toward high levels of consciousness about where and how products are manufactured. Our clothing should not be produced in labor conditions comparable to the industrial revolution. Online-only models will help to alter consumers' shopping patterns and can ultimately lead to a more sustainable business culture.

*https://www.kinderstuff.us/content_us/kinder-blog