Warren Buffett famously observed that “you only find out who is swimming naked when the tide goes out.” In the last several months, as the economic tide has rolled far out, it has starkly revealed a range of serious vulnerabilities in our economic system. Perhaps none are more striking than the disparities associated with global supply chains.
Today, consumers in North America and Europe enjoy affordable clothes and fruits and vegetables year-round, while many low-wage workers in places like India, Bangladesh, and Central America struggle invisibly to avoid extreme poverty.
Who Benefits From Outsourcing?
The coronavirus pandemic has brought one part of this economic model into the spotlight. “Outsourcing,” a term that entered our lexicon in the early 1980s, describes the contracting of work from one company to another. Prominent business consultants like the late Peter Drucker have promoted this practice for decades, advising companies to “do what you do best and outsource the rest.” This is now the prevalent model in many industries.
From a purely business perspective, outsourcing makes sense. It allows for greater budget flexibility, enabling companies to pay for certain business services and functions only when they need them. More significantly, global outsourcing of manufacturing, farming, fishing, and the extraction of fossil fuels typically relies on low wage, labor-intensive work. This yields massive cost savings for multinational companies and lower prices for us as consumers.
Outsourcing Not Just Work But Also Responsibility
But all too often, big companies are also outsourcing responsibility for how work is done, leading to the exploitation of their local business partners in less developed countries, and their low wage workers.
They are also outsourcing risk, as local suppliers bear the initial costs of production – including materials, labor, and transportation – and only receive payment once the product has been delivered.
Even after delivery, suppliers often wait months to receive payment.
The fragility of this system has come into sharp relief in recent weeks, as the coronavirus pandemic has imposed a stress test on our economic system generally, and on global retail companies in particular. A recent McKinsey study of the $2.5 trillion fashion industry warns of “dire consequences” for the sector, resulting in significant “joblessness or financial hardship” for people across the supply chain. McKinsey estimates that unless stores open quickly, “80 percent of publicly listed fashion companies in Europe and North America will be in financial distress.”
Indian Workers in Financial Distress
People making clothing in places like India and Bangladesh, mostly young women, bear the brunt of this financial distress in two ways. First, because global brands and retailers are starved for cash, and facing competing demands, some are altering or even denying payments to their local suppliers. Seeing this, several leading global organizations dedicated to improving working conditions, such the Fair Labor Association (FLA), whose board I chair, the Fair Wear Foundation, and the Ethical Trading Initiative, have adopted a common position urging their member companies to pay for work completed or underway.
A number of leading FLA brands like Patagonia, Adidas, Nike, New Balance, Under Armour, and Uniqlo have publicly announced their commitment to pay their suppliers as stipulated in these guidelines.
But other Western brands, like Guess, are ignoring their contractual commitments altogether, telling their local business partners that they simply will not pay for work that has been done. The ultimate victims are the workers themselves.
Sweatshops and Safety in Developing Countries
A second challenge relates to the safety of workers in crowded workplaces. In crowded places like garment factories in India and Bangladesh, where health and hygiene systems are fragile and social distancing is extremely difficult, governments have wisely imposed strict lockdowns to mitigate against the spread of the coronavirus.
However, hundreds of garment factories in Bangladesh defied the nation’s lockdown order and reopened, despite the risks to workers. According to Mohammed Hatem, Vice President of the Bangladesh Knitwear Manufacturers and Exporters Association, these factories have come "under pressure" from Western brands to meet export deadlines, and factory owners are fearful that they risk losing orders to countries like Vietnam or China.
As governments reopen garment factories, brands should facilitate suppliers’ efforts to keep workers safe by helping to provide face masks and sufficient hand-washing facilities and ensuring that workers can maintain a safe distance from one another during work and break times. Brands and industry organizations can facilitate this by establishing standards, promoting greater transparency, and providing financial resources collectively.
In apparel and other industries, the pandemic should serve as a wake-up call to companies, investors, and to us, as consumers, that this outsourcing of responsibility is not a viable long-term business model.
(Michael Posner is professor at the NYU Stern School of Business and director of the NYU Stern Center for Business and Human Rights. He tweets at @mikehposner. This is an opinion piece. The views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)
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