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Archive for the ‘The greater good and social responsibility’ Category

How does lean operations interact with how workers are treated? That is the question behind an article in Stanford Business (Lean manufacturing benefits workers and the bottom line, Autumn 2016). Here’s the story in a nutshell. Nike began working with its apparel suppliers to implement lean operations at the suppliers’ factories. This entailed bringing in managers to train them and then supporting them as they began implementing lean assembly lines.

While one side of Nike is doing that, another is going out and auditing suppliers for how well they maintain labor standards. This team is monitoring compliance with local labor laws as well as Nike’s own standards. They are passing out letter grades. Suppliers that are doing well get As and Bs. Those with major violations are getting Cs and Ds.

And, of course, both Nike teams are collecting data: Who has implemented a lean line? Who has cleared up their problems with overtime pay and so on? Some academics get a hold of that data and start to look at whether lean moves the needle on labor standards. (You can find a link to the academic paper here.)

Here is what they found. (more…)

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How is this for a bold assertion: All your clothes are made with exploited labor.

That is the title of a recent Atlantic article which discusses what Patagonia learned when it audited the practices of its second-tier suppliers. These are not the firms sewing sweaters or assembling backpacks. Rather these are the mills producing fabric and factories producing components that go into those sweaters and backpacks. It turns out that a lot of those mills were engaged in some dubious practices.

About one-quarter of those mills are based in Taiwan, and the majority were found to have instances of trafficking and exploitation.

The problems stemmed from how those mills found the people to work their factory lines. They didn’t hire workers themselves and instead turned to so-called labor brokers. These labor brokers charged migrants exorbitant, often illegally high fees in exchange for jobs. There were other red flags, too. Suppliers would open bank accounts into which the workers deposited their paychecks, so that fees for labor brokers could be automatically deducted. Workers’ movements were also restricted through the confiscation of passports. The recruitment and hiring process used by many labor brokers can create a cycle of fear and debt that leaves workers neither able to leave their jobs nor to make a decent living.

The article goes on to explain that sourcing labor through brokers is both legal and common in Taiwan. It is arguably necessary for the mills to be cost-competitive. Still it is an embarrassment for a brand such as Patagonia which has staked quite a bit on being a better global citizen than the typical clothing brand. (Check out the social responsibility page on their website.)  (more…)

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There have been several things written over the last couple of years about working conditions in Amazon fulfillment centers. (See, for example, here, here, and here.) Now we have a BBC report complete with hidden-camera video of what it is like inside a fulfillment center.

If you prefer to read, you can also check out “Amazon workers face ‘increased risk of mental illness’” (Nov 25).

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It is hard to think of a more challenging problem: How do you distribute necessary medicines in a developing country lacking infrastructure? That is question tackled by Simon and Jane Berry, two Brits trying to reduce childhood deaths from diarrhea in Africa. Diarrhea is the leading cause of death for children under five — which is tragic since it is not some mysterious disease. It is completely treatable by standard and (in the grand scheme of things) cheap medicines. But you need to get the medicines out to rural areas. The Berry’s solution was a packaging innovation that lets them piggyback on existing, super efficient supply chain. Whose supply chain? Here’s a hint, their not-for-profit is called ColaLife (ColaLife: Turning profits into healthy babies, BBC, Jul 22).

Simon Berry and his wife Jane had come up with a strikingly-simple idea – a package for medicine that slotted into the empty space at the top of a crate of soft drink bottles, fitting neatly in between the bottlenecks.

A dazzling idea, to piggyback the delivery of the diarrhoea medicine for babies onto one of the most efficient distribution systems in the world. Go anywhere and you will find a shop selling Coca-Cola. And the plastic packaging is ingenious – once opened it becomes a measuring device.

Here is what ColaLife’s anti-diarrheal kits look like sitting in the crates.

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Here is how the crates get out to villages.

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I’ve been thinking over the last several days about the tragic factory collapse in Bangladesh. One question that comes up is why global apparel firms would choose to source their products from Bangladesh. CNN has a spiffy graphic that clearly shows that cost is one reason (Bangladesh vs. the U.S.: How much does it cost to make a denim shirt?, May 3).

tshirt-graphic

Of course, the US ain’t exactly the right benchmark here. The real alternative is China and  the Wall Street Journal reports that wages there are four times higher than those in Bangladesh (The Global Garment Trail: From Bangladesh to a Mall Near You, May 3). That kind of cost advantage together with a tariff advantage with the EU gets you growth like this.

AH-AJ309_BANGLA_G_20130505123603

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OB-VN078_1129so_P_20121129145850How much responsibility does a downstream buyer have for how its suppliers behave? That has been a recurring question over the last several years as various news reports have highlighted tough working conditions in (largely) overseas factories. Apple’s relationship with Foxconn has been front and center here.

Now we have two stories that leave Wal-Mart facing similar questions. A horrible garment factory fire in Bangladesh killed over a hundred workers, some of whom were apparently making clothes for Wal-Mart. The problem, according to the Wall Street Journal,  is that they weren’t suppose to be (For Wal-Mart, Sears, Tough Questions in Bangladesh Fire, Nov 29).

Wal-Mart says it followed its play book when it yanked its business from a Bangladesh garment factory after the retailer’s inspectors found problems. But the chain’s clothing was still being produced there when the factory went up in flames last weekend, leaving at least 112 workers dead. …

The world’s largest retailer said it had revoked the factory’s authorization to make its products months before the fire, but declined to elaborate. It would not name the supplier it said was responsible for giving its business to Tazreen Fashions Ltd., a modern factory set up in 2007 near the Bangladeshi capital of Dhaka. …

Wal-Mart’s system of inspecting factories grades them on a color scheme ranging from green to red. It said most of the audits are done by outside firms, though Wal-Mart has an internal team that conducts surprise audits and checks factories with known problems. Factories with repeated bad grades can be banned from doing business with the company.

Wal-Mart said it is the responsibility of the suppliers to use factories approved by the company, and warns suppliers in an extensive manual that they can be banned from doing business with the retailer if they fail to do so.

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G4S has been appointed the Official Security Service Provider for London 2012 Olympic and Paralympic Games.  In addition to much talk about social responsibility, the G4S website states:

We specialise in outsourced business processes and facilities in sectors where security and safety risks are considered a strategic threat, with expertise in the assessment and management of security and safety risks for buildings, infrastructure, materials, valuables and people.  G4S is the largest employer on the London Stock Exchange with over 657,000 employees.  We have operations in more than 125 countries.

G4S was contracted to provide 10,400 personnel but today Mr. Buckles, CEO of G4S, admitted in a grueling hearing at the British Parliament that G4S currently only had 4,200 security personnel at Olympic venues.   That’s right, only 40% of the promised service level!  And the shortfall is very unevenly distributed: only 30 out of a contracted 300 G4S personnel had arrived to provide security at the Olympic cycling event on Tuesday.  Moreover, the 51-year old Buckles also said that G4S “would provide a minimum 7,000” when the games begin.

A few comments on the operations strategy (outsourcing service ops and capacity planning) and management (execution): First on operations management: According to the New York Times,

Mr. Buckles said he learned of the looming crisis while he was on vacation in the United States on July 3, but the company informed the Olympic organizers only on July 11 that it could not meet its obligations.  He was forced to apologize, saying he was deeply sorry for the shortfall in security staff and blaming it on the failure of a scheduling system.

This is a failure of executive oversight of G4S’s highest profile project and a cheap blame.  Here we have a firm whose business is staffing and a project whose requirements were known years in advance and then blaming it on “a scheduling system?”  Your operations = Your firm.

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Last week, I wrote about wedding gowns. Now it’s time to think of the other end of the fashion price spectrum: fast fashion. The Observer had an interesting piece on Swedish fast fashion retailer H&M and what they report in their annual sustainability report (Is H&M the new home of ethical fashion?, Apr 7). The report is notable because the Swedes have apparently set the goal for themselves of being “the ethical solution, the retailer that can make ethics and fast fashion synonymous.”  So how is that going?

“I don’t think guarantee is the right word,” says Helena Helmersson, head of sustainability, brightly. “A lot of people ask for guarantees: ‘Can you guarantee labour conditions? Can you guarantee zero chemicals?’ Of course we cannot when we’re such a huge company operating in very challenging conditions. What I can say is that we do the very best we can with a lot of resources and a clear direction of what we’re supposed to do. We’re working really hard.”

I believe her. Thursday’s report will show some impressive sustainable figures: for example nearly 2.5 million pairs of shoes were made last year using lower-impact water-based solvents; all building contractors have signed a code of conduct to ensure “good” working conditions; recycled polyester equivalent to 9.2 million plastic bottles has been used, and H&M uses more organic cotton in production than any other group. This year I am told, 7.6% of its cotton was organic (an industry insider estimates H&M’s overall cotton use to be around 200,000 tonnes a year). By 2020 100% will be sustainably sourced cotton. …

Does Helmersson still wake up worried they’ll be the subject of a sweated labour expose? “Yes, I worry about that sometimes. I lived in Dhaka for two years. You see how things happen down the chain in a country like Bangladesh. Remember that H&M does not own any factories itself. We are to some extent dependent on the suppliers — it is impossible to be in full control.”

And therein lies the rub. While H&M talks about responsibility, in the supply chain where retailers devolve power to factories it can be easy to distance yourself. Helmersson says H&M has invested in 100 people in CSR, 75 of whom are auditors (assessing social and now some environmental conditions in factories) and produced a series of groundbreaking short films, including one on fire safety that it claims more than 400,000 garment workers have seen.

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The Economist published an insightful article titled “The end of Cheap China: What do soaring Chinese wages mean for global manufacturing?”

The key observation is the fact that wages have been rising steadily and some good facts are given.  While there is no consensus, several sources state that wages have risen already more than 10% only this year, and “labour costs have surged by 20% a year for the past four years.” Specifically:

Labour costs (including benefits) for blue-collar workers in Guangdong rose by 12% a year, in dollar terms, from 2002 to 2009; in Shanghai, 14% a year. Roland Berger, a consultancy, reckons the comparable figure was only 8% in the Philippines and 1% in Mexico.

AlixPartners, a consultancy, offers this intriguing extrapolation: if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there (see chart). In reality, the convergence will probably be slower. But the trend is clear.

 

The Operations Room has blogged on this topic before (and even have some predictions on how cost changes will impact offshoring).  The article argues that

If cheap China is fading, what will replace it? Will factories shift to poorer countries with cheaper labour? That is the conventional wisdom, but it is wrong.

Conventional wisdom has some powerful backup (wisdom of the crowds) and is not to be dismissed entirely.  Rather, each operations strategy should be tailored to the firm’s competitive strategy.  In our Operations Strategy class we introduced a new case “Who is the next China”, arguing that, for some industries, China will be substituted by other countries and we can fairly well predict by which countries.  But that location decision must carefully consider all relevant criteria: market demand factors, supply factors, technological factors, and macroeconomic and non-market factors.  Relevant tools here are to include the Total Landed Cost into the Total Cost of Ownership.  And it is true that this will keep many companies near coastal China because the entire supply base may be there and productivity is growing.  Luckily, life is not just about one dimension (labor cost)…

But it is also true that the global economy is continuously recalibrating itself towards new equilibria.  I find it useful to look at this process by making an analogy of wages and other local economic factors with temperature: natures seeks equilibrium and heat moves from high temperature to low.  So it is with economic flows.  This continuing globalization process does provide a positive message for social welfare and global stability: it lifts stranded boats (while, admittedly, slowing down the rise of, or perhaps even lowering, the high boats).

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A few days ago, Henry Blodget wrote :

We love our iPhones and iPads.

We love the prices of our iPhones and iPads.

We love the super-high profit margins of Apple, Inc., the maker of our iPhones and iPads.

And that’s why it’s disconcerting to remember that the low prices of our iPhones and iPads–and the super-high profit margins of Apple–are only possible because our iPhones and iPads are made with labor practices that would be illegal in the United States.

The article summarizes a recent episode of NPR’s This American Life which did a special on Apple’s manufacturing.  Foxconn, one of the companies that builds iPhones and iPads (and products for many other electronics companies), has a factory in Shenzhen that employs 430,000 people. Apparently, an estimated 5% of them are kids (12 to 14 years) old; the standard shift is 12 hours and can extend to 14 – 16 hours; while the reporter is in Shenzhen, a Foxcon worker dies after working a 34-hour shift; the hands of workers who are using the neuro-toxin Hexane (which evaporates faster than other cleaners) to clean iPhone screens are shaking uncontrollably; etc.  All this for a wage of less than $1 an hour.

Henry concludes:

The bottom line is that iPhones and iPads cost what they do because they are built using labor practices that would be illegal in this country–because people in this country consider those practices grossly unfair.

That’s not a value judgment. It’s a fact.

So, next time you pick up your iPhone or iPad, ask yourself how you feel about that.

A good question indeed and you should ask how you feel. (Interestingly, respondents to this story span the entire spectrum.)  But let me ask whether Apple should care about this?  The answer is an emphatic “but off course.” Anyone familiar with “non-market strategies” knows that even a small fraction of the population can provide sufficient activism to bring a company to its senses.  (If you are not familiar, read “Reputation Rules” by my colleauge Daniel Diermeier.)  The momentum is already building: this weekend Forbes asked whether this is Apple’s Nike moment? Of course we hold big, successful companies to a higher standard; tall trees catch much wind.

So what will Apple do?  Well, it seems it already mounted campaigns–recently it disclosed for the first time its list of suppliers (without any addresses we should add–they still don’t want to make it easy, but it’s a first step). More interestingly, however, is the question how they will deal with the Foxcon issue: even Apple may not (nor want to) be in a position to control a company that runs a factory with 430,000 people.  Indeed, in a follow-up blog my colleague Marty will write about another key reason (besides cost) that Foxcon is so attractive: fast response at massive scale.

But this is not the first time Foxcon suicides are in the news (see May 2010 article) and Foxcon isn’t know for respect of its employees (recently the CEO called its employees “animals“). So Apple likely has been working on addressing this for a while.  Could the amazing $8 billion in announced capital investment at suppliers (see this earlier blog entry) include automation to reduce the human stress and risk factor? It surely would be in line with Apple’s strategic quest for high quality (i.e., consistency, low tolerances, etc.) while retaining high scale.  However, it would imply a faster-than-expected transition in China from low-level assembly by hand to higher job requirement for much fewer people.  Starts sounding like our job quandary?

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