Headlines about unethical factory standards have once again highlighted the problem that retailers face with their complex supply chains

It’s the nightmare every retailer dreads - the discovery that somewhere in their supply chain there are illegal or unethical practices going on. And, if and when such revelations break in the press, the PR damage can be huge.

Last November, Channel 4’s Dispatches documentary, Fashion’s Dirty Secrets, caused a backlash of anger against retailers - including New Look, Bhs, Peacocks and Jane Norman - when an undercover report found unacceptable working conditions at a sub-contractor’s factory.

Normally such breaches occur overseas, where working conditions that may be unacceptable for a UK retailer’s ethical code may be accepted as the norm for that factory or economy. The challenge of knowing every part of your global chain may seem insurmountable. But public anger following the documentary was exacerbated by the fact the factory in question was in Leicester - virtually on these retailers’ doorsteps.

“All this is fundamentally about knowing who you are doing business with,” says Bill Waite, group chief executive of intelligence, investigations and security company Risk Advisory Group. And this is particularly tough for the smaller retailers. Waite says: “The biggest brands already have the mechanics around this in place. They have a board-level representative, telephone hotlines and training, but once you get outside of the FTSE100 then businesses will struggle because significant resources are needed.”

Following the Dispatches programme, New Look commissioned an independent investigation by Ernst & Young, which concluded it was “satisfied” that New Look’s authorised supplier had no knowledge about the sub-contractor’s involvement. New Look is strengthening its resources regardless. Group buying director Roger Wightman says: “We are putting extra measures in place and reinforcing things we have already been doing. The way we were working wasn’t not working - this is just a further set of measures to reduce the risk.”

Cutting out risk

“Without knowing what the specific problems are, it’s hard to make improvements”

Tom Smith

How can all retailers minimise the risk of such problems occurring? Tom Smith, head of marketing and business development at Sedex Exchange - which collects ethical information on suppliers - says clarity is crucial. “Getting visibility of standards in your supply chain can identify risk areas and help you structure a programme to address these issues. Without knowing what the specific problems are, it’s very hard to create an effective programme to help drive improvements,” he says.

Robert Mitchell, head of enhanced due diligence at risk intelligence firm World-Check, says enhanced due diligence of suppliers is critical, particularly when sourcing from higher-risk locations in emerging markets. “In about 20% of cases, we see large retail houses outsourcing in high-risk jurisdictions to get clothing made, but they don’t check who they are then receiving clothes from,” he says. Checking the back of bills or who they have been asked to invoice can often provide the answer.

Other checks can be equally simple. “Do you know where the physical location of a factory is? Does it actually exist? Or is it in an area of high population or are goods being shipped from a residential area?” asks Mitchell. This could indicate when goods are not coming from a factory but from people’s homes or sweatshops.

“Certain retailers need to wake up. If a factory knows it’s having an inspection then of course it will be perfect.”

Robert Mitchell

Factory audits also help retailers detect supplier abuse, but they can be unreliable. A large retail chain may have factory inspectors but they often can’t cover every site, so also employ independent auditors. This is when problems can creep in. There is often bribery and collusion between auditors and factories, and false record-keeping is also rife in factories overseas, with two sets of records often maintained - one for the retailer and one for the factory.

Retailers must ensure the validity of their audits and include in their contracts the right for unannounced inspections. Mitchell believes some retailers are simply too trusting: “Certain retailers need to wake up. If a factory knows it’s having an inspection then of course it will be perfect.”

Checks and balances

Nevertheless, many of the retailers highlighted in Fashion’s Dirty Secrets already had rigorous precautions in place. The main supplier involved had been audited and approved and in New Look’s case was one of the retailer’s top 10 suppliers. For both New Look and Bhs, the problem had arisen because a factory they had legally sub-contracted work to sub-contracted itself without permission, says an Arcadia spokeswoman on behalf of Bhs. “The programme did show a clear breach of Arcadia’s strict code of conduct by one of our suppliers, who had sub-contracted work to another factory without our knowledge.”

Sub-contracting is rarely allowed without the approval of the retailer itself, and the terms of such should be explicitly written in the retailer’s contract terms with its suppliers.

Arcadia and New Look have since instigated a revision of their processes. Arcadia says it has met with Bhs’ supplier to ensure sub-contracting does not happen again and is carrying out a full audit of other orders with the supplier.

New Look is now reviewing and tightening the wording of supplier contracts, which Mitchell believes is good practice. “You need to look at who you are sub-contracting to. Do they have a like-for-like contract? Is there a clause in the contract that says if they outsource am I to be informed?” he says.

Buyers also need to be better briefed. Smith says: “The issues that often occur from sub-contracting can be avoided by fully educating buyers in the implications of their buying practices.”

Ultimately, relationships between supplier and retailer are key, and openness is vital. Sub-contracting without permission is often the result of a supplier being under pressure to deliver but too scared to admit it - instead leading them to cut corners.

New Look has worked with more than half of its supplier base for more than 20 years and the retailer works hard to drive transparency throughout the supply chain. But the programme was also a reminder that retailers can’t relax for a second. In December, New Look held a training day for its UK suppliers to emphasise its ethical requirements.

Collaboration will help tackle such problems but, as always, the competitive nature of retail can make this hard to achieve. Despite several fashion retailers being involved in the Leicester incident, it is not clear whether there has been much dialogue between them. Smith says: “An important factor that must be understood is your suppliers are more than likely to have been asked to provide the same information to multiple customers.” New Look has already pledged to increase the number of its suppliers that are members of Sedex from 97% to 100% compliance.

Smith adds that collaboration can help retailers create effective policies and improve standards: “Realising there are many other companies asking their suppliers the same questions will enable suppliers to spend less time filling out paperwork and paying for audits and more time actually improving standards.”

The challenge of eradicating unethical practices in the supply chain is vast, but retailers must not give up. As Wightman says: “The aim of everything we have done is to reduce the risk of it ever happening again.”

Supplier Checklist

  • Examine potential risks in your supply chain
  • Know your suppliers inside out
  • Undertake enhanced due diligence of the supply chain
  • Look at the supplier’s background
  • Ensure suppliers are up to date with your ethical requirements
  • Review supplier contracts to allow announced and unannounced audits
  • Ensure sub-contracting is forbidden within your contract terms with the supplier without your prior approval