It’s cheaper, but sourcing from Bangladesh brings with it a whole host of logistical challenges. Just how much of a supply opportunity is there in this corner of Asia? Charlotte Hardie reports

The headaches involved in sourcing from Bangladesh have in the past rendered the cost benefits virtually meaningless for some retailers. Yes, labour and manufacturing is cheap, but when you consider the risk of social unrest, ethical question marks, inadequate logistics infrastructure and insufficient power supplies, many retailers have rightly questioned whether it is worth it.

As a sourcing destination, the country has been on retailers’ radar since the 1990s. However, with the plethora of cost pressures facing the supply chain this year (see box below), and the added problem of rising labour costs in China, retailers will need to look at ways to reduce those costs - and one of them is bolstering supply in cheaper countries.

So despite its history of problems, could Bangladesh be the answer? Have some of the problems experienced in the past been ironed out? Or is it still a cheap but logistically challenging source of product?

The caveats to date have certainly been numerous. One historical problem has been that of origin fraud. Having been classified by the EU as a designated least developed country, Bangladesh wasn’t subject to quotas, which meant eligible goods were duty free. While this was another lure for retailers, it also gave rise to the problem of origin fraud. A country is only eligible for duty free access if it meets strict origin rules - one being that goods must be manufactured from local fabric. Meeting those criteria requires certificates from export authorities - many of which have in the past been fraudulent. Emma Ormond from PricewaterhouseCoopers says: “Should customs go and investigate, retailers would find out about this late and would end up having to pay duty. Some importers ended up having to pay quite significant amounts of back duty - one to the tune of £2m.”

In addition, some of Bangladesh’s factories are still “truly shocking”, says Ormond. While most retailers are members of the Ethical Trading Initiative and have in place rigorous systems to ensure - to the best of their ability - ethical working practices, the risk of sub-contracted suppliers who are unknown to the retailer is still high.

Delivering the goods

Nevertheless, Ormond believes that cost increases in the supply chain have already resulted in retailers piling into Bangladesh, which she says has led to another problem: “It’s gettingto the point of reaching capacity. Factories won’t be able to take on too much more production.” One upshot of this could be them over-promising and under-delivering, resulting in production delays.

As Gavin Parnell, project director at supply chain consultancy Total Logistics, points out: “This would have a major effect on the downstream supply chain for retailers. A lack of reliability on lead times can mean you end up using air freight because you panic. This can very, very quickly wipe out any unit cost advantage.” Another problem of this increased production could be that prices start to increase - potentially negating some of the benefits of switching sourcing from other countries in the first place.

But it’s not all bad news. On January 1 of this year, the origin rules changed, meaning that Bangladesh can now source fabrics from any origin - therefore fabric from China, which is of better quality, can now be used. That also reduces the risk of origin fraud, but on the other hand it could also increase pressure on capacity.

Despite the numerous problems that exist, Ormond believes Bangladesh is still an attractive and viable option for retailers. “It’s still risky, but in many ways it has improved,” she says. House of Fraser is one retailer that is looking to boost supply in the country. Supply chain director Mark Holland says the department store retailer currently sources mainly dining products, such as bone china, but is considering adding towels and bedding to the list.

Ultimately, retailers need to factor in the inherent problems that go hand-in-hand with sourcing from this particular country. He says: “The main concern is port infrastructure, and this is factored into lead times.”

John Lewis mainly sources schoolwear - specifically knitwear and twin-pack shirts and blouses from Bangladesh. Head of product sourcing and services Sean Allam says it chooses its suppliers carefully for their “expertise and the quality of products they produce”. He says that while there have been “issues with the infrastructure in the country”, it has “taken this into account when choosing suppliers and works very closely with them to overcome those issues”.

Mitigating risk

To minimise risk, retailers should avoid sourcing product from Bangladesh that is particularly sensitive to lead times. Another way to help overcome any potential problems is to have people on the ground in the country monitoring quality and production. In the past, some retailers have fallen into the trap of trying to manage from neighbouring countries - usually India - which has proved difficult.

George at Asda is one such retailer that has recognised the importance of having closer contact and a physical presence in the country. In 2009 it set about rolling out a productivity scheme to improve efficiencies in factory conditions. It piloted the scheme in five Bangladeshi factories in partnership with German overseas development department GTZ. Both invested in improvements on the sewing line, cutting room and finishing sections. This resulted in increased productivity and quality, reduced waste, and an empowerment of workers through training. Then last April it opened an office in the country in an attempt to ensure it remained a viable, efficient and ethical country of supply. According to Retail Week Knowledge Bank, the new office has “given the business a renewed focus on driving product innovation”.

Close monitoring will be particularly important for those retailers wanting to diversify the types of product they are sourcing from Bangladesh. Previously, it has proved an ideal place to source straightforward pieces such as T-shirts, but now it is generating more interest as a place to source more complex and expensively produced goods such as lingerie because of the cost-savings.

Providing retailers plan impeccably and prepare for every eventuality, the risks inherent with sourcing from Bangladesh - and in fact a host of other less developed countries - can be very effectively managed. Ormond sums it succinctly: “It’s attractive but go in with your eyes wide open. Don’t expect to be able to change everything from the UK.”

Trouble abroad

Previous problems experienced by retailers sourcing from Bangladesh

  • In December 2010, 31 were killed and 200 were injured in a fire at a Bangladeshi factory used by Gap. Labour rights groups, including the Clean Clothes Campaign in Europe and the Maquila Solidarity Network in North America, said it was the latest of many such fires in the country and it highlighted their safety concerns
  • In late-2006 Tesco was specifically named (with others) in allegations by War on Want about exploitation and low wages paid to their workforces by clothing suppliers in Bangladesh
  • Inditex had its fingers burnt in late 2006 in Bangladesh. According to its profile on Retail Week Knowledge Bank, it was among those caught up in a media exposé of child labour and workshop conditions in the country. Such CSR issues all began as the retailer started to look further afield for suppliers after its local Spanish suppliers reached full capacity

 

The cost squeeze supply chain costs rise up the agenda   
Indicator   Unit           Dec-103 mths ago1 yr ago5 yrs ago5 year increase 
Diesel     ppl ex-VAT      107.4100.4395.5778.5536.73%
Cotton     cents/lb         145.2496.9575.1753.3172.50%
Steel      index            188202.3139.3135.538.75%
CPI         index            116.8114.9112.610115.64%
Sources: AA (fuel), CIPS (others)