low-cost labor – The OM Blog by Heizer, Render, & Munson

OM in the News: The Search for Cheaper Labor Leads to Ethiopia

Women at work in Addis Ababa at the GG Super Garment factory

For more than a decade, Asia has dominated clothing manufacturing, churning out cheap clothes on inexpensive labor that are shipped to malls world-wide. But over the past few years, rising production costs in China and several deadly factory accidents like the collapse of Rana Plaza 2 years ago in Bangladesh, have forced apparel companies to hunt for alternatives from Myanmar to Colombia to Ethiopia. Ethiopia was recently identified as a top sourcing destination by apparel companies.

Africa, reports The Wall Street Journal (July 13, 2015), is the final frontier in the global rag trade—the last untapped continent with cheap and plentiful labor. Ethiopia’s garment sector has no minimum wage, compared with Bangladesh, where workers earn at least $67 a month. Garment workers in Ethiopia start at $21 a month. (Chinese garment workers earn $155- $297 a month.) Most countries in Africa benefit from a free-trade agreement with the U.S. And, unlike other emerging economies such as Vietnam and Cambodia, many African countries can grow their own cotton, which shortens production time.

Big apparel makers are willing to go to great lengths to find new, low-cost sources of production. Consumers have been conditioned to expect a plentiful supply of cheap clothing, which has pressured the margins of companies like Wrangler, Lee, and Calvin Klein. Ethiopia holds the most promise for developing garment production in Africa, factory owners and brands say. “Ethiopia seems to be the best location from a government, labor and power point of view,” says one CEO.

Many African countries lack roads to transport finished clothing, and landlocked Ethiopia doesn’t have a port. The workforce is untrained in sewing clothes. But apparel companies remain interested despite those hurdles. They are drawn to not only the cheap labor, but to the inexpensive power, which is the 2nd-biggest factory cost after workers. The Ethiopian government is building a railway to the port in neighboring Djibouti to help exports leave the country more quickly.

Classroom discussion questions:

1. What are the advantages and disadvantages of locating a new plant in Ethiopia?

2. Will Africa be the next China?

OM in the News: All Your Clothes Are Made With Exploited Labor

Yes, this is the somewhat shocking title of The Atlantic’s (June 3, 2015) article featuring Patagonia, which has become a symbol of well-heeled outdoor adventure. But the apparel and sporting company thinks of itself as more than just a retail company. Says Patagonia’s founder: “We aim to make the best product, cause no unnecessary harm, and perhaps most important, inspire solutions to the environmental crisis.” And yet, despite these aspirations, internal audits turned up multiple instances of human trafficking, forced labor, and exploitation in Patagonia’s supply chain.

The audits examined not Patagonia’s first-tier suppliers—the factories that cut, sew, and assemble Patagonia’s products—but the mills that take raw materials and produce the fabrics and other parts that later become jackets and backpacks. About 1/4 of those mills are based in Taiwan, and the majority were found to have instances of trafficking and exploitation. Those mills 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.

Though it may seem shocking that a company so publicly committed to fair labor practices could have such violations in its production chain, the news is less surprising when taking into account how the apparel industry operates: with unwieldy, complicated supply chains that reach around the globe. So the findings of Patagonia’s audits show the near impossibility of treating workers well at every step in the production process.

Labor violations are more rampant at the mills and parts manufacturers, which are often subcontracted to provide the materials for the first-tier factories. Traditional factory audits by both brands and NGOs often miss instances of trafficking deeper down the supply chain. Auditors often don’t even have the proper language skills to communicate with the multi-national population of workers that make up the workforce. To complicate the situation further, supply chains are massive and far-flung; relationships among brands, factories, and employees are often informal; and corporate social-responsibility programs tend to be relatively unestablished and toothless.

Classroom discussion questions:

1. What is the solution?

2. If Patagonia is a global leader in ethical manufacturing, what is the status of the rest of the apparel industry?

OM in the News: China Losing Edge as World’s Factory Floor

China is losing its competitive edge as a low-cost manufacturing base, suggests The Wall Street Journal (Jan.17, 2013), with makers of everything from handbags to shirts to basic electronic components relocating to cheaper locales like Southeast Asia. The shift—illustrated in weakened foreign investment in China—has pluses and minuses for an economy’s global growth. Beijing wants to shift to higher-value production and to see incomes rise. But a de-emphasis on manufacturing puts pressure on leaders to make sure other jobs are created. The shift is the result of a long-term trend of rising wages and other costs that have made China less attractive, especially for basic manufacturing.

Foreign capital helped build China into a low-cost manufacturing powerhouse and global growth engine. But its increasingly urban population now has higher expectations in terms of wages and working conditions and louder objections to the pollution that often comes with low-level manufacturing—demands that have eroded China’s cost advantage. “We know we can’t keep relying on a low-cost competitive advantage. We need to accelerate the value-added upgrading of our products,” says the Commerce Ministry spokesman. “You couldn’t say we are happy to see this development.”

For China’s neighbors, the trend means more opportunities. Southeast Asian nations, which claimed 2% of global foreign investment in 1997, now account for about 7.6%.

Not all of the shift out of China involves low-end industries such as garment-making. Wintek Corp., with about 50,000 workers globally that makes smartphone components for companies including Apple, just said it will invest $930 million in four new plants in Vietnam to make displays and touch screens.

Discussion questions:

1. What are the advantages and disadvantages to this shift for the U.S.?

2. What are the operations issues arising to companies that relocate manufacturing to other S.E Asian countries?

OM in the News: Harada–How America Can Fight Against Low-Cost Labor in China

Norman Bodek has visited Japan 78 times to study the Japanese continuous-improvement philosophy. On his most recent trip Bodek met with Takashi Harada, who has developed the ultimate recipe for competing against low-cost labor in China and India. The Harada Method, reported in IndustryWeek (Oct.25,2011), is one part monozukuri (or product excellence) and one part hitozukuri (or people excellence), and is steeped in respect for people. The Harada Method is designed to help shop-floor workers develop their skills and capabilities–on their own.

The key, says Bodek, is “self-reliance”, where “you, the worker can make a decision for yourself and your company and for your customer that is right. This is missing in so many American corporations. You call a company and the first thing you get is ‘ This call is being recorded’ . Why are they recording it? They don’t trust their people, and they don’t empower them to be trusted”.

The Harada Method, already taught to 55,000 managers at 380 companies in Japan, is enormously popular there because Japan (like the US) is struggling to compete with low-cost labor in China and other emerging economies.

Through the method, workers are encouraged to pick a skill that they’d like to master, and to set goals to help them accomplish it. Employees write down their goals, create a step-by-step plan to attain them, measure themselves against their goals and receive feedback and guidance. To achieve hitozukuri, managers provide lifelong training and mentoring of employees. “What I’m trying to do is get American mangers to focus on their people — recognizing that developing people doesn’t even cost you anything. It doesn’t”, says Bodek.

Discussion questions:

1. Compare the Harada Method to some of the quality improvement philosophies used in the US.

2. How can ordinary people become heroes in their own lives, and how does this apply to the factory floor?