LOOSE THREADS 002

How have payment terms evolved over the years and what do suppliers consider as "favorable/good" payment terms, i.e. that give them financial security.? [...]
14 Oct 2020
00:11:29
Manufactured
Manufactured
LOOSE THREADS 002
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Question:

The question we’re addressing today is one that’s especially timely given the sweeping order cancellations the fashion supply chain has experienced in the wake of global pandemic, and the searing new report published by the Worker’s Rights Consortium and ECCHR about contract terms in the fashion supply chain – which we definitely recommend reading.

So without further delay, here’s the question:

“I would be interested to hear more about payment terms in the industry – how these have evolved over the years and what suppliers consider as “favourable/good” payment terms, i.e. that give them financial security.

This was a question that prompted a lot of discussion, so instead of reading the answers separately we’re going to try and share snippets of the conversation.

One of the first suppliers to respond said: “I think we need more legal recourse and better contracts which level the playing field. The risk on the supplier side is paying upfront capital for goods or investments, which is paid for by future business. A proper legal structure where a supplier can easily sue a brand for breaking contracts could be a solution.

We need an international legal system with teeth. If one party knows a contract they sign isn’t meaningful and they can shirk their responsibility. Then of course signing anything is just a formality. If two businesses in the USA or Europe renege on a contract there is a clear legal recourse. The same can’t be said about international trade in other parts of the world. Here I think comparative trade theory is relevant but perhaps what is lacking from that discourse is comparative power balances.”

In episode 3 we actually talked about exactly this problem with factory owner Piet Holten. He describes how his customer, a brand, forced him to agree to new contract terms. He describes effectively being powerless: technically, he could have sued. But it would have bankrupted him. His customer knew that and took advantage of it.

Another supplier said: “We strictly do business with Letter of Credit or advance payment basis.”

Another responded: “I’d agree, some advance upfront is the best way (even if it’s a small amount, say 10%). It has been historically successful in Bangladesh. Not only in terms of security, but factories go out of their ways to ensure future orders with such a customer.

But this respondent also adds: “The country’s overall position plays a big role in setting payment terms. See, Letter of Credit is a legally binding contract. But what do we do when the brand wants to cancel an order and simply doesn’t send authorized 3rd party inspectors to audit the goods? If we deny and goods don’t go, it’d seem WE didn’t “comply with Letter of Credit terms”.

One might wonder why the factory’s bank doesn’t complain to the buyer’s bank? But A poor country like Bangladesh never holds the upper hand in such situations. We have to willingly give in to the manipulation of foreign banks, otherwise risk our bank’s other businesses.”

This is interesting too, as it resonates with a lot of what we explored in episode one of this podcast when we looked at Jessie’s time with a third-party inspection company.

Some suppliers took a slightly different angle for answering the question, and instead of focusing on the details of the terms, highlighted the need for suppliers to work together.

For example, one supplier said: “It will be a collective effort to show that IT IS a bad order term.”

Another respondent chimed in: “If another supplier takes the order then we lose out. Either the brands need to take responsibility for recognizing poor payment terms for their manufacturers, or manufacturers need a collective agreement to not accept such terms. I wonder if the latter could be considered monopolistic behavior…like a cartel (i.e. OPEC).”

Others were more skeptical of collaboration, saying things like:“A contract would mean competitors coming together. A legal agreement always needs Government’s intervention. Brands would retaliate. Maybe by using unions to put pressure on Govt, as they fund the labor associations (it’s happening in Bangladesh all the time).”

This respondent goes on to suggest a different kind of collaboration model: “Contrarily, I think of a more simplistic approach. See, open public review on Facebook has led customers choose the restaurant with the best review. A platform- where factories can do the same about brands- would bring similar outcome. Mostly, factories accept to work with ‘popular’ brands overlooking bad payment terms, because they think it’s “all formalities” and lack information. Even in a sourcing office, we see different merchandising teams handling factories in different ways.

Is an owner really that stupid to work with a buyer that kills suppliers? No, he just doesn’t know the brand’s previous transaction history, or about certain corrupt employees of sourcing offices.”

The same supplier goes on to say: “When a potential competitor is approaching me, I wouldn’t necessarily give the right information about brands. My admissions of brand’s wrongdoings would be held against me. Also, there’s no harm in misleading my contender, right?

So my personal opinion is that any collaboration has to be anonymous.

At this point, another supplier chimes in with still a different view, connecting audits to payment terms. The respondent says: “The auditing and the payment terms are in my view heavily connected. The auditing is a paper trail of CMY (cover my ass) but not intended to take real responsibility but forced upon the legal/compliance departments of the brands. Just to make sure that if anything goes bad, they can show that it is not ‘them’ but ‘us’.

The same is for payment terms. For the bigger brands the complete ignorance of their responsibility to have indeed a good relationship with suppliers and thus also for the continuity and improvement of products and processes is manifest. We have seen this during the last months. We’re working with payment terms for some of our customers far over 4 monhs after delivery. We can use factoring that costs us another fee because we need the money earlier than 4 months after delivery (working capital tied up 6-7 months).

Why are Brands not audited upon their performance in this area and only push this principle downstream. Be clear, I am not a big fan of Audits, but if we want to create a more equal playing field some accountability should take place, which includes the way the prices and payment terms are set. This is key in my view. The consumer will need an easy way to check how the brands are dealing with their suppliers, not only through he ‘sustainable’ talk through their websites.

Just thinking out loud: Suppliers could think about a ‘ranking the stars’ -‘ranking the brands’ a couple of criteria (payment terms, flexibility in volatile times, adherence to accepted standards and certificate s and not always having to do your ‘own’ audit, transparency about how they manage their supply chain to communicate to the outside world, how it is to work with that specific brand. I think suppliers will be conscious about contacting each other when getting potential orders form Brands. You might be in direct competition. That is the difficulty.”

In response to the conversation about ratings, someone else said: “I used to think ranking brands would help suppliers better choose their customer. I thought the Higg BRM would help this. Now working on the manufacturing side I’m less optimistic about such rankings. I think market for textile manufacturing is fairly saturated which means buyers’ market. If there were more buyers than manufacturers then buyers would be competing with each other for manufacturing partners, rather than manufacturers competing for business. Maybe we need to bring back the golden age of the quota system “

And I think this thought from a supplier closes out the conversation quite nicely: “As always there is not one solution. Different approaches should be tried at the same time. I think the ranking is done by suppliers, but meant for consumers. The only way to influence brands is through consumers/directly effecting shareholders value. Brands are very aware of reputational risk. If suppliers collectively come to a system where the consumer can find out how the different brands deal with them and make that accessible, that could be useful. This should be ‘anonymous’ of course otherwise suppliers would be afraid to give the relevant feedback. And it should be verifiable at the same time.

And yes, a supplier network is another thing that could work and should be explored. Suppliers are most of the time lone wolfs in the desert, trying to get some shelter, but with hardly anybody recognising their dilemma’s and risks. Suppliers have no access to the ‘individual’ customer, so this is what needs to be organised.”

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