UPDATE, May 3: On Thursday, the Walt Disney Company publicly disclosed that it is ending the production of licensed merchandise in Bangladesh following a string of garment factory accidents in the country. A letter previously issued to licensees and vendors in March revealed that Disney is ending similar merchandise production in several countries that have been accused of fostering poor working conditions, including Pakistan, Belarus and Ecuador. Some labor rights activists are now questioning whether abandoning Bangladesh and its impoverished workers is the appropriate move, given the population’s reliance on manufacturing salaries.
Just a couple of weeks ago, my colleague Bill Saporito and I published a TIME cover story about the renaissance of American manufacturing, and the decline of the outsourcing boom to emerging markets. Among the many reasons that we listed for this trend was the sense that complex supply chains increase the risk of health, safety, labor and environmental catastrophes, which can destroy the reputation of the Western multinational firms doing the outsourcing.
The news of yet another disaster in the Bangladeshi garment industry last week brings this point into stark relief. The death toll from the collapsed garment factory plaza in Savar, which housed subcontractors working with major global brands like Britain’s Primark, is at least 386, and may rise to over a thousand once authorities are done counting the bodies. This follows a devastating fire that killed 112 people at another Bangladeshi factory last year, one that was churning out goods for Wal-Mart without the company’s knowledge. Wal-Mart says it wasn’t officially using the Savar complex for outsourcing but is looking into whether any unauthorized subcontracting was done there, as the factory’s owner initially claimed. The company is also now desperately trying to repair its reputation in the region, issuing stern warnings about dropping any suppliers that violate its labor policies, and contributing $1.6 million to launch a new Environmental Health and Safety academy in Bangladesh, to provide training on workplace health and safety practices, an issue that has traditionally been handled by government.
The message is that such disasters can be avoided with the proper precautions. But the truth is that high publicized supply chain issues – from melamine tainted milk to unsafe working conditions at factories used by outsourcers to companies like Apple in China – have cost multinational brands billions of dollars, not to mention huge reputational downgrades, in recent years. A recent McKinsey survey of global executives found that 2/3rds believed that supply chain risk had increased since the 2008 recession, and executives working in Asian nations were particularly worried – 82 percent believed the risks would continue to increase over the next 5 years. Part of this is due to the growth of complex supply chains in countries with more lax regulations, but it’s also about energy volatility (volatility in the oil market has more than doubled in recent years, thanks to both political conflict and increased high frequency trading of commodities), and more extreme weather patterns. “The truth is that supply chain risks [like what we saw in Bangladesh, or natural events like the Japanese tsunami last year] are not an exception – they are the norm. It’s important for companies to think of them not as black swan events, but as things that must be prepared for, and prevented,” says Alex Niemeyer, who leads McKinsey’s global supply chain practice.
But preventing them typically involves one of two things – getting involved in nation building (a la Wal-Mart’s donations in Bangladesh), or diversifying supply chains and moving them closer to customers (which is increasingly the practice of large multinational firms like Caterpillar, which pushes “localnomics” not only to reduce risk but also energy costs involved in the transport of goods from far flung places). Eric Olson, a senior VP at BSR, a non-profit that works with 250 global companies on sustainability and issues like supply chain strategy, says that events like those in Bangladesh are encouraging a number of companies to rethink far-flung supply chains, and move business closer to home. “Even if multinationals are policing their direct suppliers, it’s impossible for them to investigate every small scale, household operation surrounding those factories,” he says, noting that he’s seeing the trend towards more local sourcing amongst white goods makers, electronics firms, and automotive companies, because of high energy costs. “Apparel is less likely to move, because it’s so dependent on cheap labor, but I think in the next 6-18 months, you may see Western multinationals start to shift production from places like Asia to Mexico, and to look at domestic insourcing as well.”
Indeed, as Saporito and I noted in our manufacturing cover, cheap apparel and technology assembly operations are likely to remain overseas indefinitely, because of the cost/productivity arbitrage. But the ways in which the multinationals involved in those businesses interact with governments and workers on the ground is likely to change. Over a hundred years ago, firms like the British East India company were involved not only in money making, but in governing the countries in which they did business. I don’t think we’re headed in quite that direction yet, but I do think that the Bangladeshi tragedies underline the fact that companies that profit from doing business in places with cheap labor and lax regulations will ultimately have to get more involved in the expensive, time consuming work of helping those regions reform – or they’ll have to get out, if only to save their own reputations.