Lessons from that Day / Rana Plaza @ 10 / PART III Interview

Spotlight: Rana Plaza @ 10

Larger Idea of Responsible Sourcing Continues to Gain Traction in Industry

Can market forces help prevent tragedies such as Rana Plaza? Not really, say Professors Vinod Singhal and Brian Jacobs as they explain that in terms of sourcing strategy, most firms are going to continue to search for the lowest costs even as the larger idea of responsible sourcing has gained traction following an increase in activists and watchdogs as also the ubiquity of 24/7 news and social media.

Subir Ghosh

26 April 2023

7 minutes

Long Story, Cut Short

Governments need to play an active role in ensuring that labour is not exploited, and develop regulations to ensure that factory owners provide fair wages.
The reason that the destruction of any one supplier factory, even with tragic loss of life, does not result in major disruption to the flow of goods is that the RMG supply chain is incredibly fragmented with thousands of small factories in many countries.
With respect to wages, there is clearly a battle between owners and workers.

The Alliance and Accord made great progress in training workers, raising awareness of industrial safety, and remediating many factory violations of safety standards, particularly fire safety. The least progress was made on building structural issues which unfortunately was the root cause of the Rana Plaza tragedy.

Root cause The Alliance and Accord made great progress in training workers, raising awareness of industrial safety, and remediating many factory violations of safety standards, particularly fire safety. The least progress was made on building structural issues which unfortunately was the root cause of the Rana Plaza tragedy. Flickr 2.0 / ILO Asia-Pacific

A widespread belief in the aftermath of the Rana Plaza disaster was that "the risks and costs of tragedies like Rana Plaza, as assessed by capital markets and consumers, are sufficient to motivate firms to shift production sourcing to developed, high-cost countries rather than developing, low-cost countries."

Two professors, Vinod Singhal and Brian Jacobs, wanted to examine this assumption. They "studied the stock market reaction to 39 global apparel retailers with significant sourcing in Bangladesh at the time of the Rana Plaza disaster. We found that although stock market reaction to retailers on the day of the Rana Plaza disaster was negative, its magnitude and significance dissipated by the following day."

Their findings were published in the March 2017 edition of the Journal of Operations Management. In this probing interview. Prof Singhal and Prof Jacobs revisit the subject.

texfash.com: If one were to do a Google search, one would come across thousands of papers/studies/reports on the Rana Plaza tragedy and its aftermath. I have spent a considerable amount of time wading through them, and find that precious few have explored the angle that you did. Why, do you think, is it so? Is it because brands and retailers have summarily been described as the villains, and that no one wants to explore a different (even contrarian) angle at all?
Vinod Singhal and Brian Jacobs: In general, the role of supply chains and supply chain partners (both buyers and suppliers) is not widely appreciated by the public. Although there is increased public awareness of supply chains since the global pandemic of 2020, many people still do not understand how different firms interact to produce, deliver, and sell goods around the world.

Even for those people knowledgeable about supply chains, a commonly held belief is that market forces can help prevent tragedies such as Rana Plaza. This belief relies on the assumption that consumers and investors will “punish” firms that engage in substandard business practices such as retailers sourcing from factories with unsafe working conditions. Our work provided evidence that this assumption did not hold in the case of Rana Plaza; retailers were not punished by investors. We believe this is due to investor knowledge that:

The tragedy did not cause any major disruptions in the flow of goods to retailers;
The retailers were not legally liable or responsible for the tragedy;
Consumers were not engaging in widespread boycotts of retailers.

Ten years have elapsed since the disaster. Do you think it eventually had any bearing on sourcing strategies of companies? What is your prima facie assessment? The landscape is no more what it was in 2013. There are more watchdogs, more activists, more industry-led initiatives, etc. Comments, please.
Vinod Singhal and Brian Jacobs: Even before Rana Plaza, it was relatively commonplace for western companies to require their suppliers to adhere to a code of conduct that prescribes certain environmental and/or social practices. The larger idea of responsible sourcing (where buyers attempt to ensure their suppliers adhere to environmental and social norms and regulations) continues to gain traction in industry. Managers are increasingly aware that the actions of their supply chain partners can have a negative impact on their own firms. As you note, the increase in activists, watchdogs, etc. has probably heightened the importance, as has the ubiquity of 24/7 news and social media. In terms of sourcing strategy, most firms are going to continue to search for the lowest costs while considering the risk of the potential negative impact of social and environmental incidents like the Rana Plaza building collapse.

Subir Ghosh

SUBIR GHOSH is a Kolkata-based independent journalist-writer-researcher who writes about environment, corruption, crony capitalism, conflict, wildlife, and cinema. He is the author of two books, and has co-authored two more with others. He writes, edits, reports and designs. He is also a professionally trained and qualified photographer.

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Managers are increasingly aware that the actions of their supply chain partners can have a negative impact on their own firms. As you note, the increase in activists, watchdogs, etc, has probably heightened the importance, as has the ubiquity of 24/7 news and social media. In terms of sourcing strategy, most firms are going to continue to search for the lowest costs while considering the risk of the potential negative impact of social and environmental incidents like the Rana Plaza building collapse.

Vinod Singhal

Charles W Brady Chair, Professor; Scheller College of Business

Georgia Institute of Technology

What has also changed since your study is that the Alliance and the Accord are no longer there. What good, do you think, came out of the two initiatives?
Vinod Singhal and Brian Jacobs: During their 5+ years in operations, the Alliance and Accord made great progress in training workers, raising awareness of industrial safety, and remediating many factory violations of safety standards, particularly fire safety. The least progress was made on building structural issues which unfortunately was the root cause of the Rana Plaza tragedy. Fixing building structures is not only expensive and time-consuming, but requires consideration of property rights because many buildings are owned by third parties who lease space to multiple factories.

Although the Accord fought in the Bangladeshi courts to remain in existence post-2018, they were eventually forced to transition their operation to the RMG Sustainability Council, a private Bangladeshi entity comprising industry groups, brands and trade unions. The effectiveness of the Council has been called into question in the press.

Nonetheless, to the best of our knowledge there have been no major safety incidents with large loss of life in the Bangladeshi RMG industry since the Rana Plaza tragedy. We think the Alliance and Accord as well as the concerted efforts of the various stakeholders including the Bangladeshi government may have contributed to this improved safety record.

There's a sentence in your study: "The insignificant reaction (of the stock markets) suggests that investors do not see the Rana Plaza disaster as significantly disrupting the apparel supply chains of retailers that source from Bangladesh." Do you think this would still be true? But the fashion world is much more politicised today than it was then. There was no evidence of customers boycotting garments made in Bangladesh. Would that be any different today?
Vinod Singhal and Brian Jacobs: The reason that the destruction of any one supplier factory, even with tragic loss of life, does not result in major disruption to the flow of goods is that the RMG supply chain is incredibly fragmented with thousands of small factories in many countries. RMG production can quickly be transferred to other factories because switching costs are low and the industry has excess capacity. Further, the lightweight/high density nature of RMGs plus the availability of cheap containerised shipping means that goods can be sourced from multiple geographic locations without major cost impacts.

The bigger concern for buying companies is the reputational impact, which might result from negative press, decreased brand value, and consumer boycotts. We found this to be largely a non-issue in the 2013 Rana Plaza tragedy. We conjecture that this is because retailers were not responsible for the tragedy. There is no doubt that younger consumers are increasingly more aware and active regarding social issues. If such a tragedy were to reoccur in the future, there’s an increased chance of consumer backlash. However, consumers also have short memories and they often choose convenience and low price over responsible buying.

But beyond blame seeking, it’s important to remember that NGOs have limited resources; they must concentrate their efforts to achieve the greatest impact. It’s much more cost-effective for an NGO to work with a major western retailer (e.g., H&M, Walmart) that buys from thousands of suppliers rather than working directly with thousands of suppliers.

Brian Jacobs

Professor of Decision Sciences; Graziadio Business School

Pepperdine University

What was mentioned in your study, and has also been seen in news reports over the last few years, is that many owners still want higher prices and that tight margins were making them cut corners on safety issues. But today, Bangladesh has a high number of "green" factories, and is the 3rd largest apparel exporter after China and EU. Yet, workers are having to demand a wage rise. Clearly, something is wrong here.
Vinod Singhal and Brian Jacobs: As with most products, the externalities of environmental and social costs are not incorporated into the pricing of RMGs. For example, there has been much press recently about the EU’s attempt to price the cost of carbon into products. While there have certainly been efforts to price in social costs (such as living wages), these have not received the same regulatory or public attention as environmental issues.

With respect to wages, there is clearly a battle between owners and workers. When we did our study of the Rana Plaza Tragedy, we observed that owners of garment manufacturing factories in Bangladesh were powerful and well-connected politically. We also observed that unionisation was not very common in the garment industry, which reduced the bargaining power of workers. These conditions may still prevail in Bangladesh. We strongly believe that providing fair and living wages is economically beneficial to both the firms and society in the long run. Governments need to play an active role in ensuring that labour is not exploited, and develop regulations to ensure that factory owners provide fair wages. Some western retailers are trying to address this issue, but ultimately this is something that the Bangladeshi RMG industry has to proactively address.

NGOs [mostly in North America and Europe] do have a watchdog role to play. But the "shame and guilt" strategy that they deployed shortly after the disaster still seems to be the prevalent/widespread strategy today. Is it because such a thing resonates with their own audiences? Are brands and retailers soft targets compared to the factory owners (as also local inspectors and politicians who were all directly or indirectly complicit) got away scot-free?
Vinod Singhal and Brian Jacobs: When tragedies do occur, it’s natural that we all (including NGOs) seek someone to blame. Large corporations with deep pockets are convenient targets.

But beyond blame seeking, it’s important to remember that NGOs have limited resources; they must concentrate their efforts to achieve the greatest impact. It’s much more cost-effective for an NGO to work with a major western retailer (e.g., H&M, Walmart) that buys from thousands of suppliers rather than working directly with thousands of suppliers. Another consideration is that if NGOs were to concentrate all their efforts on the local supplier owners, regulators, inspectors, and politicians, there is no guarantee that the western retailers would continue buying from those suppliers since they could easily switch to other suppliers in other countries.

One strategy that seems to be trending is the increased willingness of corporations and NGOs to collaborate proactively rather than waiting for tragedies to occur. Many major corporations have active alliances with NGOs to guide their strategies and operating principles in regards to environmental and social issues.

Unionisation was not very common in the garment industry, which reduced the bargaining power of workers. These conditions may still prevail in Bangladesh. Providing fair and living wages is economically beneficial to both the firms and society in the long run.

Equitable wages Unionisation was not very common in the garment industry, which reduced the bargaining power of workers. These conditions may still prevail in Bangladesh. Providing fair and living wages is economically beneficial to both the firms and society in the long run. Flickr 2.0 / Trades Union Congress