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RMG suppliers under pressure from buyers to lower prices
Most garment suppliers across the globe, including Bangladesh, face mounting pressure from buyers due to their cost negotiation strategies, according to a latest global report.
Such strategies impact the suppliers' social, environmental, quality and other compliance performance, according to the second report of Better Buying Purchasing Practices Index (BBPPI).
The negotiation strategies include not paying for samples, not paying on time and not paying the full price as indicated in a purchase order, said the report launched on Wednesday.
"Some 55.4 per cent of suppliers had been affected by high-pressure cost negotiation strategies," it said.
The report also showed significant regional differences in purchasing practices, with North American retailers forecasting the way orders are spread more consistently than European.
The report was designed to support industry efforts to improve purchasing practices in supply chains globally.
The Better Buying report surveyed 319 suppliers in 38 countries, including China, Bangladesh, India and Vietnam, and measured the performance of 67 retailers and brands.
Retailers and brands scored an average of 2.5 stars in the cost and cost negotiation category, down a star from the previous ratings cycle, according to the Better Buying report, supported by C&A Foundation and Humanity United.
The majority, 61.4 per cent, responded that buyers did not pay for samples.
This is especially a matter of concern because the number of samples can run into thousands and producing those can carry costs 10 times more than the FOB (free on board).
Thus, sampling costs quickly add up and contribute to complex financial pressures placed on suppliers, the report said.
Moreover, while some brands and retailers agreed to pay for samples, suppliers indicated that they were often late in paying the invoices.
For a notable 27.3 per cent of suppliers, their customers did not pay the full price as indicated in the PO (purchase order), according to the report.
Nearly 10 per cent of suppliers indicated that fewer than 20 per cent of their customers' POs were paid in full.
The findings outlined late or unsubstantiated claims of quality defects as the most common reason for orders not paid in full.
Other reasons included being required to contribute to the opening of a new store, remodelling an existing store, or launching a new brand.
Only 64.5 per cent of retailers and brands paid bulk order invoices on time.
Over 20 per cent of suppliers said that fewer than 80 per cent of the orders received from retailers or brands were priced to cover the cost of social, environmental, quality and other compliance requirements, it showed.
The index used data submitted anonymously by suppliers through its online platform to rate purchasing practices of buyers in the apparel, footwear and household textiles industries globally.
The BBPPI is an initiative that supports industry-wide transformation of buyer purchasing practices to ensure business relationships to allow buyers and suppliers achieve their financial, environmental, and social sustainability goals.
The report concluded that the more pressure brands or retailers place on cost negotiations, the more likely the price does not cover all the costs.
This shows the need for retailers and brands to ensure their negotiation processes promote fair and sustainable partnerships, it said.
The report stated that North American retailers forecast more consistently and accurately than European retailers, which enhances the ability of suppliers to plan its productions.
Better Buying co-founder Marsha Dickson, in a statement, said, "From these actionable insights, retailers and brands can work to streamline their operations, create stronger partnerships with suppliers and monitor their efforts over time."
Buyer performance is measured against seven key categories of purchasing practices: planning and forecasting, design and development, cost and cost negotiations, sourcing and order placement, payment and terms, management of the purchasing process, and win-win sustainable partnership -formerly known as CSR harmonisation.
BBPPI found room for all companies to improve as well as provide evidence of good practices.
The average overall Better Buying score for buyers was 2.0, out of five stars which was 2.5 in first report. The best performing category was in management of the purchasing process (4.5 stars). The worst performing category was in sourcing and order placement (0.5 stars).
When asked, Faruque Hassan, vice president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), said majority of buyers do not pay for samples, which sometimes costs up to 20 per cent of FoB.
Buyers' requirements are becoming stringent day by day, leading to an increase in the cost of doing business, he added.
"But buyers are not raising the prices of our products in line with the investment we are making for workers' safety and better quality and for upgrading of technology. Rather, they are squeezing the price," he told the BDchronicle on Thursday.
Partially admitting the findings regarding PO payment, he said that in many cases, buyers asked for discounts over late shipment or quality issues.