PURCHASING PRACTICES

Purchasing practices are the way that global retailers & brands interact and do business with the manufacturers that supply their products. Purchasing practices encompass strategic planning, sourcing, development, purchasing (buying) and the underlying behaviours, values and principles which impact workers.

“When we came together as companies in ACT to collectively work on the topic of living wage, we did so with the clear understanding that we, as businesses, have also contributed to the downward spiral on standards. Not necessarily intentionally, but as a consequence of the competitive and complex environment in which we have to operate. As businesses we have come to the conclusion that we also have to look internally at own commercial practices and behaviour. This is a pillar of ACT – responsible purchasing practices.”

Thomas Linemayr, CEO, Tchibo

ACT GLOBAL PURCHASING PRACTICES COMMITMENTS

Achieving living wages requires collaboration between brands, governments, suppliers and trade unions to support a process ensuring continuous and substantial improvement of wages and working conditions. ACT member brands collaborate by improving purchasing practices and supporting collective bargaining processes at industry level in producing countries.

Improvements in purchasing practices and new forms of collaboration between all relevant stakeholders create the space for substantial and continuous wage growth, and a sustainable development of the garment, textile and footwear sector.

 
Download Global Purchasing Practices Commitments

Based on an internal assessment of purchasing practices and after consultations with IndustriALL Global Union (the global trade union federation of workers in the garment, textile and footwear industry) and suppliers in several countries, ACT member brands have adopted commitments on purchasing practices that will guide relationships with suppliers worldwide. The ACT member brands have committed to implement these changes progressively until the end of 2023.

Accountability & Monitoring of Purchasing Practices

The ACT Accountability and Monitoring framework provides ACT member brands with an agreed set of indicators and monitoring instruments to implement their purchasing practices commitments. ACT member brands will ensure that their purchasing practices facilitate the payment of a living wage. To identify in which areas the change of purchasing practises is most essential for achieving better working conditions and higher wages, ACT has analysed existing research, surveyed brands and suppliers and created a joint expert working group of brands and IndustriALL.

download info brief

 
Download Info Brief

As a result, ACT member brands have adopted purchasing practices commitments in five essential areas: fair terms of payment, full coverage of wage increases in FOB prices, better forecasting and planning, training and responsible exit. The newly adopted ACT accountability and monitoring framework with common indicators and monitoring instruments will measure progress towards full implementation of these brand commitments on an annual basis. It specifies and operationalises the purchasing practice commitments of the Memorandum of Understanding ACT member brands have signed with IndustriALL, the global trade union federation of garment and textile workers.

A purchasing Practices Self-Assessment (PPSA) by brands and an anonymous Purchasing Practices Assessment (PPA) by suppliers are the regular monitoring tools. Communication with suppliers and workers as well as a confidential channel to raise concerns and complaints will ensure continuous external feedback. The PPSA survey among brands and the PPA survey among suppliers will be rolled-out simultaneously for all ACT member brands and suppliers in ACT priority countries in 2020. The results of these surveys together with further documentation and dialogue with national actors will serve as a baseline, followed by the release of the first ACT Accountability and Monitoring Progress Report in 2021.

FOR further information please see the ACT info brief on purchasing practices

PURCHASING PRACTICES COMMITMENTS & MEASUREMENT OF PROGRESS

Each of the five purchasing practices commitments is linked to achievement indicators that are used to measure progress and deliver tangible improvements in the buying process with suppliers.

Commitment 1

Brands commit that purchasing prices include wages as itemised costs

  • % of brands that have purchase agreements that include compliance with collective bargaining agreements.
  • % of volume for which ACT labour costing protocol is applied that isolate wages and other labour costs including wage increases.
  • % of suppliers who received guidance on labour costing in line with ACT labour costing protocol.
  • % of volume for which ACT labour costing protocol is applied that isolate wages and other labour costs including wage increases.
  • % of ACT brands that have an internal monitoring mechanism to track the application of ACT labour costing protocol including the reflection of higher wages and other labour costs in purchasing prices in place.
  • % of orders with on-time payment to suppliers.
  • % of orders where the amount paid is in line with agreed payment terms.
  • % of retrospective changes of payment terms which were not mutually agreed.
  • % of retrospective changes of payment terms which were mutually agreed and to the detriment of the supplier.
  • # of orders where penalties and/or deductions have been applied which fall outside the terms of the purchase agreement.
Commitment 2

Brands commit to fair terms of payment

  • % of brands whose purchase agreements clearly reference financial consequences for non-performance.
  • % of ACT brands who have in place an internal monitoring mechanism to track terms of payment, on-time payments
    as well as penalties issued and their root causes.

Commitment 3

Brands commit to better planning and forecasting

  • % of brands who have introduced a planning and forecasting system including capacity booking for at least their main suppliers.
  • % of volume covered by planning and forecasting systems including capacity booking.
  • % deviation (measured in pieces) from forecast on average on supplier level.
  • % increase of overall volume covered by forecasting.
  • % of suppliers who report positively on communication regarding mutually agreed critical path deadlines.
  • % of suppliers that brands are engaged with in critical path communication.
  • % of brands who have introduced a planning and forecasting system in which: a) dates and frequency for adjustments are determined and are mutually agreed, b) excess capacity is released in a mutually agree timely manner, and c) % of suppliers that report that forecast updates are in line with the agreed timeline.
  • % of suppliers who report positively on communication regarding management of peaks and troughs.
  • % of brands that have delivered training on ACT commitments on purchasing practices, for all relevant employees.
  • # of suppliers informed on ACT commitments.
  • % of ACT brands who have updated their training programs for relevant employees to include better forecasting and develop robust processes (including critical path stages).

Commitment 4

Brands commit to undertake training on responsible sourcing and buying

Commitment 5

Brands commit to practice responsible exit strategies

  • % of factory exits which comply with ACT responsible exit checklist.
  • # of complaints related to factory exits.
  • Complaints/reports received on negative impacts related to factory exits.

ACCOUNTABILITY FOR ACT COMMITMENTS

ACT LABOUR COSTING PROTOCOL

The ACT labour costing protocol provides guidance to brands for implementing the Purchasing Practices commitment* to cover wages and wage growth in brand purchasing prices as outlined in the ACT Memorandum of Understanding.

The ACT labour costing protocol is based on three key pillars:

  1. All ACT member brands agree to follow the Labour Costing Principles
  2. The principles are operationalised through a variety of labour costing methodologies
  3. ACT member brand labour costing is monitored through the ACT accountability and monitoring framework that includes internal assessments, anonymous feedback from suppliers and a complaints mechanism for suppliers and other stakeholders.
*Purchasing Practices Commitment: Brands commit that purchasing prices include wages as itemized cost.

ACT LABOUR COSTING PRINCIPLES

  1. The transformation of the global garment industry based on better wages requires changes in the current business practices and investment in sustainable business relationships based inter alia on transparent and fact-based price calculations. Brands recognise that a commitment to production countries and suppliers are a key enabler for paying living wages.
  2. All garment and footwear volume sourced is based on the ACT labour costing protocol. Brands accept responsibility to ensure that labour cost have been calculated and to verify that the price paid allows the payment of wages and all other labour costs, although the detailed costing may be performed by the supplier.
  3. The labour costing will allow for all direct and indirect labour costs to be isolated and incorporated as a distinct costing block in price negotiations.
  4. Brands will conduct labour costings in line with predicted wage increases as soon as the information becomes available or, where exact data is not available, the best estimate of an expected wage increase, and to incorporate this into purchasing prices.
  5. When other cost inputs (e.g. cost of fabric, energy costs, size of order) remain equal, wage increases will be covered through higher purchasing prices.
  6. Suppliers will not be expected to cover rising wage costs through unreasonable efficiency gains or reduced margins. While brands and suppliers can work together to increases the efficiency* of any particular purchase order, brands will not impose unilateral expected efficiency improvements on the supplier. Indicative year on year average efficiency improvements can be agreed in a fair and reasonable manner with suppliers and are independent from negotiated or statutory wage increases.
  7. Brands will contribute to efficiency improvements through better purchasing practices and training.
  8. Brands will provide guidance to suppliers (manufacturers or intermediaries) on labour costing.
  9. Brands will have an internal monitoring mechanism to track the application of ACT labour costing protocol including the reflection of higher wages and other labour costs in purchasing prices.
*Buyer driven efficiency improvements include the size of order and the capacity utilisation driven by volatility in forecasting while supplier driven improvements investment in industrial upgrading through training and technology as well as improvements in process efficiency. There is obviously a limit to the expected efficiency improvements.

LABOUR COSTING METHODOLOGIES

The labour cost component of any given order can be determined through a cost-based calculation (CBC) model (e.g. open costing), through a labour share (LS) model or indeed through a combination of both. Most brands will likely use a combination of methodologies depending on the nature of the relationship to the supplier, whether the product was procured directly or through intermediaries etc. Developing multiple approaches will provide the flexibility to address adequately the sourcing and buying models different buyers apply.

The CBC requires a detailed level of open costing between buyers and suppliers to determine the price of an item. The LS model is designed to facilitate the ring-fencing of labour costs when negotiations rest on a FOB/CMT price and do not engage in detailed costing. The overall price of a product is in this case determined more on the basis of historic prices or benchmarking in the market.

CBC – COST BASED CALCULATION MODEL FOR RING-FENCING LABOUR COSTS

The Cut-Make-Trim (CMT) price for any item is based on a number of cost items including labour cost component (LCC) – which is set by the labour minute value (LMV), the standard allowed minutes (SAM) and an efficiency factor – factory overheads, additional costs and factory mark-ups. The Free-on Board (FOB) price will also include material/ fabric and shipping. The illustration below uses the term of Cost of Making (CM) which is simply covering overheads and the labour cost component of the price. Depending on the specific buying model prices negotiations will include different aspects of the overall production process.
COSTING BLOCK  
Fabric Costs
Additional costs (trim/zippers etc)  
Labour cost component (LCC)  
Labour Minute Value  
SAM  
Efficiency Rate  
Total LCC  
Factory Contributions
(Overheads and Markup)
 

This costing-model for ring-fencing labour costs applies where suppliers and buyers negotiate prices on an open-costing basis. Transparency and detailed negotiations between buyers and suppliers allow a fact-based negotiation where wage costs can adequately be reflected as a costing block of the overall purchasing price. Other costing blocks must then of course also be identified as the illustration above already showed.

The labour cost component (LCC) needs to be identified and ring-fenced in order for brands to facilitate the payment of the negotiated wage. The LCC is the direct and indirect labour cost required for producing any particular item. The LCC is calculated on the basis of a Labour Minute Value (LMV) and Standard Allowed Minutes (SAM) and an Efficiency factor specific to the production unit and type of order.

 

Labour Cost Component = Labour Minute Value x Standard Allowed Minutes


Efficency Factory

The Labour Minute Value (LMV) is the cost of labour of each production minute in a particular production unit. This means it is calculated on the basis of the cost of labour to the factory per real production minute. The production minutes of a factory will be the number of machine operators multiplied with the normal working time of the factory. The labour cost must include the cost of direct and indirect labour (including wages, mandatory allowances, social security contributions and maternity pay).
Labour Minute Value = Direct Labour Costs + Indirect Labour Costs


Total Production Minutes

The labour minute value needs to be based on the indirect and direct labour cost of all production workers and auxiliary workers but exclude factory management.

The Labour cost component furthermore depends on Standard Allowed Minutes (SAM) per garment and factory specific Efficiency. There are two main ways in which a SAM can be determined – by sampling an average time via in factory work study or by using a predetermined motion time system approach which uses synthetically generated standard minute values which become the target times subject to the reality of the factory environment.

Efficiency is the third dimension of assessing the labour costs. Efficiency has a major impact on the unit labour costs and also on the overhead cost per unit of output. There are different elements that impact on efficiency. Both buyers and suppliers have a role to play in improving efficiency. The efficiency factor is factory specific and will be included in the negotiations on orders as an input in the price.

POTENTIAL FACTORS FOR BUYER-DRIVEN EFFICIENCY IMPROVEMENTS POTENTIAL FACTORS FOR SUPPLIER-DRIVEN EFFICIENCY IMPROVEMENTS
Size of orders:
In this case efficiency differences are directly linked to the order itself. Refitting of the line is more costly per unit for a
small order and vice versa. The different costs are related to the individual contract.
Productivity, technology, infrastructure, vertica lintegration:
These are elements of industrial upgrading that need to be part of the long-term sustainability of an industry.
Capacity utilisation:
Under-utilisation (brand and supplier efficiency) of capacity caused by high volatility of orders, bad forecasting and planning etc. is increasing labour costs per unit. This is also be the case for over-utilisation (overtime).
Process efficiency:
Process efficiency has an immediate and direct impact on costs. It reflects the actual number of workers required in a specific factory to provide a certain production capacity, the methods and layout used in the production process.

 

LABOUR SHARE COSTING MODEL FOR RING-FENCING LABOUR COSTS

The LS model assumes that the negotiations will not enter the same level of detail as in the CBC model. Buyers and suppliers are not using an open costing method to determine the LMV of each production unit and hence negotiate in less detail on the different cost components of the price. The basis for negotiations is therefore either the FOB or CMT price, or potentially the Cost of Making (CM) price which means that factory mark-up, materials and shipping and other costs are separated. In this model ring-fencing the labour cost component also requires engagement with suppliers to determine a number of supplier and order specific factors, including the labour-share of a number of standard models, their indirect labour cost, the material used, as well as an efficiency factory for the order. Determining supplier specific costing blocks is also important in order to calculate any coast increase due to a national or sector wide wage increase.

If an agreement is reached over the percentage of overall costs which make up labour costs, then an increase in wage as a result of the CBA negotiations or minimum wage increases can be estimated through a percentage increase in the labour cost. The labour-share of a particular order however will also change as labour costs rise, complexity evolves of efficiency improves.

Therefore, the engagement with suppliers on their estimated labour-share for specific models, need to be repeated at regular intervals. This is especially important for new lines or orders where no comparable historical data exists. Although some standard models can be used to benchmark costs when ordering from existing suppliers, where brands enter a new business relationship these benchmarks will need to be developed.

ACCOUNTABILITY AND MONITORING

The labour costing protocol is part of the ACT accountability and monitoring framework. As such the implementation of the protocol will be subject to regular reporting by brands based on supplier surveys and self-assessment as well as a complaint mechanism for suppliers who do not feel that the ACT labour costing protocol was applied.

GLOSSARY OF TERMS

CBC Model Cost-based-calculation Model Costing model on an open costing basis where different costing blocks are calculated in detail.
CM Cost of Making Price of labour cost and factory overheads of any particular item only.
CMT Cut-Make-Trim Price of an item excluding material and shipping costs.
FOB Free-on-Board The price of an item including material costs and shipping
Direct Labour Cost   Direct Labour costs are the costs associated with those workers who are directly involved in the manufacturing of the item (e.g. operating a sewing machine, trimming fabrics)
Efficiency Factor   Measures the efficiency of a factory or line.
Indirect Labour Cost   Indirect Labour costs are all those costs associated with workers in the factory not directly involved in the manufacturing process (e.g. cleaners, warehouse operators). In our calculations indirect labour and direct labour costs do not include management wages and expenses.
LMV Labour Minute Value This is the cost of indirect and direct labour of each minute of production.
LCC Labour Cost Component This represents the block of costs in each item associated with direct and indirect labour costs and is calculated using LMVxSAMxEfficiency.
LS Model Labour Share Model A proposed model for labour costing where labour costs are ring-fenced based on a labour share of the overall price of an item.
SAM Standard Allowed Minutes These are the number of minutes it would take a worker to complete a particular item. These would be generally understood averages, which will have to be adjusted by the efficiency of any particular factory as the real time it takes a worker will depend on a number of factors external to their ability and speed.