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The other side of pressure techniques by buyers to lower price!

by Apparel Resources

05-December-2018  |  6 mins read

Price Negotiation
Image Courtesy: Apparel Resources

That RMG suppliers are under pressure from buyers to lower prices is nothing new. However, the extent and implications of such pressure tactics can be really telling on the industry!

Bangladesh RMG sector, the second biggest supplier of apparel items globally and which has been at the forefront of fuelling the country’s growth and development, had to withstand such price negotiation strategies of buyers for long, the implications of which were laid bare by two recent reports.

As per the first report, most garment suppliers across the globe, including Bangladesh, face mounting pressure from buyers due to their cost negotiation strategies, while according to the second report of Better Buying Purchasing Practices Index (BBPPI), such strategies impact the suppliers’ social, environmental, quality and other compliance performance.

The Better Buying report which surveyed 319 suppliers in 38 countries including China, Bangladesh, India and Vietnam, and measured the performance of 67 retailers and brands, underlined that around 55.4 per cent of suppliers had been affected by high-pressure cost negotiation strategies by the buyers, which includes not paying for samples, not paying on time and not paying the full price as indicated in the purchase orders, etc.

As per 61.4 per cent respondents, the buyers did not pay for the samples, underlined the report adding such a practise is a matter of concern as number of samples can run into thousands and cost of which could be 10 times the FOB. Thus, sampling costs quickly add up and contribute to complex financial pressures placed on suppliers, the report underlined.

Reacting to this issue, Vice President of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Faruque Hassan maintained that majority of buyers do not pay for samples, which sometimes costs up to 20 per cent of FOB, while speaking to the media.

As per an industry insider, buyer’s demands are increasing significantly over the years thereby compelling manufacturers to bear increased cost of production, taking responsibility of fabric sourcing and purchase, sample development as well as courier cost while all through maintaining the pressure on sustainable and transparent working practices.

It is worth mentioning here that as per a report by Mark Anner, Center Director, Penn State titled Binding Power: Te Sourcing Squeeze, Workers’ Rights, and Building Safety in Bangladesh Since Rana Plaza, hyper-competitive structure of apparel global supply chains has contributed to a buyer-driven sourcing squeeze that has pushed down prices, adding further that in case of Bangladesh, since Rana Plaza, the price paid by lead firms to supplier factories has declined by 13% as a result of which supplier factories’ profit margins decreased by 13.3% from 2011 to 2016.

The second important issue highlighted by the BBPPI has been that of order forecast, which could have serious implications on production mechanism of a supplier factory. The report stated that North American retailers forecast more consistently and accurately than European retailers, which enhances the ability of suppliers to plan their productions accordingly.

“From these actionable insights, retailers and brands can work to streamline their operations, create stronger partnerships with suppliers and monitor their efforts over time,” underlined co-founder of Better Buying Marsha Dickson.

As per industry people, planning and consistency of the buyer’s business with suppliers can go miles towards ensuring a hassle-free and equally benefiting business experience for the stakeholders as lack of proper forecasting can lead to a plethora of issues for a supplier, the implications of which are far-reaching in terms of profits and timelines, they maintained.

Lack of accurate forecasting by customers can lead to large and unpredictable orders being placed at the lowest possible cost, with insufficient time for the manufacturer to produce the goods, the experts underlined. Adding to these is the buyers’ stress on design and development, as part of which buyers expect suppliers to come up with their own product ranges from which the buyers can select.

The faltering margins, even led the Bangladesh Government to take up the issue of pricing from the US retailers and brands in one of the TICFA meetings where it underlined that Western buyers do not want to raise the prices in an excuse of fall in demand for apparel items in their countries, including the US. The issue even propelled Tofail Ahmed, the country’s Commerce Minister to give a clarion call to the buyers to increase prices at the fourth high-level follow-up meeting of the Sustainability Compact held in Brussels.

“We’ve modernized the (RMG) factories. We have ensured building and fire safety with an improved working environment in place. Owners have invested a lot in these areas but price of apparel products is yet to be hiked. Price needs to be increased urgently,” Tofail Ahmed observed.

It’s perhaps time the stakeholders need to unite on the price issue and try hammer out a solution acceptable to all, failing which, it would become increasingly difficult for the garment manufacturers to survive and sustain in this competitive environment, more so when they are already reeling under the menace of increasing overheads and labour wages.