- Socio-Technical Centre
The economic fallout from the COVID-19 pandemic and related government restrictions have impacted global supply chains across many industries.
Social distancing measures and lockdowns have prompted some of the largest drops in production rates ever recorded. China’s production rate fell by 13.5% in January-February 2020, which was worse than both the SARS epidemic of 2002/03 and the global financial crisis of 2008/09.
Order cancellation and demand
There has been widespread criticism in the media and from NGOs regarding the cancelling of orders, even ones already in production. Early reports on the crisis showed that 77% of suppliers had their orders cancelled without receiving payment. Due to the backlash of brands cancelling orders without paying, many have pledged to honour all orders completed and in production. Yet, of the suppliers originally reporting having orders cancelled, only 27% have had most or all their orders paid in full.
There have also been major reductions in new orders being placed as demand for clothing is low. There has been a year-on-year drop in the placing of orders, and the impact of order reductions is felt throughout the supply chain.
Unethical buying practices
The crisis is also giving rise to unethical buying practices. Some brands are utilising the crisis to receive goods at a lower price and delaying payments throughout the supply chain.
An issue within the supply chain that has been either highlighted or exacerbated by the pandemic is the lack of flexibility buyers are willing to accept on receiving orders from suppliers. At the beginning of the crisis, it was reported that 48% of suppliers within the textiles, clothing, leather, and footwear industry requested longer production timelines and a pause on delivery fines. However, 33% of buyers are still not allowing for any flexibility and incurring fines or cancelling orders if there is any delay.
Speed of change
The speed at which things are changing throughout the course of the COVID-19 pandemic makes it extremely difficult to understand or predict industry effects. Early in the pandemic it was clear that clothing and footwear, along with the construction industries, were the worst effected economically.
Projections for turnovers were also very bleak. However, the most recent figures released for November 2020 show that the expected loss has more than halved to, and with 21% of brands expecting turnover to return to pre-covid levels by the end of 2020 and just more than half by 2021.
Unlike order cancellations, the drop in turnover is not as evenly spread throughout the supply chain, with garment manufacturers experiencing -16% turnover compared to finishers and printers with -30%. This is interesting as brands primarily only deal directly with garment manufacturers. This shows that the manufacturers who brands traditionally interact with have not been as financially impacted as those business further up the supply chain.
If garment supplier turnover is not as badly affected as originally thought then why is it that some major brands have still not committed to paying for all orders, or have committed but still not paid? An answer may be apparent in sales figures. When we compare figures from 2020 to 2019 after the introduction of lockdowns in March, clothing sales figures saw a steep decline resulting in a low of -72.4% in April. Over the year they saw a steady growth but were still 13% behind in October, before falling to 30.2% behind in November with the reintroduction of lockdowns.
All other industries, other than fuel, have made strong comebacks. Decreased consumer footfall, because of restrictions on non-essential stores, has affected clothing and footwear retailers the most. The drop in footfall has impacted in-store sales, and although other industries have seen an increase in online sales, clothing has struggled with only a 17.1% growth of sales online during the pandemic.
Short and long-term effects
We are starting to see the long-term effects Covid-19 has had on supply chains and major high street brands. The immediate impact to the supply chain was supply disruptions caused by closures in alignment with social distancing measures. Supply disruptions usually have short recovery times, as once input materials are found there is still a demand for outputs. However, when there is a disruption to demand, recovery times are much longer.
This is what we are seeing with the drop in UK clothing sales, which has translated into the collapse of retailers, most notably Debenhams and the Arcadia group. Without sales and cash flow it is hardly surprising that Topshop (Arcadia) did not commit to paying for orders, and this could very well be a similar story for many other brands.
Supply chain resilience
The impact to supply chains can also be examined in relation to their resilience to major events. Supply chain resilience is described as its ability to contain and recover from disruptions. Demand disruptions have a longer recovery time, and if there is a decline in demand across multiple countries this removes the ability of suppliers to redirect their products to a stronger market, further impacting supply chain recovery.
Some of the key characteristics for ensuring supply chain resilience are: flexibility, visibility, and collaboration. The data shows that flexibility is an issue for some brands and suppliers, and although visibility of the global fashion supply chain is difficult due to its complexity, many brands have been working in recent years to achieve this.
Industry collaboration has been steadily growing in recent years with the creation of initiatives such as the Accord after the Rana Plaza disaster of 2013. Further collaboration within industry because of the COVID-19 pandemic is likely.
Another method of ensuring supply chain resilience is by retaining excess or ‘buffer’ stock for a ‘just in case’ scenario, yet with fast fashion brands operating with a ‘speed to market’ approach, this will have likely emphasised COVID-19's impact to their business.
Unethical worker practices
Due to the disruptions caused to the supply chain there is an increased risk of non-ethical worker practices. As unemployment rates rise in countries where textiles and garment manufacturing is based, and as orders slowly come back in, there is a heightened risk of worker exploitation due to desperation.
Evidence suggests that there has been a reduction in supplier audits being completed as well as suppliers requesting a delay to completing them. Concerns have been raised around workers’ safety and unethical recruitment practices. It is known that once supply chains get harder to track these methods become more likely.
A recent survey of garment workers (in Bangladesh, Cambodia, El Salvador, Ethiopia, Haiti, India, Indonesia, Lesotho, and Myanmar) found that even though 60% were still employed at their pre-COVID-19 factory they had experienced a 21% monthly wage drop from March – August 2020. More worrying still is that 75% reported having to borrow money or accumulate debt to pay for food, 43% of whom were still employed. This accrued debt could potentially lead to bonded labour (where a person is forced to work to pay off a debt) and exacerbate exploitation within the industry.
With the increased potential for unethical labour practices, it is even more concerning that a survey from July reported 31% of companies’ ethical trading budgets, which are in place to deal with these issues, had been reduced.
What is clear is that the entire fashion and textiles industry is in turmoil and the full extent of the impacts to the global supply chain are not yet known. It is hard to predict how this crisis will play out and where the main casualties in the system will be.
The increased risk that COVID-19 presents for exploitation or unethical employment practices for garment and textiles workers in emerging economies is mixed, whilst the reduced budgets from brands to tackle this is cause for concern.
The challenge the whole industry has moving forward from the COVID-19 crisis is to not squander the gains that have been hard won in in recent years in ethical and sustainable trade with a race-to-the-bottom over price, but to build upon them and use the current disruption to bring further improvements.
This research project – Impact of Covid-19 on management to eradicate modern slavery from global supply chains: A case study of Indian fashion supply chains – was commissioned by the Policy and Evidence Centre, and funded by the Arts and Humanities Research Council. It is led by a team from the University of Leeds (School of Design and Leeds University Business School) with collaborators from HEC, Montreal and the Goa Institute of Management.
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