A Sustainable Supply Chain "Race to the Top"

Levi Strauss is hoping that, by incentivizing its worldwide web of suppliers to operate more responsibly, it can create what it is calling a sustainability "race to the top" in its supply chain.  The program, which the world's most-recognized jeans maker and the World Bank jointly unveiled last November, is startling simple.  In exchange for improving their performance across a number of sustainability and corporate social responsibility (CSR) metrics, Levi Strauss's suppliers will be able to access a sliding-scale of lower-cost financing arranged by the World Bank's International Finance Corporation (IFC).

If the program succeeds, the IFC could eventually expand it sector-wide, fundamentally changing the way the garment industry operates.  Yet, even if the program significantly improves the behavior of Levi Strauss’s suppliers, the program’s real success may be measured by the impact it has on the company itself.

An overview of the incentive program

The Levi Strauss-IFC program is being rolled out country by country, beginning in South Asia -- a particularly problematic region and where many of Levi Strauss's suppliers are based. The IFC recently held an explanatory meeting in Pakistan for all of the Levi Strauss vendors in Pakistan, for instance, at which the IFC explained the incentive program and answered questions from suppliers.  Once the program is introduced in a country, any vendor is eligible to participate, and thus far participation levels have been encouraging.

According to Levi Strauss VP of sustainability, Michael Kobori, all of Levi Strauss's suppliers based in Bangladesh and Pakistan have expressed interest in the program.

Conveniently for Levi Strauss and its suppliers, performance in the incentive program will be measured against Levi's existing sustainability and CSR standards (its so-called “Terms of Engagement”), and determined by Levi Strauss's own -- and already operational -- audit process.

Part of Levi Strauss's “Sustainability Guidebook,” the Terms of Engagement (TOE) were developed in 1991 using international labor and human rights standards, including the the Universal Declaration of Human Rights and the International Labor Organization’s Core Conventions, and input from human rights organizations.

The TOE is a comprehensive set of compliance guidelines, and covers the following labor and environmental, health and safety (EH&S) standards (among others):  (i) child labor; (ii) forced labor; (iii) disciplinary practices; (iv) corruption; (v) working hours; (vi) wages and benefits; (vii) freedom of association; (viii) discrimination; (ix) housing; (x) building safety; (xi) hazardous material control; (xii) emissions; (xiii) wastewater; and (xiv) waste management.

The company already assesses the performance of its suppliers against the TOE, indicating areas of noncompliance and giving each supplier a composite score for performance.  The categories are not weighted -- in other words, a fair wage is no more important to a vendor’s score than whether or not it lets its employees unionize; however, within each category there is an indication of the severity of potential noncompliance.

Levi Strauss and the IFC plan to simply use this existing audit process to determine which suppliers will be offered lower-cost financing under the incentive program.

Why it might succeed

It could be a "win-win."  Time will tell, but the Levi-IFC incentive program could turn out to be a "win-win" for Levi Strauss and its suppliers.

Small- and medium-sized suppliers in developing countries often struggle to finance their operations in what are highly-competitive markets.  As GT Nexus, Levi Strauss's cloud-based supply chain manager, framed the problem, “Capital costs ... can run high,” and “[w]ithout access to low-cost financing, many smaller suppliers can’t compete with larger operations.”  As a result of the high cost of financial capital, struggling suppliers often exploit the “natural” capital of the environment or their workers in order to stay afloat.

The hope, of course, is that the offer of cheaper capital will be a sufficient carrot to convince suppliers to change their behavior, which is where the “race to the top” metaphor comes into play.

According to the IFC, the degree of cost savings will be directly proportional to the vendors’ TOE scores: “The higher the vendor’s TOE score, the more they will save.”  In addition, those suppliers that score highest on their labor and EH&S standards would earn a further discount of up to 50 basis points on the interest charged.  Thus, vendors will be competing against each other to improve their scores, each vying for lower interest rates and potential bonus savings.

When I asked Mr. Kobori why he thought the levels of potential savings would be sufficient to change vendor behavior, he pointed to the IFC’s experience -- its Global Trade Supplier Finance (GTSF) program, a $500 million multi-currency investment program that targets emerging-market suppliers, launched in 2010 -- and that Levi Strauss and the IFC have worked together for years, including on the Better Work Program.

Mr. Kobori also mentioned that Levi Strauss engaged in some informal consultations with vendors about the incentive program, and he believed that the high levels of initial interest were indications that the incentives were sufficiently appealing.

The program could be a “win” for Levi Strauss because, in addition to generating positive PR and creating concrete benefits for the people and communities with which the company does business, it believes that a more sustainable supply chain will be good for its bottom line.  Well-treated manufacturers, for example, tend to operate more efficiently, which means fewer missed deliveries from suppliers and revenue saved for Levi Strauss.

The program leverages existing resources.  Perhaps the most compelling aspect of the program is that it will require almost no additional effort from any of the major players.

For vendors, there are minimal administrative costs.  Levi Strauss's vendors are already asked to comply with and are measured against the TOE standards.  All vendors need to do is sign up and the rest will take care of itself, Mr. Kobori said.

For Levi Strauss, the evaluation infrastructure and expertise are already in place. Nobody needs to be trained, and no new measures need to be enacted.  The system is already functioning; it is simply being applied to a new end.

Finally, though financing for the incentive program will come from a special facility, the IFC has been working with this type of credit for years, and it knows the landscape.

How success will be measured

Mr. Kobori said that the program’s success would be measured by three criteria:

• How many vendors are signing up for the program?


• For the vendors that have signed up, is their performance improving and, if so, how significantly?


• What are the vendors saying about the program?  Do they like it, and is it helping them?

According to GoodGuide, Levi's is one of the most sustainable players in its industry, ranking second among jeans makers (behind Patagonia) on overall sustainability, and among the top 5 percent of all companies for environmental performance and community engagement.

In an interview with the Financial Times when the incentive program launched in November, OxFam’s ethical trade manager, Rachel Wilshaw, said that whether the program would be deemed a success would depend on the strength of Levi Strauss’s supplier audits and monitoring. That is definitely true, but Levi Strauss currently scores off-the-charts in the main auditing categories measured by GoodGuide -- “off-site interviews” (9.9 out of 10) and “unannounced visits” (8.9) -- perhaps softening concerns about the degree to which the company will hold its vendors accountable.

A more significant area of uncertainty, to me, is whether the incentive program can get Levi Strauss  to improve its own behavior.  While the company (and its flagship brand, Levi's) is a model corporate citizen when it comes to environmental sustainability and scores a respectable 7 out of 10 overall on societal impact due to many strengths in this area, it still has areas in need of improvement  like “living wage or social policy” (4.8); indigenous rights (4.0); and forced labor and child labor policies (5.0, respectively), according to GoodGuide.

The company’s behavior in Cambodia, one of the fastest growing and most tumultuous apparel manufacturing markets in the world, troubled many.  In 2013, Levi Strauss cut ties with one of its Cambodian factories where workers were engaged in an ongoing strike for higher wages.  The company claimed that the vendor was failing to live up to the TOE; yet, the timing raised questions about Levi Strauss's commitment to working with suppliers to improve working conditions in its supply chain.

Similarly, when continued protests were greeted by the arrival of the Cambodian military in September 2014 (without incident this time), H&M, Zara and other apparel leaders signed a letter committing to living wages for their suppliers.  Levi Strauss was absent from the commitment, following a further reduction of its orders from Cambodian factories in May 2014.  The protests eventually led to a modest wage increase for workers in the Cambodian apparel manufacturing industry, which Levi Strauss subsequently supported.

*****

When I spoke to Mr. Kobori last week, he seemed genuinely hopeful that the incentive program would create positive change in the Levi Strauss supply chain and, perhaps, serve as a model for an industry-wide program in the future.  He also made a point to use our conversation to hint at future sustainability and worker well-being efforts in the pipeline. We look forward to seeing those come to fruition.

Image credit: Flickr/memn