Operations Management

Japan 10.5

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labor law enforcement is a selling point when trying to attract foreign inward investment. But the big problem is that local authorities are flexible in interpreting the law and have scarce resources.”

Clothing companies had been a focus of non-governmental organization (NGO) campaigns criticizing low pay, overtime, safety problems and child labor in Chinese supply chains. NGO criticisms could lead to significant damages to a company’s reputation. Thus, to operate in China, SGC had to face the problem of labor conditions. Other risks associated with poor labor conditions included quality problems, low productivity, and high employee turnover. Takashi summarized two principal risks associated with operating in China. Reputation, as poor labor conditions created negative publicity damaged the brand value. Also, operational risks were important and stemmed from poor productivity and high employee turnover (due to poor labor conditions).

Foreign companies with factories in China were less exposed to those risks than companies outsourcing production. Control was limited when outsourcing. Companies actual factories in China had implemented occupational health and safety programs. They paid basic wages above the legal minimum. Their social security payments and working hours complied with regulations. Some provided extra benefits, such as housing subsidies and holidays. These factories required a minimum volume of business and had to reinvest continually to update their technology. The overhead costs of an outsourced vendor, on the other hand, were spread over a couple hundred clients. Takashi thought it would take years for a new factory to achieve the best practices, platforms, and intellectual property on par with a third party. So he decided to use Chinese suppliers instead of establishing an SGC factory in China.

8. Potential Suppliers in China

In China, Shiraishi Garments Company had two major suppliers. The first one produced accessory goods (supplier 1) and the second one sewed garments (supplier 2).

Supplier 1. Located on the outskirts of the city of Wenzhou in Zhejiang province, supplier 1 employed 1,500 laborers. Its number of overtime hours were problematic, as 78% of employees worked at least 132 hours of overtime per month. Most workers arrived at this factory unskilled. Because they were often paid piecemeal, and never for overtime, there was no incentive for the factory to cutback hours. Workers built skills on the job. The factory did not pay for training, carrying hidden costs of low productivity and quality and factory overhead. Although the factory incurred warnings and fines, supplier 1 did not provide any sort of bonus to employees at all. A rule book issued to workers instructed them on every aspect of factory life. The harsh penalty system included

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fines for any violation of the rules, including (a) arriving late, (b) talking during work, (c) leaving the workplace, or (d) spitting. Supervisors and middle managers spoke rudely and shouted at workers when production goals were not met.

Employees were despondent about the long hours and low pay. The fines and poor quality food exacerbated their unhappiness. Workers reported that there were few ways to communicate at all with managers. Most had no desire to do so. Relationships between workers and supervisors were strained. Employees frequently suspected supervisors of not accurately recording the number of pieces they produced and of extending working hours further than what management had scheduled.

It seemed health and safety management was good. Accidents were recorded by the medical center and minor injuries were dealt with in the first aid room in each production unit. Takashi still had concerns about ergonomic issues such as congested facility layouts, bad lighting, and poor ventilation. Problems also included inappropriate storage and handling of toxic chemicals, improper protection equipment for workers, and the lack of chemical safety training.

Supplier 1 had headaches managing its own suppliers. Low quality and late delivery of raw materials delayed production and squeezed the window of time for jobs and orders. They undertook used purchasing from multiple-source, buying from a list of potential suppliers to avoid getting locked into a sole source.

Supplier 2. A small factory in the city of Dongguan in Guangdong province, employing around 400 workers, sewed garments for SGC and a few other foreign retailers. The managers described relations with foreign purchasers as uncomfortable in terms of tight lead times, late sample approval, and last minute changes to product specifications. All these problems put increased pressure on supplier 2 to deliver orders, which were sometimes not filled. It also led poor communication between merchandisers, factory management, and production.

Insufficient communication about changes to product specification led to more reworking and, therefore, overtime. The reworking time averaged 7% during production and 10% after final inspection. On some production lines with particularly difficult styles, reworking could reach levels of more than 50%. As the piece rate compensation system did not cover reworking, a significant proportion of time was not only utterly unproductive, it was also unpaid. Very few workers knew there was a legal minimum wage. But all were aware they were not compensated for overtime and believed their wages were unfair. Two- way communication between workers and management was poor, so changes in pay or hours were not understood and on occasion resented by workers. There were few effective channels for workers to raise concerns with management, and managers usually did not respond to worker concerns or suggestions. Although the factory levied fines for 18 different kinds of offences, workers did not receive any training.

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Supplier 2 had other areas of concern. Takaishi saw there were inadequate escape routes and locked or blocked emergency exits. Systems for tracking and improving productivity and quality were poor or nonexistent. There was no formal production line quality control system and no records of reworking rates during the production process. The piecemeal workers were given daily productivity targets and supervisors made daily estimates of how many pieces each worker made. Those records were not kept for more than a few days.

Supplier 2 estimated that 70% of its fabric supplies necessary for production were delivered at least one week late. Worker annual turnover at supplier 2 was extremely high, 140%. Most workers left because of the overtime hours and management had no apparent concern for their well-being.

9. Auditing

Factory auditing by the government was not the best tool for tackling the problem of Chinese labor standards in supply chains but, at the time, it was the only way. Independent auditing is a critical factor that a company can use to maintain its reputation and achieve ethical behavior. But auditing alone, especially if superfical, is not enough to drive positive change. It was easy to audit financial conditions, but difficult to audit a supplier for social conditions related to labor, community, and the environment. Health and safety audits were also difficult. For instance, Takaishi noted one audit checklist item, which stated, “The supplier has a fire alarm.” Further questions not considered were, “does it work?” “Do workers know what it is?” “Do workers have the right or the will to use it?” “Would they know what to do in an emergency?” “Can everyone in the factory hear it?”

A black-and-white audit approach could not solve these kinds problems. Even if short timeframes to prepare and improve to pass an audit were granted, the fundamental problem was still poor labor conditions. Post-audit follow-up from the auditors was poor and resulted in few improvements actually being implemented.

Audits even could drive dishonesty, lack of openness, and fraud. Suppliers felt forced to provide the “right” answer or face penalties. Chinese factory managers were becoming skillful faking records and coaching workers to give acceptable responses during interviews. This trend towards concealment was a barrier to improving labor conditions because it wasted time and money without making any change in the workplace.

Whereas workers did not want to work the excessive hours demanded of them, they were willing to work more than the low limits set by Chinese law to increase their pay. They knew that if a factory reduced hours to legal limits as a result of an audit, without some commensurate effort to increase productivity, wages would decrease dramatically.

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10. Attacking the Roots

The sun was low and darkness was now descending over the Tokyo Bay’s man- made islands. Takashi walked back to the window. His mind was clearer now. He believed that the current approach, dependent on compliance-focused audits, had made little progress in tackling poor labor conditions in SGC’s Chinese operations. The days of sweatshop labor might be numbered because the business environment was changing in China. Workers had mobile telephones and word of worker mistreatment spread fast. International purchasers could no longer rely on profits earned by exploiting Chinese workers.

Takashi thought he needed to focus more on continuous improvement and capacity building activity. But a new approach to finding a sustainable solution was needed. If such an approach was impossible, he was prepared to seriously consider getting out of China.

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