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Essay: Exploring Governance Structures and Actor Dynamics in Fashion Supply Chains

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Global supply chain Management Essay

Q: Through the use of different analytical frameworks in the module (SCM, GVCs and GPNs) critically analyse the structure of governance in a supply chain of your choice (either logistics, or coffee, or FFVs, or clothing, or coltan), and how different actors respond to that. Who are the main winners and losers? And why?

The fashion industry has faced several changes during the past decades. While once competitive advantage was achieved through prediction of demand and fashion trends, nowadays it is reached by providing quick response to trends presented during the fashion walks (Bhardwaj and Fairhurst, 2010). As a consequence, in today's fashion market there are 3 main characteristics: short life-cycle, high volatility and low predictability (Christopher et al, 2004). This has led to a change in supply chain management. Christopher (2011) describe SCM as "the management of the upstream and downstream relationship with suppliers and customers in order to deliver superior customer value at less cost for the entire supply chain". In order to analyse the supply chain of any industry, there are some aspects that are necessary to consider. First of all, as claimed by Cox (1999) and Gereffi and Fernandez-Stark (2011) in their analysis of SCM and GVC the governance structure is important to understand who has the power in the chain. Nonetheless, supply chain does not only have a consequence on firms that are part of it, but they also influence the development of countries, as well as influence on the flow of capital workers etc. (Henderson et al (2002) and Gereffi and Fernandez-Stark (2011)). Indeed, through the outsourcing of activities in other countries there is the creation of global production Networks (GPN) that have created opportunities for countries and workers (Barrietos et al, 2011). In this essay, it will be presented with a deep analysis of the supply chain in the fashion industry. At first, it will be presented the governance structure in the supply chain, claiming that retailers own the power, while suppliers bare the risks. Later, it will be discussed how different actors respond to that. In particular, it will be analysed the response of firms (retailers and suppliers), labour, nations and institutions. Lastly, it will be discussed who are the winners and losers in this sector; focusing again on firms, labour and nations. This analysis will be conducted taking into account three analytical frameworks: SCM (supply chain management), GVC (global value chain) and GPN (global production networks).

STRUCTURE OF GOVERNANCE IN FASHION SUPPLY CHAIN

The analysis of governance in the supply chain is extremely important, in order to understand how it works and who has the power. Both the SCM and GVC frameworks consider the governance structure. According to Cox (..) for example, there are conflicts of interests both between supply chain and within the supply chain. Indeed, with his critical SCM he claims that all the companies in the supply chain (both the lead company and the suppliers) wants to obtain value for themselves, consequently, in order to be successful companies need to have power over someone else. Gereffi and Fernandez-Stark (2011) as well, when considering the GVC claims that it is important to study the governance structure because it allows people to understand how the chain works and how it is coordinated. Before discussing the relations of power, it is important to understand how the supply chain is managed. As previously mentioned, over the years the fashion industry has evolved considerably, and nowadays the main characteristics of the market are cheap prices, flexible design, quality and rapid response (Bhardwaj and Fairhurst, 2010). There has been the creation of the so-called fast fashion, where there is the need to provide new fashion clothes rapidly in order to meet costumer's demand (Perry et al, 2014). This model usually requires to be able to replenish products on a weekly basis (Abernathy and Volpe, 2006) For example, Zara managed the supply chain in order to get new orders twice in a week (Tokatli and Kizilgun, 2009). Because of this, in the past years there has been a change in the SCM, with lead firms outsourcing most of their activities offshore, in order to be able to have lower production prices and being able to be more competitive in the market (Perry et al, 2014; Bhardwaj and Fairhurst, 2010). For example, Zara moved production in countries such as Morocco, Turkey and India, because they are able to provide a quick response. H&M as well is claimed to have more than 800 suppliers all around the world (Perry et al, 2014). Nonetheless, not only retailer in the mid-market have done that, but also luxury brands such as Prada and Gucci, who once were the symbol of the "made in Italy" have started offshoring activities because of high pressure in the market (Tokatli, 2014; Tokatli, 2012). For example, now Prada, is claimed to have 480 manufacturing abroad in countries such as China, Turkey, Vietnam and Romania) (Tokatli, 2014). Usually, the supply chain works as follow: the retailers place the order to the manufacturer, who can design and market the label, and then place the final order to the suppliers who are the ones actually producing the items (Appelbaum et al, 2005). After understanding the structure of the supply chain, it is now important to understand the governance structure. In the case of the fashion industry, as claimed by Gereffi and Fernandez-Stark (2011) and Perry et al (2014), the supply chain is buyer-driven, meaning that the retailers are the lead companies in the supply chain and they decide how the chain operates, by exercising power and control over suppliers so that they meet certain standards. As a consequence, they are able to control both production and distribution. Large retailers have the power because they can choose among a huge variety of suppliers, being able to pressure down the prices, and can exercise more and more control over them thanks to the new technologies (Appelbaum et al (2005); Barrietos et al (2011)). For what concern the set of prices for example, by offshoring activities retailers have passed the risks and responsibilities to the suppliers. By doing so, the buyer (the retailer in this case), is protected in case something goes wrong. This is called the reclamation system. According to that, the buyer is the one deciding whether to pay the full amount at the end or pay a reduced price in case something was nor right (for example if there is a delay) (Tokatli and Kizilgun, 2009). Furthermore, the suppliers have no power to challenge that, because there are a lot of suppliers available, consequently, retailers can easily change suppliers if there are some inconveniences (Tokatli et al, 2008). Because this retailer can also set the prices they want and chose the suppliers that are able to offer them.  Furthermore, retailers also have the power to decide when to pay suppliers, usually between 60 and 90 days, and if suppliers want to be paid earlier they need to offer a discount. As previously mentioned retailer also has more control of the suppliers thanks to the new technologies. Indeed, they are now able to share costumers demand directly with manufacturers, which, consequently, need to respond quickly to the demand. Because this supplier had to change the production, planning, inventory system, sourcing etc. (Abernathy, 2000). Again, it is possible to see how the pressure is passed to the suppliers, which have to deal with changing production system in order to meet requirements. Sometimes they will also have to overstate their "production capacity" in order not to lose orders from retailers (Hammer and Plugor, 2016).

ACTORS RESPONSE

It is now important to analyse how customers respond to the governance structure explained above. First of all, it will be considered the firms, both the retailers and the suppliers. For what concerns retailers their main aim is the one to shift productions into countries with low standards and cheaper labour, such as in Asia, Latin America and Africa, and increase their control over the suppliers (Appelbaum et al (2005); Barrietos et al (2011)). By shifting production, the will be able to keep their power in the supply chain, by being able to meet the standards and price that the market requires. On the other hand, the suppliers have different goals. Indeed, as claimed by Barrietos et al (2011) and Rossi (2013), suppliers will aim at reaching economic upgrading. As explained by Gereffi and Fernandez-Stark (2011), economic upgrading "stimulates innovation and competitiveness among firms". This happens when firms try to move to more value-added activities in the supply chain. This could happen through process upgrading (increase efficiency), product upgrading (producing more valuable items) or through functional upgrading (change the mix of activities performed with higher value ones) (Rossi, 2013). Eventually, they want to become full package suppliers, who are suppliers which include the whole production process (Mezzadri, 2008). They will also try to increase capabilities and productivity by reducing the cost (usually at the expense of workers), in this way being more competitive in the market (Hammer and Plugor, 2016). Another factor to consider is labour. Usually, workers are involved in labour contracting, where they are moved in different locations according to different needs of the market and seasonality. To some extent, this is a way of securing them work, on the other hand, they are victims of exploitation. As a consequence, their aim, directly related to the one of the suppliers (economic upgrading), is being able to reach social upgrading (Barrietos et al, 2011). As explained by Gereffi and Fernandez-Stark (2011), social upgrading is when workers move to a position of employment where rights and standards are respected and there are decent working conditions. Various researches have been conducted to analyse whether economic upgrading of firms can result in social upgrading for workers, nonetheless not always this correlation happens (Gereffi and Fernandez-Stark, 2011). As explained by Barrietos et al (2011), regular workers usually try to organise themselves and take part in trade unions, which allows them to have more protection in the workplace. Nonetheless, there are also a great number of irregular workers employed in the sector, usually migrants and women, who are not able to do so. Lastly, the other actors to consider are the nations and institutions. For what concern countries, they usually look for international trade and investment, because it is considered a pivotal step toward economic upgrading (Blowfield (2005); Staritz and Morris (2014)). As a consequence, they view the presence of international companies in their territory positively. When deciding where to outsource international retailers consider 4 main factors: low wage nations, accessibility to textiles, close proximity to the market and public-policy (Abernathy and Volpe, 2006).  Above all, public-policy considers the trade tariff and policies as well as agreements between countries. As a consequence, developing countries need institutions to provide, regulations and policies to facilitate trade with international companies, so that they can reach economic development. Above all policies that affect the links between the developed country and US and European market are essential. For example, the US established the North America Free Trade Agreement (NAFTA) in 1994, which removed quotas and tariff of garments that moved from member countries. Alongside this, other regional treaties with countries such as Israel and Jordan were made, whose aim was to reduce the tariffs of production in the country. The EU as well created some arrangement to reduce or eliminate quotas and provide duty-free. As with the US, the highest part of these agreements is made with less developed countries and the ones positioned in close proximity to the EU or US market (Abernathy and Volpe, 2006). Nonetheless, bilateral agreements alone are not enough. Indeed, local government should consider adopting policies, lowering taxes, and make investment and grants in order to facilitate the relationship with developed countries (..). for example, as explained by … the should "reduced freight charges, reductions in utility costs, and the removal of export duties and other taxes". For instance, while Bangladesh is favoured by the agreement with the EU and US because of its status as "less developed country", in order to assure long-term viability is important that government invest in infrastructure that allows to facilitate exports, as well as lower trade costs (Abernathy and Volpe, 2006). Furthermore, in order for less developed countries to reach economic development and compete with other countries, it is important that they develop a high value in market diversification and in product diversification. Market diversification is when the country is able to export to different countries, while product diversification means that the country produces a different kind of products. This is important to create market stability, indeed in the case of a crisis in one country, or lower price in an item, they might be able to compensate the loss with the other countries and products (Ernst et al, 2005). This is for example why China is one of the biggest exporters in the fashion industry.

WINNERS AND LOSERS

After the previous analysis is now easier to determine the winners and losers in this context. First of all, the focus will be made on states, then the analysis will move towards smaller actors such as the firms, and lastly, it will be considered the actors within the firms: the labour. For what concern the countries, as previously mentioned, there are some characteristics that firms consider when deciding where to outsource production. As a consequence, countries which are distant from the market, with political instability and poor infrastructure are most likely to lose out in this scenario, even if they provide low wages (Abernathy and Volpe, 2006). As claimed by Ernst et al (2005), there are different categories of winners and losers when considering countries. First of all, there are the absolute winners, countries such as China, Pakistan and Turkey, that thanks to the market and product diversification will benefit the most. For example, Turkey benefits from a competitive advantage because of easy access to fabrics, low policy cost (thanks to liberal access to the EU market) and low transportation costs (because of the proximity with EU) (Tokatli and Kizilgun, 2009). Then there are "slight losers countries", such as Thailand, Cambodia and Bangladesh. These countries could be winners only if some policies are applied. For example, create relationship and agreements with other countries and renormalization of the production system. Indeed, Bangladesh, for example, present problems related to its port, such as climatic uncertainty, and poor infrastructure, that need to be overcome in order to compete in the market (Abernathy and Volpe, 2006). The third category is the loser countries, that can only survive in a niche, but only if some restructuring plans are provided (Ernst et al, 2005). In this category fall countries that can benefits from the proximity with the market, for example Mexico for what concern the US market (Abernathy and Volpe (2006); Ernst et al (2005)) and Romania, Turkey; Morocco and Egypt for what concern the EU market (Ernst et al, 2005). Lastly, there are the countries that are the biggest losers. These are smaller countries such as OECD countries and sub-Saharan African countries who once could benefit from "privileged" access into the market, but after the end of quotas, they do not. These countries in order to have a change in economic development will have to specialise in other sectors (Ernst et al, 2005). Now, the focus will pass into the firms. As seen in the first paragraph the power of governance resides on the retailers, which have passed all the risks and problems to their suppliers. It is then easy to understand why it is claimed that the retailers are the "winners" while suppliers are the "losers" in this context. Indeed, even if it was believed that moving to added value activities such as design will give suppliers/ manufacturer more power, it seems like the asymmetric relationship still exist (Tokatli et al, 2008). In fact, entering in design, for example, has become a necessary activity but not a sufficient one (Tokatli and Kizilgun, 2009). It is possible to see this asymmetry in the price negotiation and in the distribution of value. For what concern the price, for example, the price that retailer sell the product is 3 to 5 times higher than the one they pay the suppliers. For example, Zara charges an increase of 4 /4.5 times to the products (Tokatli and Kizilgun, 2009). This enlights the difference of value suppliers and retailer gains. Furthermore, as previously mentioned, the suppliers bare the risks, and if something goes wrong the retailer is protected at the expenses of the suppliers, thanks to the reclamation process. For instance, M&S suppliers are the ones that pay when the products are returned to the store for whatever problems (for example if the customer did not like the colour) (Tokatli et al, 2008). Nevertheless, the winners and losers are not just between suppliers and retailers, but it can be claimed to be between suppliers as well. indeed, as previously explained, nowadays suppliers need to move to added value activities, provide full-package service. As a consequence, firms that are able to manage their activities and able to incorporate those new activities in their firm are able to succeed. The one that has not the necessary recourses to do that are most likely to fail and become the losers in the situation (Tokatli and Kizilgun, 2009). Lastly, it is important to consider the winners and losers insider the firms: the labour force. In the GPN's literature there is always a focus on the relationship between economic upgrading of the firms and social upgrading of the workers and has previously mentioned the correlations between this two is not always positive. This means that economic upgrading does not always result in social upgrading, and when it does it does not consider the whole workers (Rossi, 2013). Because of the pressure imposed by the retailer to have lower costs, greater flexibility and at the same time comply with work standards, suppliers usually employee two types of workers: skilled workers and unskilled workers (Barrietos et al, 2011). Skilled workers (or regular workers) are usually senior workers who have developed skills over the years, have a regular contract, are paid the minimum wage, do not exceed the regular working hour and are protected. They are used to reach quality standards. On the other hand, unskilled workers (or irregular workers are usually young and unskilled people who are exploited. Indeed, they are paid below the minimum wage, work more than the regular working hours and are not protected and do not have rights. Usually migrants and women and overrepresented on irregular workers (more than 86% of irregular workers in Morocco are women (Rossi, 2013). As previously mentioned, economic upgrading might result in social upgrading for regular workers but could result in no social upgrading or even downgrading for irregular workers. Indeed, when the suppliers take on new activities in order to reach economic upgrading, regular workers benefit through learning new skills and gaining new capabilities. Being regular workers, they also have the possibility to organize themselves and being part of unions, that are able to protect workers.  Nonetheless, on the other hand, irregular workers are the one used in order to comply with the lower cost imposed by the industry, and this result in bad working conditions (Barrietos et al, 2011).

Conclusion

In conclusion in this essay, it has been deeply analysed the supply chain of the fashion industry also considering the response of various actors involved and considering who are the winners and losers of the situation. Firstly, an analysis of the governance power between firms in the supply chain was necessary to understand how power is distributed. After having underlined how the power reside in the hand of the retailer the response of every actor has been analysed: firms (both retailer and suppliers trying to reach economic development), labour trying to reach social upgrading and countries and institutions trying to achieve economic development. Lastly, some considerations have been made on who are the winners and losers. Indeed, it was considered both the greater context of winners and losers between countries and the asymmetrical relationship between firms in the same supply chain. Lastly, the winners and losers inside the firms (workers) have been considered as well, underlining how irregular workers are the one the lose out the most. Concluding it was possible to see the complex relationship within the supply chain and analyse the asymmetrical relationship presented.

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