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Towards Sustainable Labour Costing in UK Fashion Retail

Article  in  SSRN Electronic Journal · February 2013

DOI: 10.2139/ssrn.2212100

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Towards Sustainable Labour Costing in the
Global Apparel Industry:
Some evidence from UK Fashion Retail

Abstract

This paper focuses on a specific feature of buying behavior in the UK fashion retail industry:
the negotiation of a manufacturing price (CMT cost) with suppliers which does not separately
itemize labour cost. This practice, tacitly supported by both buyers and suppliers, is examined
against the backdrop of ongoing wage defaulting and import price deflation in the global
apparel industry. Whilst wage non compliance cannot be solely explained by this buying
practice, since other commercial practices and factors may have an equal if not greater impact
on a supplier’s liquidity/ability to pay on time and in full, the case is nevertheless made that
an absence of labour costing must inevitably have an effect on the capacity of a factory to
deliver an order at a negotiated price and to meet compliance benchmarks at the same time.
The paper attempts to construct a formula for sustainable labour pricing at the buyer end
using industrial engineering principles which appear to have been lost in the truncation of
buying firms caused by international sourcing. The methodology, which can be used to
calculate a living wage, has implications for international buying practice but its success will
depend ultimately on the extent to which the core principles of freedom of association and
collective bargaining are respected within the sector.

Key words: CMT, labour costing, work study, living wage, social compliance, trade unions.

Professor Doug Miller

School of Design
University of Northumbria
Central Campus East 2
Newcastle upon Tyne
NE1 8ST
United Kingdom

Email: doug.miller@northumbria.ac.uk

1
 ‘In all buying, consider first, what condition of existence you cause in the production
of what you buy; secondly, whether the sum you have paid is just to the producer, and
in due proportion lodged in his hand’1

John Ruskin

In recent years campaign groups have repeatedly focused in the UK on the issue of a living
wage for apparel workers in the supply chain of high street fashion retailers (Labour Behind
the Label 2006, 2007, 2008, 2009; War on Want 2008, 2009). This has been echoed
elsewhere (International Textile Garment and Leather Workers Federation ITGLWF 2009;
Merk 2009, United Students Against Sweatshops Designated Supplier Programme2 ; (Playfair
2008). However, there is an equally chronic and more immediate issue of wage non
compliance in both the buying and supplying countries of the sector. In the USA, ‘wage
theft’ , as some have termed it (Bobo 2008; Dirnbach 2009; Worker Rights Consortium
2010), has taken on chronic proportions with 43% of apparel workers in what is left of a
manufacturing industry being underpaid their legal minimum entitlement, and 71% not
receiving payment of overtime (Bernhardt et.al. 2008). In the supply chains of the USA and
the EU the situation also gives cause for concern. A recent survey drawing on audit data
provided by the US based multi-stakeholder Initiative – the Fair Labor Association, revealed
that 58% of the supplier facilities audited were underpaying wages and 68% reported
difficulties in paying overtime (Vaughan-Whitehead 2009:13).

Whilst wage defaulting can take on a number of forms and has a number of causes
(Impactt/Traidcraft 2009; Dirnbach 2010), a central demand from the campaign groups, has
remained the issue of pricing. (Labour Behind the Label 2009:5; the Asia Floor Wage
Campaign - Merk 2009: 60; the Playfair Campaign 2008: 30-34). In one of his last statements
Neil Kearney, General Secretary of the ITGLWF, articulated this demand more precisely:

‘A sustainable system would see the employer being responsible for the
payment of a living wage and the buyer being responsible for making the
payment of a living wage a contractual obligation, paying prices that enable the
supplier to fulfill that obligation, and supporting suppliers in bearing the risk of
paying higher wages for instance by providing greater stability in orders. This
should not be an issue given the fact that wages make up such a small fraction
of retail prices.’ 3

In a recent set of benchmarks on purchasing practices, the UK Ethical Trading Initiative

called on its member companies to ensure that the terms of their agreements with suppliers on
prices, lead times and quantities are consistent with the ability of the supplier to observe the
provisions of the Base Code (Ethical Trading Initiative 2010). Most of the work undertaken
by the ETI on purchasing practices with its member firms has, however, thus far left the area
1
John Ruskin 1860 Unto This Last, Essays from the Cornhill Magazine reprinted as Unto This Last in 1862
2
http://www.workersrights.org/dsp.asp (last accessed 16.3. 2010)
3
ITGLWF response to Transfair’s proposal to pilot Fair Trade Certified apparel for the US market. 4.2.2010.

2
of pricing untouched (ETI 2007). Pricing and, more specifically, the costing of labour within
this buying practice, has remained somewhat of a ‘black box’. This paper seeks to lift the lid
on this process in an attempt to examine how sourcing departments might implement the
basis for both wage compliance and the payment of a living wage in their supply chains.

Four questions concern us at the outset. Firstly, how is labour currently costed in the
industry? Secondly, is there a relationship between this practice and social compliance?
Thirdly, how might current practice be improved? Fourthly, what are the necessary
preconditions for the implementation of a sustainable apparel pricing system in an outsourced
multi buyer make to order system of production? Such questions pose a series of research
challenges. Costing sits at the heart of competition and is one buyer practice which remains a
commercially sensitive area. Since the investigation was concerned with costing methods
rather than actual pricing it was possible to overcome the initial reticence on the part of a
small sample of 7 high street fashion companies to determine their current practice in costing
labour in price negotiations with suppliers. CSR staff were sent a survey questionnaire and in
some cases there was a follow up telephone interview. Personal acquaintance was a crucial
factor in eliciting a response on what is still deemed to be a very sensitive area. More
qualitative data was acquired from leading experts in the sector and some former practitioners
(buyers). In terms of supplier behaviour there was greater dependence on the existing
literature and it is clear that this is an under researched area. In order to generate a model,
actual costing data was necessary and for this the value chain work undertaken in Cambodia
by Nathan Associates and Werner International (2007) and extensive communication with
staff at General Sewing Data was invaluable. Inevitably, this paper draws some tentative
conclusions on questions which require much more in depth study and piloting. It is hoped
that it can provoke a debate and offer some guidance for retailers to re-evaluate their costing
practices.

Costing garments and costing labour in the Global Apparel industry.

The Buyer end

Costing can be described as the process of estimating and then determining the total cost of
producing a garment, including the cost of materials, labour and general expenses of indirect
costs (Brown and Rice 2001). Historically, labour cost in garment manufacture has been
determined by multiplying the estimated amount of time taken to complete a garment by
either an individual or a group of workers by the actual labour cost which is either the
minimum wage or the prevailing wage (minimum wage plus additional wage elements
existing at the factory in question) expressed as a minute value. Payment systems would
either be based on remuneration by the ‘piece’ or on the basis of ‘time saved’. The estimated
amount of time taken to complete a garment has always been a ‘contested terrain’ in the
industry (Edwards 1979; Edwards & Scullion 1982; Boggis 2001) going right to the heart of
the twin compliance issues of wages and hours for workers, and to the issue of capacity,
efficiency and ultimately profit for management.
In the hey-day of branded manufacturing, companies developed their own in house industrial
engineering expertise to calculate labour cost, and three approaches emerged to determine a
‘standard time’ for assembling a garment: – bespoke time study, historical estimates, and
what is known as PTS or pre-determined time standards. Bespoke time and motions study,
i.e. the application of a range of ‘techniques designed to establish the time for a qualified

3
worker to carry out a task at a defined rate of working’ (Kanawaty 1992 243) can only be
carried out in factory with new styles made in the sampling department by an experienced
machinist, and the standard time and production target eventually established once assembly
had actually commenced. A second method, preferred by those companies unable to invest in
industrial engineering focussed on approximations of labour time based on historical data.
The third approach – PTS is based on methods time measurement, (MTM) whereby basic
human motions are used to build up the time for a job at a defined level of performance (ibid:
381) under defined conditions. This approach deconstructs a garment into its constituent
parts, identifies the manual labour operations required to complete these components, and
uses methods analysis to pre determine manufacturing standard times and production targets.
So-called standard minute values (SMVs) (the US term is Standard Allowed Minutes or
SAMs) are externally calculated from a database empirically determined for the range of
manual operations necessary to assemble a particular product.
All three forms of work measurement for arriving at a standard time would normally make
provision for relaxation, contingency and special allowances, particularly in factories where
incentive schemes were negotiated by trade unions (Carew 1987:155). Generally, the
principle was established that piecework bonus would be plus 33% of the basic minimum rate
for the achievement of 100 performance.4 Traditionally then, on piecework systems, the Base
Rate or Minimum Fall Back Rate* would be set at 75 performance.

So what has been the impact of international outsourcing on the practice of costing, and
labour costing in particular? A handful of branded manufacturers - Levi Strauss & Co and
Triumph International for example have retained in house industrial engineering expertise,
but as the process of international outsourcing transformed the nature of the industry and
brands, retailers and supermarkets have entered the global apparel market and established
buying functions, their lack of experience in the production process is evidenced by their
overall approach to the negotiation of a garment contract price. For global buyers, the
traditional approach has been to consider the costs which make up the Freight on Board
(FOB) or ex factory price5: fabric, trim, packaging and the manufacturing cost often referred
to as CM (cut make) or CMT (cut make and trim cost). CMT is a term used to describe the
direct and indirect labour assembly costs, factory overhead and supplier profit. From what is
known, the direct and indirect labour cost, often referred to as the ‘make’ element, is only
rarely quoted as a separate item.

In the case of a brand, where the focus is likely to be on quality of fabric and, where the price
of the fabric (itself a matter of negotiation between the textile supplier and the buyer) will be
proscribed to the supplier and identified as such in the commercial contract, sourcing
companies focus much more in the negotiation with a supplier factory on the CMT element in
the price. As David Birnbaum has commented, this breakdown of FOB into fabric + CMT
came about when garment importers moved from "buying" to "sourcing":

When garment buyers relied on the factory to provide the complete product, they were
interested in the lowest FOB price. However, this changed when importers began to

4
Interview with Derek Cattell – former NUTGW/GMB full time officer and works study tutor. See also Article
13 of the Ladies Apparel Contractors’ Association and the United Better Dress Manufacturers’ Association and
the International Ladies Garment Workers Union (Forerunner of UNITE) 1989-1991 p.12 See also Section 15
sub section 5b of the regional framework agreement for the Textile and Clothing industry of Baden
Wuerttemberg 1984-to date (which provides for a 15% minimum production bonus vis a vis non PBR worker).
5
Some buyers prefer to CIF (Carriage, Insurance, Freight in addition to the FOB or LDP – landed duty paid.)

4
 "source" garments, i.e. break the garment down into a series of material and processes.
As the process of sourcing developed under the Quota system, the importer began to
negotiate the fabric directly with the textile mill leaving the factory to simply buy the
material from the designated mill at a previously agreed price. (Birnbaum 2008: 17)

This has left CMT as the only area where the importer/buyer negotiated with the factory.
Here is what one UK industry practitioner has to say:

Most companies negotiate using historic data….Example you made that shirt for
US$2.00 - make this one for US$1.90. Very little science goes into the negotiation
& certainly 90% of companies that work this way will not give a toss on what the
labour rates are in the factory, as long as the external audits do not put them under
the country laws of paying the “minimum wage”6

This appears to be borne out by a survey of leading high street fashion retailers and brand
owners undertaken during the first quarter of 2010. The results are reproduced in Table 1
below:

6
Email correspondence with Derek Boyden

5
Table 1: Labour Costing practice in selected UK High Street Retailers

Company A B C D E F G

Market Fashion retail Women’s fashion Fashion retail Fashion and Casualwear Retailer Fashion retailer
segment Fashion accessories

Is CMT broken No No No No Yes No

down

Open book Moving slowly No No No Yes but CSR Yes – moving towards Yes
costing to this in some not totally clear this but still no info
cases . as to its extent provided by supplier on
margins

Calculation of No No No No Yes aspired No

labour cost

PMT used No Yes in some CMT Production No No own work yes No

factories but data is engineers in study in hubs
not supplied owned factory

Which system is GSD

used e.g. GSD

Dialogue with None None Some in a key Yes In pilots None

production supplier country
engineers None
where known

Any dialogue No No, discussions take No Yes No

with these on place with the sales
labour costs person or factory
manager.

6
With the exception of one retailer, which was attempting to break its CMT costs down into
direct labour, social costs, factory overhead and factory margin, most respondents were not
engaging in any labour costing per se, nor was there any dialogue between buyers and
production engineers in supplier companies where they existed.

The Supplier end

There is no authoritative study on the extent of industrial engineering in the supplier countries
of the world’s apparel industry. One investigation which took a critical look at production
management in apparel manufacturers in Commonwealth countries, found that almost
everywhere, production management and industrial engineering capabilities needed to be
upgraded (Lezama et.al. 2004:164) and that with the exception of the majority of factories
surveyed in Sri Lanka, most suppliers in South Africa, Bangladesh and Mauritius reported the
use of time studies to determine the standard minute value (SMV) in order to evaluate direct
labour costs rather than benchmark against external PTS standards, (2004: 115). In
Cambodia, a USAID study on competitiveness of the apparel sector discovered that no
factories were generating their own standard times (2005:21). Crucially, whilst a company
like GSD (Corporate) Ltd. which specialises in PTS, can report an increase in the number of
manufacturing clients which are turning to predetermined time studies to generate their
SMVs, the number of brands and retailers which have embraced this approach to inform
labour costing and garment pricing is currently negligible - a situation consistent with the
survey data reported above.7 Against this backdrop suppliers who maybe using more
‘rigorous’ forms of labour costing, are happy to negotiate a ball park CMT price, lest they
disclose sensitive costing data to the buyers. As a former international buyer and supplier
has commented:

Larger manufacturing groups have their own production engineers who will know
the precise labour minute values on their garments but may not disclose this to the
buyer because they may seek to push this down so they will resist trying to give
all the information to the buyers, or will not give the correct information8

Some buyers have resorted to the one-sided practice of requiring that their suppliers ‘open
their books’ during price negotiations, a practice which some observers see as naked power
play in an attempt to drive prices down. (Lamming et.al. op.cit: 558) In such circumstances, it
is argued, suppliers may have no other option but to ‘hedge’ by distorting their figures.
Consequently FOB and CMT negotiations can remain somewhat of a crude ‘cat and mouse’
exercise, (Lamming et. al 2005; SOMO 2003) as buyers continue to drive the market (Gereffi
1999) and their purchasing practices are based on target margins.

Here is what the General Secretary of the Garment Manufacturers of Cambodia (GMAC) has
to say:

The buyers nowadays come to us with the specifications of the garments they
want produced.......what generally happens is that the factories are given a CMT
price as a lump sum value and the factories are left to manage it as they like. In
this case, there is some haggling and negotiations about providing a longer
standard time in order to get a higher CMT price. In most cases however, there is

7
Interview with Paul Timson Managing Director of GSD (Corporate) Ltd.
8
Interview with Sean Chiles

7
 just a negotiation to obtain a higher CMT price without much reference to the
standard times. ... We are left to manage our own costs and the buyers generally
adopt a take it or leave it attitude when it comes to the price they provide to us. 9

Suppliers may thus end up selling to a buyer at a cost that is later found to be unachievable,
the consequence of which may be either a reduced wage bill or profit margin or both and an
unachievable delivery schedule based on the existing available capacity. This in turn can lead
to low wages and excessive overtime – the former to protect reduced profit, the latter to
ensure that delivery is made on time, regardless of the social consequences of long working
hours. Others will have the work undertaken in another factory –a move likely to constitute a
breach of the commercial contract or code of conduct provision.
Here is what one industry expert has to say:

Traditionally, the discussion between buyer and supplier has been about “cost”,
but without accurate assessment of time, cost cannot be accurately quantified.
Additionally, without accurate time standards, production output and efficiencies
cannot be effectively assessed and delivery schedules are therefore all but
impossible to judge10.
Towards Sustainable Labour Costing - Making human labour as important as fabric

If buyers are serious about the commitments they undertake in their codes of conduct, then
there is a responsibility to ensure that provision is made in the FOB or CMT price to cover
the prevailing wage and moreover a living wage labour cost. In the same way that fabric can
be costed out, and rendered as a dedicated and contractual cost item in the price negotiation
of every garment bought, so too is it possible to ring fence the cost of labour in a price
negotiation. It is necessary therefore to consider the processes by which such an exercise
could be undertaken.

If a buyer is to engage in sustainable labour costing then some form of, and therefore
familiarisation with PTS will be necessary, particularly where there is no existing in house
industrial engineering expertise. Companies such as GSD have standard minute values
calculated for garment basic styles and new styles would need to be added to the central
database as these are worked out in conjunction with a specific supplier. Figure 2 below
shows a costing sheet containing standard minute values for the labour input required for a
standard 5 pocket western style jean. The remaining data fields would need to be entered
following dialogue with the respective fabric suppliers and the assembly factory in question.
GSD refer to this process as ‘fact based negotiation’11. In this example, the SMV for the
different sets of operations required to assemble a pair of jeans totals 20.737 minutes. This
time however is synthetic in that it relates to the average or ‘virtual’ factory environment
based an extensive sample of processes, physical environment, equipment and technology,
and workers’ remuneration observed in a range of manufacturing organizations. Early
supplier assessments prior to establishing a commercial relationship ought to yield sufficient
information to enable an assessment of a factory’s ability to achieve PTS standards.

9
Email correspondence with Ken Loo, General Secretary of the Garment Manufacturers Association of
Cambodia 7.12.2009
10
Paul Timson, General Sewing Data
11
Interview with Paul Timson, GSD

8
 Figure 2: Costing – SMV for a 5 pocket western Style Jean

Courtesy GSD

A critical variable in all of this is the level of factory efficiency: that is the number of pieces
assembled in the time available in the hour, taking into consideration any “downtime.” It is
important to note that in work study parlance, ‘efficiency’ and ultimately productivity (the
amount of output per unit of input (labour, equipment, and capital), is the responsibility of
factory production management and not the worker. (Bheda 20002:8) There are wide
variations of efficiency and varying interpretations of efficiency across the industry. The two
successive USAID Reports on Factory Competitiveness in Cambodia for example revealed
variations in factory efficiency of between 35% - 80% of international standard times
(2005:28; Nathan Associates, Werner International 2007). Adjustments to the SMV for
variations in efficiency can be calculated using the following formula:
(SMV/Efficiency) x 100
So, for example, for a 5 pocket western style jean

Process Standard Minute Value @ 80% factory *@35% factory

efficiency efficiency
Total 20.737 25.921 59.248

Case Study: Towards a Living Wage in Cambodia

Cambodia is a particularly instructive case. In 1999 the US-Cambodia Bilateral Textile
Agreement linked quota access in the US market to factories' compliance with international labour
standards, as monitored by ILO sponsored ‘Better Factories Programme’ (now the ILO/IFC Better

9
Work Initiative). The Cambodian apparel industry has proved resilient in the wake of the removal of
Quota in 2004/8 but workers in the sector have baulked at the declaration this summer of a new
monthly minimum wage of $61, engaging in a series of strikes12 to force the government and the
13
employers to increase the NMW to a living wage target of $93 . Since the international
competitiveness of a sector can appear to be compromised by a substantial hike in the NMW, (Miller
2009) the responsibility for a wage increase must be shared by those buyers who choose to source
from the country. An increase can only be achieved in any systematic ongoing way through the FOB
which in turn means that a calculation will be required for each style ordered. Let us consider how this
might unfold in placing an order for the above western style jean Cambodia, were a buyer to make an
effort to address the living wage.

Example: Western 5 pocket jean made in Cambodia

Working on the basis of a 26 day month, the number of minutes a worker would have
available equals

26 days x 8 hours x 60 = 12480 minutes per month

The buyer must establish the existing prevailing wage and pay elements in the supply factory
in question in Cambodia. Using data from the USAID Cambodian study (Nathan Associates
and Werner International op.cit) we see that as at 2007, the average cost of labour was $78.97
including hourly rate and benefits, and overtime. See Table 4 below. However, in order to
arrive at the basic earnings, it is necessary to subtract the overtime figure from the total to
arrive at a standard remuneration figure for a basic week/month. In this case there is no
incentive scheme, but other elements (attendance allowance, a seniority bonus and holiday
pay) which make up the wage and would need to be factored into the calculation where they
exist.

$78.97 – $16.29 = $62.68 (monthly minimum)

Thus for the factory to be in a position to meet its current obligations under a buyer code of
conduct, the unit labour cost would need to be:

62.68/12480 = 0.005 (US$ cents) x 25.921 @ 80% efficiency = 13cents

62.68/12480 = 0.005 (US$ cents) x 59.248 @ 35% efficiency = 29.9 cents

12
www.just-style.com Cambodia: Talks to resolve pay dispute make slow progress http://www.just-
style.com/news/talks-to-resolve-pay-dispute-make-slow-progress_id109061.aspx last accessed 4.10.2010
13
Chandararot K. & Dannet L. 2009 Living Wage Survey for Cambodia’s Garment Industry, Cambodia
Institute of Development Study/Friedrich Ebert Foundation/ITGLWF-TWARO (Asia Region) p.25

10
Table 4: Wage breakdown in a Cambodian factory

Monthly Days/Month Hours/Year

Base Daily Hourly
Rate(US$)

a) Base Rate 50.00 26 2496 1.92 0.240

- -
Attendance Pay 5.00 0.19 0.024
- -
Seniority Pay 4.00 0.15 0.019

b) Base rate w/attendance and seniority 59.00 26 2,496 2.27 0.284

Holidays (23 days per year) - -1.9 -184 0.18 0.023

Vacation (18 days per year) - -1.5 -144 0.14 0.018

c) Adjusted for vacation and holiday 59.00 22.6 2,168 2.61 0.327

Overtime (1.5 x base rate x 2 hours 16.29 5.6 542 0.05 0.007

d)Average Monthly Pay with overtime 75.29 28.2 2,710 2.67 0.333

Holidays 11.5 x 2 x base rate 3.69 1.0 92 0.04 0.005

e)Total including holiday compensation 78.97 29.2 2,802 2.71 0.338

Source: Nathan Associates/Werner International 2007

11
Ring fencing the labour cost would thus force the supplier to address the issue of how the
factory is operating since the basic minimum wage would be the same regardless of factory
efficiency.

What are the cost implications of moving to a living wage? If the monthly living wage figure
of $93 is divided by the available worker minutes in a month, one arrives at a figure of:

$93/12480 = .75 cent per minute14

If this figure is then multiplied by the number of minutes required to make the garment @
agreed efficiency, then the unit labour cost would be

e.g. 20.737 minutes x .75 @ 80% efficiency = 19.3 cents and 44 cents at 35%
efficiency.

To this would need to be added a percentage for social costs where such are paid, to arrive at
a labour cost per garment which equated to a living wage. Significantly, the magnitude of the
labour cost to both a buyer and supplier would hinge on the level of efficiency in the factory
and not upon the level of wages switching the attention back on to the issue - long recognised
by stakeholders- of the need for effective management and management systems in supplier
factories.

Impacts
Sustainable labour costing would require a change in existing practice which involves a
separate itemisation of the full unit labour cost in any commercial contract between buyer and
supplier as a non negotiable item alongside fabric. What would be the implications of such an
initiative e for price, compliance, and the buyer-supplier relationship? A critical impact
question for both the sourcing company and the supplier relates to the means by which an
increase in the unit labour cost is to be funded. Assuming adoption of the policy of ring-
fencing the labour cost component of the FOB, the buyer would have at least five (not
mutually exclusive) options here. Firstly, they could pass the increase on to the consumer
through a marginal increase in the retail price (Pollin et.al 2004)15. Secondly, they could
absorb the increase and take a hit on margin. Thirdly, they could absorb the increase but seek
to pay for this through supply chain efficiencies rather than squeeze profit (ETI Purchasing
Practices 2007). Fourthly, they could insist on the supplier absorbing the increase in which
case the factory management would have to absorb a reduction in profit to cover the
increased labour cost. Fifthly, they could work with the supplier to increase productivity and
efficiency to improve throughput and, by committing increased volume, enable the supplier
to absorb this extra cost through factory efficiencies. Some UK fashion retailers e.g. Marks
and Spencer (ETI Wages Action Forum Notes Jan. 21 2010.) and New Look (New Look
Wages Project Update January 2010) are already moving down this productivity path, and

14
rounded to the nearest decimal point
15
There is some debate how marginal this increase would be. As Table 6 shows this would vary between 1 and
3% in Bangladesh on certain garment categories. However, percentage add-ons as the garment passes through
intermediary stages before landed duty paid stage might inflate the FOB. (Miller and Williams 2009).

12
New Look has marginally increased its unit price by 4 cents to assist one of their strategic
suppliers to achieve this16.

Since there will be an inevitable discrepancy between SMV and factory efficiency, moving to
sustainable labour costing will require more transparency in buyer/supplier transactions.
What is effectively ‘open book costing’ will require integrity measures on the part of buyers
such as price increases, long term supply agreements and the offer of productivity expertise
where available. A productivity/efficiency enhancement programme coupled to the delivery
of a living wage ought to accelerate a process already underway in some parts of the global
industry of consolidation and upgrading of machines, methods and materials most certainly in
those companies on their way to full package.

16
Letter to ActionAid dated 19.01 2010

13
Table 6: Impact of a Living Wage increase on FOB on selected garments made in Cambodia (allowing for efficiency)

Unit labour cost to Living Wage Unit

cover current labour cost Additional
Garment Style FOB SMV18 @ 80% @35% Current Minimum Wage plus Current Formula Cost to
$17 efficiency efficiency minimum add-ons Living Wage LW/12480 x SMV in $ buyer of
wage NMW/12480 x SMV demand @ costing in
in $ @ 80% efficiency (Monthly) 80% efficiency19 a living
wage
Men’s Polo 2.05 15.323 19.15 43.78 $6320 9.6 cents (22 cents @
35% efficiency) $93 14.27 cents(32.62 5 -10
cents) cents
Men’s Formal 9.58 22.091 27.6 63.117 $63 13.9 cents(31 cents
Shirt @ 35% efficiency) $93 20.5 cents(47 cents) 6 -16
cents
Men’s western 5 11.63. 20.737 25.9 59.248 $63 13 cents (29.9 cents
pocket jean @ 35% efficiency) $93 19.3 cents (44 cents) 6.3 -14
cents

17
Industry figures
18
Courtesy GSD
19
Figure in brackets @ 35% efficiency)
20
Figure rounded up and excluding overtime

14
Towards a new buyer incentive scheme
Ring fencing labour cost will require a significant adjustment on the part of buying
departments and probably a greater role for merchandisers. Software systems will need to be
put in place to enable swift inputs of SMVs, factory efficiencies and local remuneration
packages. One challenge is likely to be the impact of fast fashion retailing on the number of
SKUs and changing styles but as buyers engage with PTS companies which in turn are
engaging with workers and their organisations to determine new SMVs for new garment style
so the compendium of SMVs can be expanded21. To take the Polo shirt as an example, the
SMV of 15.323 quoted in Table 6 above is for a basic polo shirt whereas a heavily styled
garment with an intricate neck construction and considerable topstitching would carry an
SMV of 20.587.22 However in the same way that buyers and merchandisers have to keep
track of material costs, so too should they maintain and update a database of minute values
and labour costs for the factories in their respective sourcing countries.

Ethically conscious sourcing companies could drive this development with a new
buyer/merchandiser incentive scheme with an initial bonus awarded for ring fencing a living
wage figure into a commercial contract but payable only on receipt of such verification data
confirming that workers were not only being paid a minimum but also a living wage.
What will clearly facilitate this process will be the existence and implementation of
compatible work measurement and time analysis systems by both a buyer and supplier in the
same chain so that predicted SMVs by buyers could be verified using the same tools for
measuring efficiencies in factory. GSD appears to be the PTS provider which is most known
by Brands/Retailers in the UK at the present time and would offer a common language, and
thereby a technique, for the ethical establishment of auditable time/cost benchmarks which
hopefully would form the basis of more transparent and achievable production targets,
payment schemes and production planning in the future. Significantly, Marks and Spencer
which has been working with GSD with its model factories in Bangladesh has announced in
its Plan A commitments for 2010 to 2015:

Implement a process to ensure our clothing suppliers are able to pay workers a
fair living wage in the least developed countries we source from, starting with
Bangladesh, India and Sri Lanka by 2015. We will achieve this by ensuring that
the cost prices we pay to our suppliers are adequate to pay a fair living wage and
by rolling out our ethical model factory programme to ensure the cost price
benefits are paid to workers.

However, successful implementation will depend crucially on worker involvement and it is to

this point that we now must turn.

A Route Map?

If we assume that those companies which are committed to delivering a living wage
establish and ‘ring fence’ a sustainable labour cost in the pricing of a garment, how would
21
In Australia, where the retailers negotiated a Homeworkers’ Code of Practice with the Textile, Clothing and
Footwear Union of Australia in 2008 and received Government backing to promote the Code, the parties to the
Agreement are using a jointly agreed Product Sewing Time Manual as a reference point to ensure that the those
homeworkers in clothing and footwear in Australia are not cheated out of their wage entitlements
22
Figures provided courtesy of GSD Corporate Ltd.

15
anyone know that this had been passed on by the supplier given the privacy of commercial
relationships between buyer and vendor? Most certainly for the fashion retailers in the UK
surveyed in this paper which are keen to escape the moral gaze, one would expect a public
declaration that a company was indeed now paying a living wage as per the procedure
outlined above. Moreover a disclosure to this effect with specified amounts would need to be
made to the workforces in question. This could be done periodically or on an annual basis,
and constitute part of the ‘pot’ from which any pay improvements could be financed by
collective bargaining where trade unions exist.
However, in non union environments it is difficult to envisage how sustainable labour costing
can work without the issue of efficiency (systems of production management and workplace
industrial relations) being addressed by collective bargaining, where a workplace union has
access to the technical expertise of an outside trade union. Where unions do not exist, buyers
and factory management should publically reiterate the guarantee of non victimisation in the
event of joining a trade union in line with the freedom of association and collective
bargaining statements of principle found in the respective codes of conduct of fashion
retailers addressed in this paper (ITGLWF 2010). Workers and worker representatives will
require access to expertise on productivity bargaining in clothing manufacture from a
worker/trade union perspective. A challenge for the trade unions in the developed (buying)
countries will be to harness the learnings made under collective bargaining prior to the
accelerated migration of production under the Multi Fibre Arrangement and to disseminate
these across the supply chain before they are lost as full time officers and workplace union
representatives retire. Democratically elected workers or employee committees will not be
privy to this expertise and moreover will fail to satisfy freedom of association if they are
prevented from affiliating with the broader trade union movement.

One potential stumbling block remains. Where sustainably costed transactions are isolated
occurrences in a multiple buyer make-to-order environment, how would the principles of
equity and fairness prevail when only certain workers on lines dedicated to ‘sustainably
costed’ apparel would theoretically have access to a ‘living wage’? (See Miller & Williams
2009). Providing workers can rotate on such work, annual negotiations or distributions of the
living wage bonus could thus apply to the whole factory.

Conclusions
On the evidence presented in this paper, it would appear that there is an absence of precise
labour costing on the part of buyers and widespread variation in the ways in which labour is
priced at the supply end in the global apparel industry. In an environment where both buyer
and supplier aim for target profit margins, pay and working conditions (and with that, social
compliance), are left compromised leading to potential code violations in other areas.
Although the absence of labour costing at the buyer end can be explained in part by the
outsourcing of manufacturing, it is possible to reinstate elements of the function of
production management at buyer level in an effort to address this issue. When allowance is
made for factory efficiency, incentive, and any existing local factory payment system, it is
possible to calculate a labour minute value for any garment, which also incorporates a living
wage element. Such ‘fact based negotiation’ must involve a shared understanding on the part
of a sourcing company, its supplier, and the supplier’s workforce of agreed standard minute
values for garment styles and components and an assessment of the factory’s efficiency. It is
possible to determine and ‘ring fence’ the agreed labour cost and to make this an explicit part
of the commercial contract between the buyer and the supplier, in the same way that fabric is
16
itemised in CMT negotiations. Such an initiative will require a high degree of transparency
and openness between sourcing companies and their suppliers, and is likely to succeed in the
first instance in those manufacturers which are considered to be strategic partners by their
sourcing companies. Since sustainable labour costing is likely to lead to a more intensive
assessment of factory productivity, efficiency, and production incentives on the part of
suppliers, worker involvement in this process is crucial. However, the continuing blind spot
in relation to freedom of association and collective bargaining across much the industry does
not augur well for the implementation of such an initiative

17
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