Global apparel bodies urge brands to adhere to payment terms, prices

More than a dozen global apparel bodies have urged fashion brands and retailers to strictly follow payment terms and agreed prices between suppliers and buyers to establish fair business practice in the $500 billion apparel industry.

The associations came with suggestion at a time when garment suppliers are squeezing prices of goods procuring from Bangladesh and other countries. They also faced order cancellation.

A total of 13 associations including the members of the STAR Network of Regional Producer Associations supported by GIZ FABRIC plus partners, the International Apparel Federation and Better Buying Institute made the call in a White Paper on the Definition and Implementation of Commercial Compliance released on September 16, 2021.

The paper illustrated key results of Sustainable Terms of Trade Initiative (STTI) which is a manufacturer driven initiative and focused on creating fairer purchasing practices in the textile and garment industry.

“Payment terms may not exceed 60 days or the number of days that is customary between a buyer and supplier, whichever is shorter, said the paper in its key recommendations.

No late payments. If payments are deferred, supplier and buyer will negotiate a fee that covers the supplier’s interest for the period and loss of opportunity or profit from the late payment, it said.

On top of that, no changes to the mutually agreed price may be permitted except when there are changes in external costs that exceed 5 per cent of Free on Board (FOB) price, such as changes in price of raw materials, the paper recommended.

When fluctuations exceed 5 per cent, either party may request price changes and any profit or loss that results will be shared between the buyer and supplier. No additional discounts shall be taken by the buyer after the purchase order has been issued, it added.

Furthermore, every order will include a clear demarcation of the transfer of ownership of the goods and responsibility for risk past which points the buyer must accept and pay for delivery of finished goods.

All prices will cover all costs of compliant production and allow for a reasonable and maintained supplier profit.

“It is the first phase to improve buying practices in the apparel supply chain. Through these sorts of initiatives, we have to compel buyers to abide by the ethical buying practices and make them to pay a fair price,” Fazlee Shamim Ehsan, director of International Apparel Federation, told The Business Post

Shamim however said the exporters have to improve their bargaining capacity to bag fair prices of goods, said Shamim. If these recommendations could be implanted through a farmed agreement, Bangladesh will be the beneficiary as we are getting low prices from the brands and retailers,” he added.

The issues of fair buying practices came under spotlight mostly after the outbreak Covid-19 pandemic as the buyers cancelled work orders and deferred payment as an aftermath of it.

Bangladesh faced work order cancellation of over $3 billion, while many exporters yet to realise deferred payment.

“Due to fierce competition, the pressure on manufacturers has long been enormous. Manufacturers are expected to reduce costs while increasing services,” said the paper.

This was already the case before the Covid-19 pandemic, but during the pandemic, the unhealthy buyer-supplier relationship was taken to a new level and became more visible, it added.

A lot of trust in buyer’s ability or willingness to enact good purchasing practices was lost. The discussion around purchasing practices has been growing among manufacturers and among brands and retailers, these associations observed.

To create a more balanced commercial relation between a buyer and its suppliers, it is necessary that manufacturers contribute an equal part to the discussion of what constitutes better purchasing practices and how these can be achieved, it added.

Meanwhile, the white paper also suggested commendation for unused capacity and force majeure.

“A buyer will confirm available capacity for a specific time period with the supplier in advance. If capacity reserved is more than 20 per cent of a supplier’s total capacity, the buyer pays for the capacity that remains unused, said the paper.

Force Majeure’ can only be invoked on mutually agreed and legally valid grounds and will respect the transfer of ownership and risks defined elsewhere in the contract. If there is a force majeure event, then costs already incurred by the manufacturer will be paid by the buyer, it added.

On the other hand, penalties to the supplier will be mutually agreed upon, reasonable, clearly stated in the agreed terms, and require supporting evidence for any claims of supplier fault, it said.

Penalties related to quality will only be applied when the commercial value of the product is affected by the deficiency, and they will be substantiated with evidence from a trusted third party, it said.