Subcontracting and Solutions
Welcome to Part 2 of our conversation with Jessie and Kim, co-founders of Manufactured Podcast! In this conversation, we dug deep into the systemic issues that fuel our reliance on subcontracting. We get to the bottom of why subcontracting occurs due to the power imbalance between brands and suppliers, how sharing the risk and reward is the way forward to shorten supply chains, why brands would benefit from this, and what we can do to help mitigate the risks associated with subcontracting.
WHY DOES SUBCONTRACTING EXIST?
Jessie: Garment manufacturing is like a pyramid. You have higher quality orders at the top of the pyramid, and then a compliant garment factory in the middle, with subcontractors at the bottom. As a supplier, you want to prioritize high value orders, such as $1 t-shirts. However, such orders are not placed regularly, and during low season you have to accept cheaper orders, such as $0.5 t-shirts, to pay your fixed operational costs, including staff payroll and rent. The issue is that once you have accepted orders with barely any profit, and better orders come back, you have no other choice than to outsource the cheapest orders, as it happens in an unstable and unplanned manner. You cannot afford to reject either customer, you need to maintain all relationships, because forecasting is never accurate, and you need to always have orders in.
When I was working in merchandising in China, we got annoyed by the suppliers because they were overbooked and didn't tell us, but then I realized that suppliers are struggling so much to ensure that orders are placed on a monthly basis, that they are forced to use subcontracting. There’s a major tension created by the difference between fixed operational cost related to capacity, and uncertain forecasting. This is just an example of how the risk and reward distribution is very imbalanced in the garment industry.
Kim: As a general manager, I did subcontract, for many reasons. It was a complicated decision for me, especially because I came into it from a human rights background, where I was told over and over that subcontracting is bad. But when you manage a production facility, your success depends on being able to keep your capacity and your orders in equilibrium, as that's what drives your bottom line, way more than marginal increases in minimum wages, or efficiency gains.
Let's say your payroll is $100, for all your production employees in a month. If you sell 100 pieces, then your labor cost per piece sold is $1. But if you only sell 50 pieces, then your labor cost per piece sold is $2, although nothing in the factory has changed, you haven't gotten faster or slower, you haven't hired or fired anyone. The only thing that's changed is how many pieces you've sold. Your capacity really needs to be in equilibrium with the amount of orders that you're going to get, but as a factory manager, you have no idea how many orders you're going to get, and the only solution is to have a capacity that can expand and contract to match whatever orders that come in, which is achieved by subcontracting. It’s a tool to deal with uncertainty.
HOW DOES FORECASTING PLAY A ROLE IN SUBCONTRACTING?
Kim: We would get forecasts about incoming orders from the brands that we worked for. They would predict to order 100,000, or 200,000, or whatever it was, but the number didn't actually matter, it was more of a “heads up” on what was coming, so that we could prepare for it. But forecasts were wrong all the time, because nobody can perfectly predict how many pieces they're going to sell.
The forecasting information is not committed, it can change with no consequence to the brand. Meanwhile, as a factory manager, you're using that information to make irreversible financial decisions in terms of workforce volume, and how much raw material you're going to buy. Those decisions have to be made a long time before you have any sort of commitment as to what you're actually going to sell.
Down the line, orders come in for more or less than what's been forecasted, and it’s the factory manager who's left trying to solve it. To go back to that example, let's say your forecast was for 100,000 pieces, but then the actual orders come in for 50,000 pieces only. I had made sure to have enough people on my payroll to produce 100,000, and have bought materials for 100,000. I have to still cover those costs, regardless of how many pieces I've sold.
HOW IS IT RELATED TO THE DISTRIBUTION OF RISK AND REWARD?
Kim: The problem is being pushed down to others, who are off the radar, less regulated, who act as a sponge that can absorb the extra orders other factories get in. If you were to make your business decisions totally based on these forecasts, and have a relatively fixed capacity that couldn't change at all at the last minute, you wouldn't survive. For me as a factory manager, I had a capacity that was fixed and unable to fluctuate based on the orders that were coming in. When the choice is between making sure that I can pay the people who are on my payroll, versus not working with somebody that I don't totally feel okay with, I chose my staff. I had a responsibility towards them, and I had to make this choice.
WHAT ARE THE SOLUTIONS TO SUBCONTRACTING?
Kim: Is subcontracting something that we should be trying to eliminate or put more visibility over? That is not the issue. If brands shared in that risk of factory managers having to make decisions about how many people they're going to have on their staff, about how many raw materials are going to have on their shelves, if the brand has some stake in that, not 100%, but some stake, subcontracting wouldn’t happen the way it does.
For instance, let's say the brand forecasts it’s going to buy 100 pieces, but in the end, it only needs 80. The equivalent of whatever you would need to produce those 20 pieces goes unused in terms of materials and labor could be split. 10 could be paid by the factory, and 10 by the brand, instead of the factory paying all 20. That's what I mean by shared risk. Brands having some skin in the game, which should be relative to the margins, or the value added at each step of the chain, would cause a shortening of supply chains, because the factory manager wouldn't have as strong of an incentive to subcontract.
There are a lot of problems that come with subcontracting in terms of inconsistent quality or reputational risk if it's discovered. So, if brands were supporting factories with this balancing act between orders and capacity, factory managers would have a lot less incentive to subcontract in the first place.
HOW CAN RISK BE MORE EQUALLY DISTRIBUTED?
Kim: Ultimately, all the actors in the supply chain would share the risks caused by brands. With the order cancellations, material suppliers would complain that brands cancelled all these orders unfairly. Their cash flows are so tight, that they need that money to get through their next payroll payment, and they can't think further ahead. But ultimately, a factory demanding that a brand takes on inventory that it also can't sell doesn't really help the factory in the long run either.
All the players in the supply chain are benefited from getting whatever is produced as close to market demand as possible. But because of the way the risk and reward is distributed, it creates incentives that are counter producing to that, and that increase the length of the supply chain and the lead time. When you have a longer lead time your chances of actually getting products to market that match demand is even smaller.
Jessie: In my previous job, we had a trusting relationship between suppliers and brands. Some suppliers told us openly that our orders were not produced by them, and that it was outsourced, however followed with intensive quality control. We understood why they wanted to outsource, why they had to, and how they controlled the quality.
HOW WOULD BRANDS BENEFIT FROM CHANGING THE SYSTEM?
Kim: Questions such as why don’t brands purchase the material for their orders, which are so logical, highlight some of the key issues. What is so absurd about the situation is that brands sharing in the financial risk of their suppliers would lead to a shortening of the supply chain, which would lead to shorter forecasting horizons, a shorter lead time, which would lead to higher quality in production, and making better quality stuff that people actually want to buy, with less waste. Sharing risks really is in the brand's best interest. However executives within brands, especially publicly traded brands, have such a narrow and short term understanding of shareholder obligations, and there's so much pressure to make these quarterly profits, that buying inventory, putting more inventory on your books and buying material is seen as a liability that hurts them in the short term. If they zoom out a bit, however, they will realize that in the long term, they’ll be better off.
I don't think brands are evil entities that care about profit above anything else, but the incentives at that level are not really aligned with these collective goals, which would really benefit everyone, although with slightly longer term results.
WHAT CAN DESIGNERS DO?
Kim: A lot of the designers I worked with, or that were my counterparts within brands when I was working in the factory side, didn't understand much about how their products were made, which created a big gap. Before you can talk about how to make your product, how to make someone's product better or more sustainably, you have to be on the same page about how it's being made. A lot of the people who work in sustainability departments in factories tell us that explaining how products are made in the first place is what they spend a lot of their time on, even though they’re being employed for sustainability. On the flip side of that, a lot of the designers that we've talked to who have had experience working in a garment factory or in production, they really echo that, saying that design school did not teach or equip them with skills needed to understand production. Courses were much more focused on the artistic side of design, instead of how to translate a creative direction into a recipe production.
Jessie: A major issue is artistic design versus production capacity. Designers should learn how to address the difficulties of workmanship, which must match with the order volume. Designs take a long time to be learnt by factory workers, so the more complicated they are, the more challenging and expensive they become for factories, which is why they should be ordered in larger volumes. Another issue is the difficulty of material sourcing, for instance, the potential order quantity is 500 pieces, however, the design requires accessories that are very hard to find. Factories can do it, but it's very expensive, because the order volume is only 500 pieces, for which the purchasing team had to spend a large amount of time. Factories feel they cannot say no to customers as they need to maintain relationships. I really want to tell designers, “Did you realize how difficult this little thing like you made is? It's very artistic, but workmanship is difficult and the quantity is so small”.
The design is to match the order volume, but again, as Kim said, if you don't understand the technicalities behind how things are made, it's very difficult for designers to understand why this simple design would be so hard or so expensive on the production floor.
Kim: There were so many times designers would complain that a specific color didn’t match. From our side, we knew the color didn't match, but, if we got the color to match, then the color fastness wouldn’t have been good enough. We'd go in circles for weeks, around these misunderstandings from the design side, that often provisionally approved solutions, expecting for a change in the following order. We would spend so long discussing these issues without coming to a conclusion, wasting precious time that could have been used for production, instead of having a major amount of pressure to deliver the order.
Buyers and suppliers live on two totally different planets, they don't speak the same language, they don't see the same thing. They don't approach things in the same way. - Jessie Li
Thank you again for another very insightful conversation - we hope that you enjoyed reading this as much as we enjoyed talking with them!
We hear so much around transparency, certifications, material sustainability, but we are asking brands to shed more light on the issues that lie at the core of human rights violations and waste, both in terms of material waste and value. We hope for a world where factory managers and workers don’t have to depend on inaccurate forecasting to have a stable income. In the same way that solar panels are the most logical solution for affordable and sustainable energy in the long term, brands should support to shorten the supply chain and focus on slightly longer payback periods.
The next and final part of our conversation with Kim and Jessie will look into production systems that do not fit the current definitions of sustainability. We asked Kim and Jessie to help us understand where the hundreds of millions of clothes that we find in large markets around the world are made, and how overstock and leftover materials are part of the same conversation. STAY TUNED!