50/50: Brands Need to Share in the Financial Risks of Their Suppliers

I often field requests from ethically-minded fashion brands looking for “ethical” suppliers. And while I applaud the intent, it’s a line of questioning that frustrates me. Implicitly, the question suggests that the industry’s sustainability woes must be the result of unruly suppliers. The problem is viewed as external, a matter of finding suppliers with the right “values.”


Not only does this rely on racist stereotypes, it ignores the systemic nature of the problems we’re collectively up against. By definition, systemic framing means that we’re all implicated. The most we can expect of one another (whether investor, brand, supplier, or consumer) is to proactively probe the boundaries of our own implication. We must be willing to hold up a mirror, so to speak.

In response to these inquiries, my first question to the brand is always: why don’t you do the production yourself? Respondents are quick to point out their lack of expertise: they don’t know anything about manufacturing, or the country in which they’re seeking to produce. And while expertise is certainly part of the story, it’s incomplete. More often than not, it’s also about the brand’s need to minimize financial risks.

The truth is: manufacturing is risky. Making clothes requires lots of up-front investments in people and materials, and those people need secure jobs and decent paychecks.

That means that whoever’s doing the production has a pretty hefty, fixed payroll payment at the end of each month. And when there’s no crystal ball to perfectly predict how much consumers will buy, a hefty, fixed payroll payment is daunting. But it’s precisely this uncertainty, combined with an unequal distribution of financial risk, that leads to workers being squeezed.

I’m not saying all brands looking to source more responsibly must do their own production. Or even that brands should assume all the financial risks associated with production. But a brand’s first step towards more responsible sourcing should always be a willingness to articulate an honest answer as to why production is being outsourced in the first place.

Once this hurdle is cleared, the rest becomes a lot more obvious: though doing the production yourself might not make sense, are you willing to share in the financial risks your suppliers take on? Are you willing to support them with this really tough balancing act between orders and capacity (which again, is a big part of the incentive for cheap and flexible labor)?

At an absolute minimum, this means paying suppliers deposits. Deposits aren’t just about cashflow and supporting suppliers to front the costs of materials and wages. They’re about having skin in the game. If demand disappears overnight, deposits give suppliers a basic guarantee that they won’t bear the costs of unsold inventory alone. It’s also important to note that deposits are generally tied to purchase orders. But if a purchase order is only for one month’s demand and total lead time is four months, then a 50% deposit on that purchase order would not represent 50/50 risk sharing on the total financial commitment required.

That’s why deposits are a baby step. The next step towards ethical sourcing is prices that hinge on consistency relative to demand projections. Suppliers make irreversible financial decisions about how many people to hire and how many materials to buy based on the demand projections they get from brands. Often, those investments have to be made months before confirmed orders come in. This is why, when those projections, inevitably, are wrong, suppliers (and by extension workers) are the ones who pay the price.

In the long run shared risk is a win-win for everyone. Workers will benefit because the supplier’s incentive to rely on cheap and flexible labor is greatly reduced. The supplier benefits because you, the brand, now have an incentive to ensure they’re loaded, to ensure their orders and the capacity remain in equilibrium. Suppliers will also be a lot less likely to overbook and to subcontract. Meaning you, the brand, benefit from shorter lead times, less waste, and less overproduction. Having a vested interest in each other’s successes and failures will radically increase trust, too. Meaning you’ll be in a position to have an open and honest conversation with your supplier about how to continuously improve your product.

A parting thought: many of the ethically minded brands I chat with seem to think that offering a supplier the chance to produce their products is somehow a favor, a chance to work with a “good guy”, someone who actually “cares”! Part of changing the fashion industry is changing this mindset: suppliers are offering you something of value, something you can’t do yourself.

Valuing the making of clothes starts with you. Invest the time to understand how suppliers do what they do, what their pain points are, and how you may inadvertently contribute to the incentives that lead to such unsustainable outcomes.

As a former factory manager, the litmus test to which I held myself was simple and universally applicable: if any one of my business partners was ever discovered to be engaging in unethical behavior, could I look myself in the mirror and confidently assert that nothing we’d done had encouraged, motivated, or contributed to their decision to behave that way?

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