Chat with us, powered by LiveChat BC Management Case Against Exploitative Working Conditions Report - Uni Pal

Description

Read the case Attacking the Roots: Shiraishi
Garments Company and an Evolving Thicket of
Business Ethics in China;
Read the reading material Improving supplier’s
situation through supplier cooperation: The case of
Xintang jeans town;
Watch the movie China Blue
Write your report to address the following
discussion questions:
1.What are the operations management problems
in the movie “China Blue”?
2.Do you have any solutions to improve labor
conditions in the movie?Journal of Business Ethics Education 4: 135-146.
© 2007, Senate Hall Academic Publishing.
Attacking the Roots: Shiraishi Garments
Company and an Evolving Thicket of
Business Ethics in China
Bin Jiang and Patrick J. Murphy
Kellstadt Graduate School of Business, DePaul University, USA
Abstract. This case examines management underpinnings of conducting socially purposeful
business in contexts where the labor conditions and ethics are questionable. Shiraishi Garments
Company was a Japanese entrepreneurial venture in the clothing industry that evolved into a highly
successsful multinational company. After its supply chain had extended into China, some ethical
labor issues emerged. The decision point is focused squarely on the company’s CEO, who must deal
with conflicting forces stemming from his personal values and professional responsibilities. In
exploring the issues, the case illustrates business risks of superficial standards auditing of
international operations. The case also describes how multinational firms are often part of the
problem and the solution when it comes to ethical labor issues. On these grounds, the case study
reveals some alternative approaches to the audit model based on more meaningful partnerships.
Implications pertain to successful and ethical supply chain relationships between foreign
entrepreneurial firms and the developing economic systems they enter.
Keywords: operations, entrepreneurship, supply chain, international, China, labor conditions,
safety.
1. Introduction
Takashi Shiraishi stared out his office window, watching reflections of a hazy
afternoon sun shining on Tokyo Bay. The date was February 9, 2005. Since early
the year prior, Shiraishi Garments Co. (SGC) had begun outsourcing its whole
production capacity to China in order to dramatically increase its profit margins.
As SGC’s President, Takashi saw the immediate benefit of such outsourcing to his
bottom line. But operations were vastly different in China. Some ethical issues
had emerged related to the health and safety of Chinese workers. Some disturbing
accidents had occurred in the manufacturing facilities. These events had long
concerned Takashi for reasons that were personal. But now the reasons were also
becoming business-related. As a consumer products company dealing in clothing
and apparel, SGC needed to maintain its positive reputation: business success
depended on its brand. Takashi was increasingly certain he was going to have to
make a tough strategic management decision to resolve the tradeoff between
ethical business operations and being a highly profitable multinational company.
A licence has been granted to the author(s) to make printed copies of the paper for personal use only. Apart from these licenced copies, none of
the material protected by the copyright notice can be reproduced or used in any form either electronic or mechanical, including photocopying,
recording or by any other information recording or retrieval system, without prior written permission from the owner(s) of the copyright. © 2007,
Senate Hall Academic Publishing.
136
Attacking the Roots
Japanese firms had wrestled with public trust for several years, especially
since the Snow Brand milk poisoning episode in 2000. That was when over
13,000 consumers became seriously ill. Cheap labor, albeit domestic, was
reported as the reason. Yet, Japanese companies were still moving operations into
other countries for more cheap labor, which was also increasing the level of
domestic Japanese unemployment. Some of these companies were taking steps
to demonstrate concern for international employees with a strong commitment to
corporate citizenship. SGC also worked hard to improve labor conditions in its
Chinese supply chain. For instance, when local suppliers were reluctant to make
the financial investments for first aid training in factories, SGC paid for the initial
sessions. Soon thereafter, the Chinese partners saw less time lost due to injuries
and began to embrace first aid training. Later, two major suppliers also began to
use the same first aid training and noted the same benefits. Although the direct
costs were absorbed by SGC’s bottom line, Takashi undertook additional similar
initiatives, such as the production of a first aid handbook and posters with
information about hazardous substances. But it never seemed to be enough. The
entire issue was like an evolving thicket of conflicting forces. Takashi realized
he was going have to do more than just trim the branches.
2. Finding the Roots
As Takashi gazed at the setting sun, he pondered some more ideas to boost
healthier workplace practices. For example, reducing the long working hours and
increasing worker compensation throughout its Chinese operations. But such an
initiative would seriously affect SGC’s bottom line. Quite simply, outputs would
reduce drastically because less hours were worked per employee. Although
focusing on health and safety might help SGC’s reputation, lower revenues did
not make business sense, especially in the short term. But accepting the status quo
was not necessarily less risky either: SGC’s supply chain was showing cracks due
to Chinese labor force dynamics. For example, he considered the Chinese
workers churning out lady’s brassieres for Ginza, the famous shopping district in
Tokyo. Those employees were growing miserable while working in factories
where security guards kept them behind locked gates and taking a bathroom break
for longer than a minute was fineable offense. Employee turnover rates in two of
these particular suppliers exceeded 100%. It was becoming impossible to recruit
enough employees to maintain production. As a result, SGC orders were
increasingly not being filled on time. Takashi found it unbelievable that
production demands were so great that a labor shortage was emerging in the
world’s most populous nation.
Another option, suggested by SGC’s Board of Directors, was to withdraw
operations from China. SGC could enter other Southeast Asian countries such as
Vietnam and Laos, where more cheap labor was available and there was not a
Journal of Business Ethics Education 4
137
growing emphasis on labor conditions. Takashi rejected that option. He was a
staunch proponent of the Japanese ideal of Kyosei, which had been embraced by
international bodies such as the Caux Roundtable.1 Just as the Kyosei ideal
emphasizes economic and social development, Takashi believed economic
survival was not the true goal of SGC. Rather, he wanted SGC to play a role in
improving the lives of its customers, shareholders, and employees. In the case of
China, therefore, he wanted SGC to contribute to the human rights, welfare, and
education of Chinese people.
It was now past dusk. The running lights of cargo ships headed out to sea
through the Uraga Channel were visible, and the Tokyo Aqua-line bridge was
illuminated. Takashi resolved to make the right strategic decision for SGC before
the month of March, in just 19 days. But he did not know where to start. He did
not want to lose the competitive advantage of outsourcing to China, and he
refused to exploit the labor force. He wanted SGC to maintain the reputation of
a company that cared about its employees. This puzzle of how to keep making
money in China while emphasizing more ethical business operations was driving
him mad. Takashi knew he was not going to solve this puzzle by looking out the
window. He vowed to act as quickly as possible. He strode to his desk and picked
up the telephone.
3. SGC’s Background
Japan has one of the biggest and most sophisticated apparel industries. When it
comes to fashion, the Japanese taste in clothing is among the most particular in
the world. For centuries, the most cherished possessions of Japanese women have
not been silver, gold or any kinds of precious stones. Instead, it has always been
the lush rich colors and the perfect fit of their kimonos. Much more than other
cultures, clothing signifies worldviews, personal tastes, and sensibilities in Japan.
Although many contemporary Japanese live in plain apartments, most have a
strong willingness to spend considerable sums of money on fashionable, stylish
clothing. This aspect of the market environment underlies SGC’s niche.
Takashi Shiraishi established SGC in 1978 after watching a news report on
television. The oil crisis was hitting the economny hard that year, leading the
Japanese government to announce and publicize the “energy suit”. The energy
suit was a short-sleeved safari outfit designed to allow companies to save
expenses on air conditioning. The idea was a total failure however, because
although a few ministers wore energy suits for a week or two, nobody would dare
to wear one to the office. Takashi’s recognized his entrepreneurial opportunity
when the news reporter said,
1.
The Caux Roundtable Principles were developed in 1994 by business leaders interested in
ethical and responsible corporate behavior as a foundation for business worldwide. See
www.cauxroundtable.org
138
Attacking the Roots
The businessman puts on the darkest suit he owns, a white shirt, sober tie, and
that is what he wears in Japan, no matter what the temperature is outside. The
Japanese find this rigidity comforting, as it eliminates the nerve-racking
necessity of making choices.
A recent art school graduate, Takashi believed such conservative dressing
habits created a real venture opportunity: introducing customization into the drab
business attire market. He believed differences in taste, preference, and lifestyle
mattered significantly to customers, even to those in the same age demographic.
Thus, the purchasing patterns were diversified. He eventually opened a men’s
clothing shop in a Tokyo department store. Even though the small shop offered
products in conservative colors such blue, gray, brown and black, there were other
options besides drab suits and neckties. Based on skin color, hair style, and other
characteristics, Takashi helped customers select colors, accessories, styles, and
shapes for tie knots. He became a master at making customers feel special and
important. Such personal attention made all the difference. Customers absolutely
enjoyed that SGC took such interest in their appearance.
4. The Growth of SGC
As SGC grew, the clothing designs were transferred to sewing subcontractors in
the Tokyo suburbs. SGC usually ordered smaller quantities with more designs
whereas other retailers ordered larger quantities and fewer designs. Although it
was easier to fill orders for other retailers, the subcontractors were more interested
in SGC. As all the retailers wanted low prices and high quality from sewers,
business relationships changed frequently because of price wars. Yet, the relation
SGC had with its sewing subcontractors remained strong. SGC made detailed
reports on defects and also gave advice about how to improve quality and
production. SGC shared customer comments and fashion forecasts, too, so
subcontractors and suppliers could keep pace with the market.
On average, within two weeks of an order customers would receive
customized garments from SGC. The clothes arrived at the customer’s home, and
sometimes delivery personnel even showed customers how to wear the clothing
correctly. Then they would visit the customer ten days later to see if everything
was going well. Customers thus felt sense of obligation to SGC, which would
always be there should the clothing require service or repair.
The customer-oriented strategy combined with supplier relationship
management were successful and good for business. SGC’s garments were only
15% higher than ready-made ones, but with SGC consumers were able to choose
from more than 10,000 unique style permutations. The SGC brand quickly
became synonymous with quality and prestige. During the 1980s, when the
Japanese economy was booming, SGC was a medium-sized but prestigious brand.
Journal of Business Ethics Education 4
139
However, by 1991, its annual sales for eleven retail outlets had skyrocketed to
exceed 22 billion yen.
5. SGC Tightens Its Belt
As the 1990s progressed, economic globalization and an aging population
dramatically changed the Japanese apparel industry. Rather than purchasing
completely designed garments, the new generation purchased items from several
different shops, mixing them freely to match their flighty sensitivities. Young
shoppers displayed a strong tendency to buy clothes at select shops near railway
stations and fashion-specific commercial districts rather than conventional
department stores, which were more sophisticated but also more traditional.
There was also a new casual style trend for male consumers. Perhaps a general
disillusionment with the “salary man” lifestyle made a more laid-back attitude
seem attractive. Simultaneously, the Japanese economy entered its “ten lost
years” once the real estate and stock market bubbles burst in 1990. Japanese
consumers lowered spending on clothing by making fewer purchases and
preferring lower-priced items. As such, from 1991 to 2004 the percentage of
household clothing expenditures decreased every single year.
The Japanese male clothing market was becoming more fashion-oriented but
commodity-driven. SGC’s customized business attire did not meet this trend
well. Since the late 1990s SGC had been struggling with shrinking sales and profit
margins, as shown in Table 1. At some point, Takashi recognized that he had to
cut costs to survive. That point, in 2004, was when Takashi took steps to
outsource SGC’s sewing operations to Chinese companies.
Table 1: Shiraishi Garments Company. Financial Highlights (yen, in millions)
March 31year-end
2000
2001
2002
2003
2004
Sales
236,225
232,819
221,781
215,822
189,313
Operating income
17,661
14,032
15,275
12,910
12,872
Net income
7,266
6,026
5,049
4,567
4,347
Source: SGC internal documents
140
Attacking the Roots
6. Chinese Allures and Challenges
In 2004 the whole business world was already watching the Chinese economy.
The reality of 1.3 billion potential consumers and low labor costs were attractive
to American, European, and Japanese companies. Shelves around the world were
stacked with low-cost goods churned out by China: the world’s workshop and
fourth largest economy. Its highest volume products were clothes, toys, and
technology appliances (e.g., DVD players). The national minimum wage had
increased by 30%. In the poor inland areas, where most migrant laborers come
from, more young people could find jobs near their hometowns. As a result, when
exporters near the coast had poor working conditions, migrant labors would be
less likely to go there for work. Unbeknownst to foreign companies, labor
conditions wer emerging as an important factor in the national labor market.
Once China joined the World Trade Organization (WTO) in 2001, its
attractiveness as a manufacturing center increased further. The World Bank then
estimated that China would account for half of world textile manufacturing by
2010.
Takashi had conducted his own research in the China as a production solution
for his business. Table 2 shows Takashi’s 2004 data, which revealed that China
was not the cheapest place to outsource. However, Takashi believed personally
that the criteria for the best place to manufacture were not so straightforward.
Right now, the place was China because of low labor costs as well as the
tremendous foreign direct investments in its textile and apparel manufacturing
industries. Indeed, those industries were growing fast, and the rising productivity
of Chinese high-tech sewing facilities were outpacing anything else the world had
ever seen. Takashi visited several “supply chain cities” and was utterly impressed
that everything needed to manufacture garments existed in a single location.
Many Chinese vendors were located within the supply chain cities. Factories
were located near textile mills and other suppliers of various components. From
a business perspective, ahen considering the factories, political climate, time,
fabric availability, human resources, infrastructure and speed to the Japanese
market, Takashi was sure China was preferable to other Asian countries. He
wanted to play a role in the positive development of China. From a personal
perspective, and based on the historical context of Japanese and Chinese culture
in southeast Asia, he saw a particular opportunity with China. His personal
interest in making a contributions to innovation, trust, and world community
called for him to embrace an ethical leadership role that might be especially
appreciate by Chinese manufacturers.
Journal of Business Ethics Education 4
141
Table 2: Hourly rates for sewing laborers in Asian urban regions
Country
Rate ($/hr)
Laos
0.04
China (mainland / inner)
0.12
Vietnam
0.12
Sri Lanka
0.14
Bangladesh
0.19
Pakistan
0.23
India
0.25
Indonesia
0.42
China (coastal)
0.48
Japan
10.5
Source: Cal Safety Compliance Corporation (CSCC)
7. Chinese Manufacturing Practices
Takashi noticed the salary rate in Chinese coastal areas was four times higher than
in China western regions. Many labors thus had left rural poverty in the
countryside for the new factories along the coast. As the 2004 Chinese New Year
approached, Takashi was surprised to see that up to 120 million migrant laborers
filled roads and railways to reunite with families in countryside. This large
migration helped keep wages low. Migrant laborers were a cheap and compliant
work force who had attracted much foreign direct investment and ensured the
viability of millions of domestic businesses. However, Chinese prosperity had
been achieved through their exploitation. In the Pearl River Delta, for example,
one local vendor in SGC’s new supply chain told Takashi, “There are many girls
with good eyes and strong hands. If we run out of workers who will accept our
current wages, we will go deeper into the hinterland and recruit new workers.” In
that vendor’s factory workers were earning basic monthly wages of $37 and
worked 16 hours per day, seven days per week. These realities troubled Takashi.
Low wages and poor labor conditions were the dark side of cheap labor costs.
Domestic China policy had not yet addressed them effectively as of 2004.
Takashi saw that state-owned enterprises, although not productive or profitable,
treated workers fairly well. At the same time, private sector companies were
exploiting migrant labor, mostly young females. At the very root of the problem
was the failure of local government to address the issue. He recounted in his
journal, “The local authority’s priority is to attract foreign direct investment, and
142
Attacking the Roots
labor law enforcement is a selling point when trying to attract foreign inward
investment. But the big problem is that local authorities are flexible in
interpreting the law and have scarce resources.”
Clothing companies had been a focus of non-governmental organization
(NGO) campaigns criticizing low pay, overtime, safety problems and child labor
in Chinese supply chains. NGO criticisms could lead to significant damages to a
company’s reputation. Thus, to operate in China, SGC had to face the problem of
labor conditions. Other risks associated with poor labor conditions included
quality problems, low productivity, and high employee turnover. Takashi
summarized two principal risks associated with operating in China. Reputation,
as poor labor conditions created negative publicity damaged the brand value.
Also, operational risks were important and stemmed from poor productivity and
high employee turnover (due to poor labor conditions).
Foreign companies with factories in China were less exposed to those risks
than companies outsourcing production. Control was limited when outsourcing.
Companies actual factories in China had implemented occupational health and
safety programs. They paid basic wages above the legal minimum. Their social
security payments and working hours complied with regulations. Some provided
extra benefits, such as housing subsidies and holidays. These factories required a
minimum volume of business and had to reinvest continually to update their
technology. The overhead costs of an outsourced vendor, on the other hand, were
spread over a couple hundred clients. Takashi thought it would take years for a
new factory to achieve the best practices, platforms, and intellectual property on
par with a third party. So he decided to use Chinese suppliers instead of
establishing an SGC factory in China.
8. Potential Suppliers in China
In China, Shiraishi Garments Company had two major suppliers. The first one
produced accessory goods (supplier 1) and the second one sewed garments
(supplier 2).
Supplier 1. Located on the outskirts of the city of Wenzhou in Zhejiang province,
supplier 1 employed 1,500 laborers. Its number of overtime hours were
problematic, as 78% of employees worked at least 132 hours of overtime per
month. Most workers arrived at this factory unskilled. Because they were often
paid piecemeal, and never for overtime, there was no incentive for the factory to
cutback hours. Workers built skills on the job. The factory did not pay for
training, carrying hidden costs of low productivity and quality and factory
overhead. Although the factory incurred warnings and fines, supplier 1 did not
provide any sort of bonus to employees at all. A rule book issued to workers
instructed them on every aspect of factory life. The harsh penalty system included
Journal of Business Ethics Education 4
143
fines for any violation of the rules, including (a) arriving late, (b) talking during
work, (c) leaving the workplace, or (d) spitting. Supervisors and middle
managers spoke rudely and shouted at workers when production goals were not
met.
Employees were despondent about the long hours and low pay. The fines and
poor quality food exacerbated their unhappiness. Workers reported that there
were few ways to communicate at all with managers. Most had no desire to do
so. Relationships between workers and supervisors were strained. Employees
frequently suspected supervisors of not accurately recording the number of pieces
they produced and of extending working hours further than what management
had scheduled.
It seemed health and safety management was good. Accidents were recorded
by the medical center and minor injuries were dealt with in the first aid room in
each production unit. Takashi still had concerns about ergonomic issues such as
congested facility layouts, bad lighting, and poor ventilation. Problems also
included inappropriate storage and handling of toxic chemicals, improper
protection equipment for workers, and the lack of chemical safety training.
Supplier 1 had headaches managing its own suppliers. Low quality and late
delivery of raw materials delayed production and squeezed the window of time
for jobs and orders. They undertook used purchasing from multiple-source,
buying from a list of potential suppliers to avoid getting locked into a sole source.
Supplier 2. A small factory in the city of Dongguan in Guangdong province,
employing around 400 workers, sewed garments for SGC and a few other foreign
retailers. The managers described relations with foreign purchasers as
uncomfortable in terms of tight lead times, late sample approval, and last minute
changes to product specifications. All these problems put increased pressure on
supplier 2 to deliver orders, which were sometimes not filled. It also led poor
communication between merchandisers, factory management, and production.
Insufficient communication about changes to product specification led to
more reworking and, therefore, overtime. The reworking time averaged 7%
during production and 10% after final inspection. On some production lines with
particularly difficult styles, reworking could reach levels of more than 50%. As
the piece rate compensation system did not cover reworking, a significant
proportion of time was not only utterly unproductive, it was also unpaid. Very
few workers knew there was a legal minimum wage. But all were aware they
were not compensated for overtime and believed their wages were unfair. Twoway communication between workers and management was poor, so changes in
pay or hours were not understood and on occasion resented by workers. There
were few effective channels for workers to raise concerns with management, and
managers usually did not respond to worker concerns or suggestions. Although
the factory levied fines for 18 different kinds of offences, workers did not receive
any training.
144
Attacking the Roots
Supplier 2 had other areas of concern. Takaishi saw there were inadequate
escape routes and locked or blocked emergency exits. Systems for tracking and
improving productivity and quality were poor or nonexistent. There was no
formal production line quality control system and no records of reworking rates
during the production process. The piecemeal workers were given daily
productivity targets and supervisors made daily estimates of how many pieces
each worker made. Those records were not kept for more than a few days.
Supplier 2 estimated that 70% of its fabric supplies necessary for production
were delivered at least one week late. Worker annual turnover at supplier 2 was
extremely high, 140%. Most workers left because of the overtime hours and
management had no apparent concern for their well-being.
9. Auditing
Factory auditing by the government was not the best tool for tackling the problem
of Chinese labor standards in supply chains but, at the time, it was the only way.
Independent auditing is a critical factor that a company can use to maintain its
reputation and achieve ethical behavior. But auditing alone, especially if
superfical, is not enough to drive positive change. It was easy to audit financial
conditions, but difficult to audit a supplier for social conditions related to labor,
community, and the environment. Health and safety audits were also difficult.
For instance, Takaishi noted one audit checklist item, which stated, “The supplier
has a fire alarm.” Further questions not considered were, “does it work?” “Do
workers know what it is?” “Do workers have the right or the will to use it?”
“Would they know what to do in an emergency?” “Can everyone in the factory
hear it?”
A black-and-white audit approach could not solve these kinds problems. Even
if short timeframes to prepare and improve to pass an audit were granted, the
fundamental problem was still poor labor conditions. Post-audit follow-up from
the auditors was poor and resulted in few improvements actually being
implemented.
Audits even could drive dishonesty, lack of openness, and fraud. Suppliers
felt forced to provide the “right” answer or face penalties. Chinese factory
managers were becoming skillful faking records and coaching workers to give
acceptable responses during interviews. This trend towards concealment was a
barrier to improving labor conditions because it wasted time and money without
making any change in the workplace.
Whereas workers did not want to work the excessive hours demanded of
them, they were willing to work more than the low limits set by Chinese law to
increase their pay. They knew that if a factory reduced hours to legal limits as a
result of an audit, without some commensurate effort to increase productivity,
wages would decrease dramatically.
Journal of Business Ethics Education 4
145
10. Attacking the Roots
The sun was low and darkness was now descending over the Tokyo Bay’s manmade islands. Takashi walked back to the window. His mind was clearer now.
He believed that the current approach, dependent on compliance-focused audits,
had made little progress in tackling poor labor conditions in SGC’s Chinese
operations. The days of sweatshop labor might be numbered because the business
environment was changing in China. Workers had mobile telephones and word of
worker mistreatment spread fast. International purchasers could no longer rely on
profits earned by exploiting Chinese workers.
Takashi thought he needed to focus more on continuous improvement and
capacity building activity. But a new approach to finding a sustainable solution
was needed. If such an approach was impossible, he was prepared to seriously
consider getting out of China.
146
Attacking the Roots
Int. J. Production Economics ] (]]]]) ]]]–]]]
Contents lists available at ScienceDirect
Int. J. Production Economics
journal homepage: www.elsevier.com/locate/ijpe
Improving supplier’s situation through supplier cooperation: The case of
Xintang jeans town
Bin Jiang a, Srinivas (Sri) Talluri n,b, Tao Yao c
a
Department of Management, The Charles H. Kellstadt Graduate School of Business, DePaul University, Euromed Management Marseille, USA
Department of Supply Chain Management, Eli Broad Graduate School of Management, USA
c
The Harold and Inge Marcus Department of Industrial and Manufacturing Engineering, Pennsylvania State University – University Park, USA
b
a r t i c l e i n f o
abstract
Article history:
Received 12 November 2009
Accepted 9 March 2011
Inferior labor conditions in developing countries have raised Western customers’ awareness of
sweatshops. Developing countries’ suppliers are facing growing pressure from Western clients on
ethical issues associated with the production of low-cost goods at the expense of worker health, safety,
and welfare. Inferior working conditions not only adversely affect worker well-being, but also
negatively impact performance and productivity, which is detrimental to the entire supply chain in
the long-run. In this paper, we consider the case of Xintang International Jeans and Textile City, the
largest manufacturing base of jeans in China, which sought to shed its sweatshop image. Working
closely with the administration of this manufacturing base, we applied operations research techniques
to analyze local suppliers’ possible operations strategies based on considerations of price and delivery
guarantees, two critical dimensions of competition in the apparel and textile industry. Our analysis
highlighted the fact that local suppliers’ cooperation may be an effective way for improving labor
conditions in the long-run. Our work has significant implications for societal improvement in
developing countries through better labor conditions and increased cooperation while maintaining a
healthy level of competition.
& 2011 Elsevier B.V. All rights reserved.
Keywords:
Supplier cooperation
Game theory
Labor conditions
1. Background
China’s advantages in the global apparel and textile marketplace are moving well beyond cheap equipment, materials, and
labor. Industries in China are leveraging economies of scale and
low labor costs in an effort to achieve a global competitive
advantage via a new form of industrial organization referred to
as ‘‘factory town’’, which is akin to an industrial cluster. In an
apparel factory town, all materials and processes needed to make
the final products exist in a single location. Garment factories are
located close to textile mills and other suppliers of various
components, including yarn dealers, sewers, pressers, packagers,
and freight forwarders. Purchasing from factory towns is a highly
attractive proposition to Western buyers, since such a one-stopshopping approach reduces transaction costs and enhances purchasers’ bargaining power due to stringent competition among
suppliers (Frenkel and Scott, 2002). There are a total of eight
primary apparel factory towns in China, generating massive
volumes to supply global and domestic markets (see Fig. 1).
n
Corresponding author.
E-mail addresses: bjiang@depaul.edu (B. Jiang),
talluri@bus.msu.edu (S. Talluri), taoyao@psu.edu (T. Yao).
Located near Hong Kong, the Xintang International Jeans and
Texture City is a well-known base of jeans production because of
its large scale operation. There are over 2600 jeans factories and
related enterprises with about 100,000 workers and over 1000
registered global and domestic jeans brands. More than 250
million pairs of jeans were manufactured in 2006 at Xintang
and approximately 85% of them were exported.
The apparel industry has faced significant criticism over its
sweatshop image mainly in its East Asian factories. In May 1998, a
panel of experts raised issues relating to violation of worker rights
and inappropriate working conditions in a variety of garment and
sportswear factories of leading transnational companies (Shah,
2006). In the same vein, one of the main issues with Xintang jeans
town is that it was notorious for its sweatshop image with low
worker wages and long overtime hours. In manufacturing a pair of
blue jeans that was sold for $30 in the US, local workers received
less than 90 US cents (based on the exchange rate in 2005). They
usually worked 24–30 h of overtime in a week. Overtime work
was more flexible and cheaper than investing in new production
technology or hiring more workers, because most apparel workers were not paid by working hours but by finished pieces.
Without an overtime premium, local jeans manufacturers had
no direct financial incentive to reduce long hours. However, the
negative effects of poor working conditions on worker welfare,
safety, health, and general well-being were quite evident.
0925-5273/$ – see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2011.03.010
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
2
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
Fig. 1
In order to improve working conditions, local governmental
law specified a normal working day of 8 h and a 5-day working
week of 40 h, and established a minimum wage which ranged
from a high of 780 Yuan/month (US $96.18) in cities to a lower
rate of 450 Yuan/month (US $55.49) in rural regions. However,
there were no meaningful overtime or minimum wage enforcement mechanisms. Migrants from the countryside form a readily
exploitable labor pool with few legal protections (Harney, 2008).
With the pressure from Western clients on acceptable labor
standards escalating, the Administration and Board of Directors
of Xintang International Jeans and Texture City (ABDX) began to
take steps to demonstrate concerns for ethical issues facing local
suppliers. In 2005, the Guangdong Provincial Department of Labor
and Social Security (DL&S) and the ABDX worked together to
resolve the societal concerns and ramifications associated with
poor labor conditions in this jeans town. Their primary goal was
to increase worker compensation and provide better conditions
for improving worker health and safety.
Based on Western purchasers’ suggestion, the DL&S consultant
team and the ABDX established a strict auditing system to
monitor jeans manufacturers’ working practices. The audit at a
factory was carried out by a panel including representatives of
that factory’s Western client(s) and ABDX auditors. A typical audit
involved a factory inspection, discussions with managers, worker
interviews, and document checks. At the end of the audit, the
audit panel presented the factory managers with a list of issues to
be addressed. The factory was required to correct the identified
problems and support any follow-up audits. If problem areas
continued to exist, the factory was subject to sanctions in the
form of financial payments from the ABDX and/or a withdrawal of
its client’s business.
Translating the audit results into a real change on the factory
floor, however, was a major challenge (Jiang et al., 2009).
Mr. Chen Kangqiang, the Chairman of ABDX, communicated to
the DL&S consultant team, ‘‘By law, jeans manufacturers are
supposed to provide time-and-a-half pay after 8 h on weekdays
and between double and triple the pay for Saturdays, Sundays,
and holidays. Complying with labor codes definitely raises factories’ operating costs. However, the price Western clients pay
has not increased one penny over the past ten years.’’ On the one
hand, pressure from Western export markets, which originally led
to the establishment of higher supply chain labor standards, is a
major impetus for improving working conditions in China. On the
other hand, pressure from Western firms to implement higher
labor standards is intended to protect their corporate and brand
images. Such Western clients ‘‘are not necessarily interested in
Chinese labor issues. They are interested in public concern in the
West, and in responses that can deliver visible signs of short-term
improvement’’ (Crijns and van der Putten, 2005, pp. 17).
Facing potential overhead increases and Western clients’
squeezing pressure on cost, Xintang’s managers felt that they had
little choice but to present false data. It was not surprising to see
audit fraud in Xintang escalate to a higher degree. In order to pass
the audit as well as not significantly increase operating costs, Mr.
Chen believed that a majority of jeans manufacturers resorted to
falsified book-keeping to a certain extent. Factories were becoming
increasingly sophisticated in their dual book-keeping practices
and in coaching workers to provide acceptable responses during
worker interviews.
As factory’s methods to mask problems became more sophisticated, so did audit detection methods. Xintang audits started to
become unannounced so as to catch managers off guard; worker
interviews were conducted off site to encourage worker openness; and auditors made surprise visits to factories late at night to
investigate whether factories were operating on unrecorded overtime. Although these methods helped the ABDX learn more about
the real conditions in factories, this further aggravated hostility
between the ABDX and factories. Such tensions made it difficult to
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
achieve any sustainable change. For example, while the strict
audit program in Xintang dramatically reduced overtime work,
this jeans town regularly lost workers to other factory towns that
did not strictly enforce restrictions. The reason was that many
workers were eager to put in longer hours in order to earn more
income. In 2005, the average worker turnover rate in Xintang was
more than 140%.
2. The new direction
The DL&S consultant team found that the average profit
margin in Xintang had reduced from 30% to 5% over the past
decade because of the fierce competition among factories. The
harsh economic realities made it exceedingly difficult to achieve
both low prices and humane working conditions.
Several reasons accounted for the fierce competition in Xintang. First, the entry barrier to the apparel industry was very low
in terms of capital and technology. A factory operation could
begin with just a few manually operated sewing machines (Zhang
et al., 2004). At the same time, there was almost an endless
supply of cheap labor. Large numbers of farmers left the inland
countryside in droves preferring to take their chances in the new
factories near Hong Kong. Second, the government granted very
flexible policies for the growth and operation of these emerging
apparel firms. They were much less restricted by the rules and
regulations when compared to the state-owned enterprises
(Sonobe et al., 2002). Third, as these firms were started by
farmer-entrepreneurs in towns and even in villages, they set
examples as role models to others. This resulted in a tremendous
increase of such firms with same work methods and similar
products being sold in the same markets (Wang et al., 2004). To
increase their market shares, factories vehemently waged price
wars. This cannibalistic competition among Xintang jeans manufacturers resulted in razor thin profit margin for firms.
Besides the fierce competition, Xintang jeans manufacturers
also faced pressure from global buyers, particularly in terms of
squeezing prices and tight lead times. Local factories were in a
subordinate position in buyer-driven value chains where small
suppliers tended to be dependent on larger, dominant buyers. The
bargaining power between global buyers and local jeans manufacturers was unequal, allowing the powerful buyers to relinquish
many of the responsibilities for product and process improvement
at local factories (Browning et al., 1995; Frenkel, 2001). For
example, global buyers often deliberately deferred a decision
until the last minute in order to better understand what their
competitors’ strategies are in reacting to consumer demand,
either in terms of volume or product specification. Therefore,
final samples of products were often subject to revisions, even
after production was underway. Generally, buyers were mainly
concerned with getting the right quality product at the right price
and suppliers are concerned with supplying the right quality
product at a profitable price (Fynes and Voss, 2002). As a result,
suppliers have to pass on the pressures of buyers’ demanding
requirements to workers. The buyers’ requirements on cost
reduction forced jeans manufacturers to minimize wage expenditures and buyers’ late sample approvals resulted in expanding
working hours to meet the tight delivery deadline.
The DL&S consultant team believed that the cannibalistic
competition among jeans manufacturers and the power imbalance between local factories and Western clients were the root
causes of poor labor conditions in Xintang. Instead of imposing
labor codes on factories, the ABDX should help factories improve
their economic realities; otherwise, there would be little or no
concrete sustainable improvements in labor practices. The
consultant team suggested that everyone in this factory town
3
genuinely employ a strategy of cooperation instead of competition, the cannibalistic competition would be eliminated and the
local jeans manufacturers’ negotiation power over western clients
would increase. Under the strategy of cooperation, Xintang jeans
manufacturers could charge Western clients higher prices to
improve their profitability and then their working conditions.
3. The basic model to test the new strategy
The DL&S consultant team developed profit maximization
models to analyze competition and cooperation strategies based
on considerations of price and delivery time guarantee, two
critical dimensions of competition in the apparel industry. We
first discuss the models in a general sense with specific details
following.
The objective of the mathematical model is to maximize the
expected net profit per unit time subject to the reliability for the
deliverable time guarantee. This model provides an analytical
framework to analyze the interrelationships between delivery
time guarantee, pricing, demand, and the overall profitability of
local factories under competition and cooperation. Factories
compete to provide goods in a make-to-order fashion. Tools and
techniques from queuing theory, mathematical programming,
and economics have been applied to analyze this situation.
Queuing theory is utilized to model the responsive demand.
We model the demand for a factory as a function of its own price
and delivery time guarantee as well as other factories’ price and
delivery time guarantees. Each factory chooses joint decisions in
pricing and delivery time guarantee levels to maximize its own
profitability while keeping a predetermined level of delivery
reliability.
The chance constrained programming model we developed
incorporates various constraints. The first constraint states that
the factory’s desired delivery reliability meets a predetermined
delivery time, and the second constraint identifies the factory
system stability such that the arrival demand rate does not
exceed the operating rate. Other constraints are specified on the
price, delivery time, and demand rate.
Economic theory is applied to model factories’ dynamic price
and delivery time competition and cooperation. The theory of
repeated interaction suggests that in an oligopoly making a
homogenous product, factories would realize their interdependence, and may be able to sustain the monopoly delivery time
and price with collusion. The threat of a serious punishment
would be sufficient to deter the attempt to cut prices or shorten
delivery time.
We now discuss the details associated with model parameters,
assumptions, and formulations:
Parameters:
li: amount of orders faced by factory i per unit time;
mi: operating rate (capacity) of factory i;
gi: desired delivery reliability (i.e., the guaranteed cycle time)
agreed by factory i management and its buyer (0 o gi o1);
pi: unit price charged by factory i;
gi: delivery time guarantee by factory i according to the
contract;
oi: unit operating cost for factory i.
Assumptions:
(1) Factory i investment function: Ii ¼wmi. We assume workers in
the labor-intensive apparel industry have identical productivity, loyalty, and mobility. Because jeans manufacturers are
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
4
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
paid by piece rates, we modeled a factory’s investment cost as
a linear function of its capacity mi.
(2) Orders arrive at factory i according to a Poisson process with
mean rate li; the handling time of an order is decided by the
factory’s capacity, i.e., exponentially distributed with mean
rate mi.
(3) When there are n factories fiercely competing with each other
in this factory town, it is reasonable to assume that their unit
operating cost and service level should eventually converge,
i.e., oi ¼o and gi ¼ g.
The mean demand rate for factory i depends linearly on its
own price and delivery time guarantee as well as other factories’
prices and delivery time guarantees, i.e.,
li ðP,GÞ ¼ ai bi pi ci gi þ
n
X
dij ðpj pi Þ þ
n
X
j¼1
j¼1
jai
jai
eij ðgj gi Þ,
ð1Þ
where ai 40, bi 40, ci 4 0, dij 4 0, eij 40 for all i (i¼ 1, 2,yn), j
(j¼1, 2,yn, jai), P (p1, p2,y,pn), and G (g1, g2,y, gn). The
parameter ai represents the basic demand that is not related to
price and delivery time guarantee and depends on other factors
such as the factory’s reputation or quality. bi and ci measure the
sensitivity of each factory’s demand to its own price and handling
time, respectively. dij and eij measure the competition intensity
among factories with regards to pricing and handling time, i.e.,
the sensitivity of a factory’s demand to any other factories’ prices
and handling times. Assuming that all other parameters remain
unchanged, a unit decrease in factory i’s price will attract (bi þdij)
more units. A higher value of dij elevates the importance of price
competition. Similar connotation can be used to explain eij for the
delivery time guarantee competition. With some loss of generality but substantial gain in expositional efficiency, we assume
ai ¼a, bi ¼b, ci ¼c, dij ¼ d, and eij ¼e.
Because a factory always tries to maximize its profit, we can
describe this behavior as:
Max pi ¼ ðpi oÞli ðpi ,gi Þ wmi ,
ð2Þ
Pðt o gi Þ ¼ 1 e ðmi li Þgi Z g,
mi 4 li ,
ðfactory desired delivery reliability constraintÞ
ðfactory systemstability constraintÞ
pi 4 o 40, gi, li 40,
ðnon-negativity constraintsÞ
where t is the steady state actual handling time for random orders.
So and Song (1998) studied a closely related problem to our
objective function (2). Their work showed that for very high service
levels (e.g., g 40.9), which is true in our case, the tail distribution of t
can be accurately approximated by an exponential function, i.e.,
Pðt 4 gi Þ ¼ e ðmi li Þgi . Moreover, So and Song (1998) and Palaka et al.
(1998) proved that the constraint of a desired delivery reliability
must be binding at optimality, i.e., 1 e ðmi li Þgi ¼ g. Therefore, the
optimal m i can then be expressed as
m i ðpi ,gi Þ ¼
lnð1 gÞ
þ li ðpi ,gi Þ:
gi
ð3Þ
In China, the most populous country in the world, there is an
abundance of labor force in the countryside. For labor-intensive
industries, manufacturers can easily optimize their capacities by
using these mobile workers. Mobile workers are highly flexible
and can be hired and laid off at short notice. As a result, a factory’s
optimal capacity is exogenously fixed in this project. Substituting
Eq. (3) into Eq. (2), the profit maximization model for factory i can
be rewritten as
Max pi ¼ ðpi o wÞli ðpi ,gi Þ þ wlnð1 gÞ=gi :
ð4Þ
For the competition strategy, each jeans manufacturer simultaneously and independently decides individual price and delivery
time guarantee. The basic model in Eq. (4) can be analyzed as a
non-cooperative n-person game:
2
3
n
n
6
7
X
X
6
7
Max pi ðpi ,gi ,P i ,G i Þ ¼ 6a bpi cgi þ
dðpj pi Þ þ
eðgj gi Þ7
4
5
j¼1
j¼1
j ai
w lnð1 gÞ
ðpi o AÞ þ
,
gi
j ai
ð5Þ
where
P i ¼ ðp1 , p2 ,:::, pi 1 , pi þ 1 ,:::, pn Þ,
G i ¼ ðg1 , g2 ,:::,gi 1 ,
gi þ 1 ,:::, gn Þ, and i¼1, 2,y,n.
For the cooperation strategy, all factories decide on prices and
delivery time guarantees jointly, considering that a central policy
maker (e.g., the ABDX) decides on relevant variables so as to
achieve total profit maximization. According to the game theory,
such a cooperative model is a monopolistic model (due to the
collusion). The total profit maximization model is given as:
Max
Y
¼
n
X
pi ðpi ,gi ,P i ,G i Þ:
ð6Þ
i¼1
From Eqs. (5) and (6), we obtain two different strategies’ p i and
gi . The following numerical example shows the comparison of
p i and gi under different strategies.
4. Analysis
The DL&S consultant team applied a numerical example to
demonstrate the effectiveness of the proposed models, compare
optimal decisions under competition and cooperation strategies
with different demand characteristics, and analyze the elasticity
of demand and profit to price and delivery time guarantee.
In this example, the number of jeans factories is n ¼10, the
desired delivery reliability g ¼0.9, the unit operating cost c¼ 3, the
investment coefficient w¼0.6, and the basic demand a¼200.
According to the ABDX’s requirement, three different scenarios
of clients’ demand were considered:
Scenario 1: the demand is more dependent on price than
delivery time guarantee, i.e., b4c, d 4e. In the numerical
example, b¼2.0, c¼0.4, d¼ 0.1, and e¼0.05.
Scenario 2: the demand is dependent on price as well as on
delivery time guarantee, i.e., b¼c, d ¼e. In the numerical
example, b¼0.4, c¼0.4, d¼ 0.05, and e¼0.05.
Scenario 3: the demand is more dependent on delivery time
guarantee than price, i.e., boc, d oe. In the numerical example, b¼0.4, c¼2.0, d¼0.05, and e¼0.1.
Given the above settings, the consultant team applied Mathematica 5.0 version to obtain the optimal prices, delivery time
guarantees and each factory’s profit as shown in Table 1.
According to Table 1, the cooperation strategy leads to higher
optimal price and profit than those under the competition
strategy. For the delivery time guarantee, the cooperation strategy
is in par with the competition strategy, i.e., when customers are
not sensitive to delivery time (Scenario 1), it is not necessary to
improve the delivery time guarantee (0.245 vs. 0.268); when
customers are sensitive to price as well as delivery time or more
sensitive to delivery time (Scenarios 2 and 3), the results under
the cooperation strategy are comparable to those under the
competition strategy (0.112 vs. 0.118 and 0.053 vs. 0.053).
Since the cooperation strategy may increase price but reduce
demand, could it mean that Western clients would significantly
withdraw their businesses from Xintang? The DL&S consultant
team believed that such a result is unlikely to occur. There are
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
5
Table 1
Optimal results under competition and cooperation strategies.
Scenario 1
Demand is more dependent on price than delivery time
Scenario 2
Demand is dependent on price as well as delivery time
Scenario 3
Demand is more dependent on delivery time than price
Competition
Cooperation
Change (%)
Price
Demand
Delivery time
Profit
49.481
100.939
0.245
4625.590
51.773
96.346
0.268
4636.167
4.6
4.6
9.4
0.2
Price
Demand
Delivery time
Profit
224.172
110.286
0.112
24,313.800
251.741
99.256
0.114
24,617.867
12.3
10.0
1.8
1.3
Price
Demand
Delivery time
Profit
224.104
110.252
0.053
24,285.037
251.668
99.227
0.053
24,588.933
12.3
10.0
0.0
1.3
Table 2
Elasticity analysis under competition and cooperation strategies.
Elasticity
Demand
Scenario 1
Price
Delivery time
Scenario 2
Price
Delivery time
Scenario 3
Price
Delivery time
Profit
Competition
Cooperation
Competition
20%
10%
20%
10%
0.869
0.517
0.008
0.003
0.211
0.077
0.006
0.001
0.252
0.053
0.000
0.000
0.099
0.017
0.000
0.000
20%
10%
20%
10%
0.921
0.557
0.631
0.406
0.208
0.102
0.398
0.110
0.276
0.015
0.425
0.376
0.103
0.006
0.188
0.033
20%
10%
20%
10%
0.176
0.062
0.832
0.322
0.118
0.021
0.771
0.275
0.047
0.084
0.203
0.044
0.025
0.061
0.150
0.016
two reasons: first, under the competition strategy, if one factory
increases its price, its buyers may switch to other suppliers who
can provide lower price. Under the cooperation strategy, however,
buyers have to accept the uniformly increased price in this
manufacturing base; second, Xintang’s price level was already
extremely low because of the previous cannibalism competition
among factories. Even on increasing the price by 20%, the new
price would still be competitive in the world market. To prove
that the above arguments are robust, the DL&S consultant team
carried out an elasticity analysis. By using optimal prices and
delivery time guarantees in Table 1 as base values, we increased
them by 10% and 20%, and computed individual factory’s new
demands and profits by utilizing Eqs. (1) and (2) under the
aforementioned three scenarios, and then obtained the elasticity
of demand (percentage change of demand/percentage change of
price or delivery time guarantee) and the elasticity of profit
(percentage change of profit/percentage change of price or delivery time guarantee), respectively.
The results, summarized in Table 2, show that the elasticity
under competition strategy is always more responsive than that
under cooperation strategy. For example, in the first scenario, the
elasticity of demand to price for the two strategies is 0.517 vs.
0.077 and 0.869 vs. 0.211 when the price increases 10% and
20%, respectively. This means that when price increases by 10%
and 20%, under the competition strategy the demand will
decrease 5.2% and 17.4%, but under the cooperation strategy the
demand will only decrease by 0.7% and 4.2%, respectively. This
implies that because all factories under the cooperation strategy
can be treated as a signal negotiator in the market, they have the
Cooperation
power of monopoly to take higher price and longer delivery time
(Barney, 1986; King and Lenox, 2000).
5. Implementation, benefits, and societal impact
Based on above analyses, the ABDX decided to establish
unified standards for the lowest price and the shortest lead time
in this factory town. In 2006, the cooperation agreement among
Xintang jeans manufacturers was signed on February 1 and
entered into force on March 15. The Anti-malicious Competition
Committee, led by the Chairman of ABDX and made up by
representatives from the top 30 factories in Xintang, provided
for regular meetings to exchange information on this factory
town’s current enforcement activities and priorities, to solve
unnecessary conflicts or inconsistencies between those enforcement activities and individual factories’ policies, to discuss policy
changes, which they were considering, and to discuss other issues
of mutual interest relating to the realization of cooperation in
competition matters. The committee’s mission was not to eliminate competition among factories, but to monitor factories to
compete with each other on quality, design, and innovativeness
rather than on price and delivery guarantee time.
On March 31, 2006, all jeans factories in Xintang began to
carry out the unified standard of pricing and delivery. While
different jeans products had different pricing ranges and cycle
times, on average the new standard raised the lowest price by
about 15% and extended the shortest delivery time guarantee by
four more days. If a factory was found to have engaged in
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
6
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
predatory pricing or violated the legal overtime, the ABDX would
impose a heavy fine and in some extreme cases even shutdown
operations.
In 2006 Xintang’s total export was 212 million pieces, an
increase of 10.23% from the previous production season. The
average price per piece increased 15% from $4.27 to $4.93 and
the workers’ average monthly pay increased nearly 18%. This was
the first occurrence of simultaneously increasing export and
increasing price in this jeans town’s history since 1992. In
addition, workers’ average overtime reduced from 26 h per week
to 16 h per week; average turnover rate reduced from 140% to
35%. These achievements laid the foundation for the ABDX’s next
step of shedding the sweatshop image for this jeans town.
Xintang’s cooperation strategy presents new hopes and opportunities for the improvement of labor conditions in China. It
already has had a ripple effect by setting the tone for what
happens at other factory towns. During the implementation of
Xintang’s new strategy, one administrative official at a factory
town told Mr. Chen, the Chairman of ABDX, ‘‘I have paid great
attention to your new strategy since the beginning. I want to
know how relative parties will deal with labor condition problems so we can use your experience as a reference in the future.’’
The factory town of ties, Shengzhou, which holds more than 40%
global market shares, followed Xintang’s footsteps to raise its
lowest price by 10% in 2008, and the increased income was
utilized to raise worker wages. In 2008, the China Ceramic
Industry Association required all members to collectively raise
export product prices by 5% in order to fund the improvement of
labor conditions and environmental protection.
The local suppliers’ cooperation strategy, by which Xintang’s
jeans manufacturers are pushing back against the low wages and
harsh working conditions, should also have meaningful effects on
labor conditions around the world. Today 25% of the global
workforce is Chinese. From basic assembly work to the upper
tiers of industry and services, China is setting the global norm for
working standards. Workers in rich and poor countries alike, feel
the effect of China. Global corporations move to China to lower
labor costs and they use those lower labor costs as a lever to drive
down those in the rest of the world in a ‘‘race to the bottom.’’
Thus, failure to raise standards in China will have a devastating
effect on workers around the world.
In addition, because emerging countries do not add significant
capital to the global economy, more workers are competing to
be employed by essentially the same amount of capital. This
unbalanced equation has increased the bargaining power of
capital, decreased that of labor, and substantially contributed to
wage stagnation or decline in emerging countries (Costello et al.,
2006). Xintang’s case provides a practical way for local suppliers
to improve their collective bargaining power over Western
capital.
The results of these strategies from a societal impact can also
be seen through better employee wages and working conditions
leading to improved welfare, health, and general living conditions. As a result of these improvements, firms would stand to
gain from a long-term standpoint with respect to improved
product quality, productivity, and performance.
6. Concluding remarks
Often there is a huge gap between the labor codes imposed by
governments or Western companies on Chinese factories and
these factories’ actual working practices. Chinese suppliers are
becoming increasingly adept at circumventing the audit system.
This in turn not only renders the results of audits inaccurate, but
also eliminates the possibility for any meaningful improvements
in labor conditions.
China’s new labor regulation, which took effect January 1,
2008, is designed to better protect workers’ rights, including
signed, written contracts for all employees. The motivation for
this new labor law was almost entirely internal, because Chinese
government saw very obvious signs of discontent and problems
where migrant workers were clearly being abused. All of this
represented a source of social instability.
Focusing on Xintang’s practice, this paper assesses the problems with the instable labor force and argues that to some
extent poor labor conditions are driven by fierce competition and
unfair buying practices, which tend to shorten lead times and
squeeze prices. Since suppliers in the buyer-driven value chains
are teetering on cannibalistic competition, it is exceedingly
difficult for them to simultaneously achieve both the competitive
cost advantage and the humane working conditions. This case
explicates how competition and cooperation strategies impact on
the behavior of rational and self-interested suppliers within
Xintang. The game theory models, numerical analyses, and real
improvements in this jeans town indicate that powerless suppliers in a buyer dominated supply chain should collectively work to
stabilize their overall competitive relationship and secure joint
competitive advantages, because the cannibalistic competition
reduces the glamour of the business, and propels suppliers in a
race to the bottom in wages and working conditions. While the
focus in this research is on the apparel industry, the cooperation
efforts here may point the way out for struggling suppliers in
other highly competitive labor-intensive industries to achieve the
tricky balance between low prices, short lead times, and stringent
working conditions.
Appendix
Solution of Eq. (5)
2
3
n
n
6
7
X
X
6
7
Max pi ðpi ,gi ,P i ,G i Þ ¼ 6a bpi cgi þ
dðpj pi Þ þ
eðgj gi Þ7
4
5
j¼1
j¼1
j ai
jai
w lnð1 gÞ
ðpi o wÞ þ
,
gi
ð5Þ
where
P i ¼ ðp1 , p2 ,:::,pi 1 , pi þ 1 ,:::, pn Þ,
G i ¼ ðg1 , g2 ,:::, gi 1 ,
gi þ 1 ,:::, gn Þ, i ¼1, 2,y,n. For factory i, given the other factories’
prices and delivery time guarantee, we differentiate Eq. (5) with
respect to pi and gi:
n
n
X
X

@pi ðpi ,gi ,P i ,G i Þ
¼ a 2 bþ ðn 1Þd pi cgi þ
dpj þ
eðgj gi Þ
@pi
j¼1
j¼1
j ai
þ½b þðn 1Þd ðo þ wÞ,
@pi ðpi ,gi ,P i ,G i Þ
w lnð1 gÞ
¼ ½c þ ðn 1Þe ðpi o AÞ
:
@gi
gi2
The Hessian matrix is
2

@2 pi
@ pi
a½b þðn 1Þd
@p2
@pi @gi
i

H ¼ @2 p @2 p ¼ ½c þðn 1Þe
i
i

@pi @gi @g2
i
j ai
ðA1Þ
ðA2Þ

½c þðn 1Þe
:
2w lnð1 gÞ

gi3

Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
The second order conditions for profit maximization by each
factory can be satisfied if
4w½b þ ðn 1Þd lnð1 gÞ
½c þ ðn 1Þe 2 Z 0,
gi3
i:e:, gi r

4w½bþ ðn 1Þd lnð1 gÞ
1=3
ðB2Þ
To maximize pi ðpi ,gi ,P i ,G i Þ, the first order conditions are
given by Eqs. (A1) and (A2), that is,
a 2½b þ ðn 1Þd pi cgi þ
dpj
þ
1
0
n
n
n
P
P
P
a cgi þ
dpj þ
egj þ
ðpj o wÞd
C
B
j¼1
j¼1
j¼1
C
B
B
j ai
jai
jai
oþ wC
C w lnð1 gÞ
B
B
:


B
2 C
gi
2½b þ ðn 1Þd
C
B
A
@
:
½c þ ðn 1Þe 2
n
X
n
X
j¼1
j¼1
jai
j ai
Taking the derivative of Eq. (B2) with respect to gi, we can
obtain that
@
Pn
i¼1
eðgj gi Þ
2
þ ½bþ ðn 1Þd ðo þ wÞ ¼ 0
pi ðgi ,P i ,G i Þ
@gi
ðA3Þ
w lnð1 gÞ
¼ 0:
gi2
ðA4Þ
The optimal prices and delivery time guarantee can be found
by solving Eqs. (A3) and (A4) simultaneously. Since (A3) is a
nonlinear equation, it is possible that there are multiple feasible
solutions to above equations. If

1=3 #
4w½bþ ðn 1Þd lnð1 gÞ

gi A 0,
,
½c þ ðn 1Þe 2
then ðp i ,gi Þis
pi ðpi ,gi ,P i ,G i Þ.
the
optimal
solution
which
maximizes
¼
cðw þoÞ
ca
c2 gi
w lnð1 gÞ

þ
2
a½b þ ðn 1Þd 2½b þðn 1Þd
gi2
3
6P
7
n
P
6 n
7
c6
dp þ
eðgj gi Þ7
4j¼1 j j¼1
5
ja i

½c þðn 1Þe ðp o wÞ
7
jai
2½bþ ðn 1Þd
80
1
n
n
n
P
P
P
>
>
pj þ
eðgj gi Þ þ
ðpj o wÞd
>
>B
C
>
j
¼
1
j
¼
1
j
¼
1
>B
C
n >
B
C
2½bþ
ðn 1Þd
2½bþ
ðn 1Þd
2
>
j ¼ 1 >B
C
>
>
@
A
>
jai >
:
0
n
n
X
X
e we 1 B
B
þ Ba ½b þ ðn 1Þd ðwþ oÞ cgj þ

dpj þ
2
2
4@
j¼1
j¼1
j ai
n
X
Solution of Eq. (6)
j ai
9
>
>
=
C
e
dc
:

eðgj gi Þ
ðpj o wdÞC
A
2
2½b þ ðn 1Þd ½b þ ðn 1Þd >
>
j¼1
;
1

jai
ðB3Þ
Max
Y
¼
n
X
pi ðpi ,gi ,P i ,G i Þ:
ð6Þ
i¼1
For factory i, given the other factories’ prices and delivery time
guarantee, we differentiate Eq. (6) with respect to pi:
Q
n
X

@
¼ a 2 bþ ðn 1Þd pi cgi þ
dpj
@pi
j¼1
In addition, by taking the second order derivative of Eq. (B3)
with respect to gi, we obtain
P
@2
pi ðp i ,gi ,P i ,G i Þ
c2
2w lnð1 gÞ
þ
¼
2½b þðn 1Þd
@gi2
gi3

2
2 #
n
X
1
dc
dc

þ
e

:
2½b þðn 1Þd j ¼ 1
2½b þ ðn 1Þd
2½b þ ðn 1Þd
j ai
j ai
þ
n
X
ðB4Þ
eðgj gi Þ þ ½b þ ðn 1Þd ðo þ AÞ þ
j¼1
jai
n
X
n
P
p
It can be shown by Eq. (B4) that
i¼1
91=3 3
2 8
>
>
>
>
>
>
>
7
6 >
>
>
>
7
6 >
>
>
= 7
6 < 4wblnð1 gÞ 7 6 gi A 60, 7: h i n P 7 6 >
2
2 >
>

>
>
7
6 >
ðe ðdc=2½b
þ
ðn 1Þd ÞÞ
ðdc=2½b
þ
ðn 1Þd Þ
c
>
>
>
5
4 >
>
>
j¼1
>
>
;
:
ðpj o wÞd:
j¼1
jai
Since
P
Q

@2 ni¼ 1
¼ 2 b þðn 1Þd o 0,
2
@pi
jai
it can be obtained from the first order condition that
a cgi þ
n
P
j¼1
p i ðgi ,P i ,G i Þ ¼
wþo
þ
2
jai

i ðpi ,gi ,P i ,G i Þis concave for
dpj þ
n
P
eðgj gi Þ þ
n
P
j¼1
j¼1
j ai
jai
ðpj o wÞd
2½b þ ðn 1Þd
:
Therefore, we can obtain 2n equations with respect to
p1 , p2 ,:::, pn , g1 , g2 ,:::, gn by considering the first order conditions given in Eqs. (B3) and (B1). Then we can find the profitmaximizing solution p 1 , p 2 ,:::, p n , g1 , g2 ,:::, gn by solving these 2n
equations.
ðB1Þ
Substituting Eq. (B1) into Eq. (6), it can be obtained as:
(
n
n
X
X

1
pi ðgi ,P i ,G i Þ ¼
a b þ ðn 1Þd ðo þwÞ cgi
2
i¼1
i¼1
9
>
n
n
n
=
X
X
X
þ
dpj þ
eðgj gi Þ
ðpj o wÞd
>
;
j¼1
j¼1
j¼1
jai
j ai
jai
References
Barney, J.B., 1986. Strategic factor markets: expectations, luck, and business
strategy. Management Science 32 (10), 1231–1241.
Browning, L.D., Beyer, J.M., Shetler, J.C., 1995. Building cooperation in a competitive industry: Sematech and the semiconductor industry. Academy of Management Journal 38 (1), 113–151.
Costello, T., Smith, B., Brecher, J., 2006. Labor Rights in China. Retrieved August 12,
2008, /http://www.fpif.org/fpiftxt/3824S.
Crijns, G., van der Putten, F.P., 2005. International supply chains and labor
standards in China. IIAS Newsletter 36 (10), 17.
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010
8
B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]
Frenkel, S.J., 2001. Globalization, athletic footwear commodity chains and employment relations in China. Organization Studies 22 (4), 531–562.
Frenkel, S.J., Scott, D., 2002. Compliance, collaboration, and codes of labor practice:
the Adidas connection. California Management Review 45 (1), 29–49.
Fynes, B., Voss, C., 2002. The moderating effect of buyer-supplier relationships on
quality practices and performance. International Journal of Operations and
Production Management 22 (6), 589–613.
Harney, A., 2008. The China Price: The True Cost of Chinese Competitive
Advantage. Penguin Press HC.
Jiang, B., Baker, R.C., Frazier, G., 2009. An analysis of job dissatisfaction and
turnover to reduce global supply chain risk: evidence from China. Journal of
Operations Management 27 (2), 169–184.
King, A.A., Lenox, M.J., 2000. Industry self-regulation without sanctions: the
chemical industry’s responsible care program. Academy of Management
Journal 43 (4), 698–716.
Palaka, K., Erlebacher, S., Kropp, D.H., 1998. Lead time setting, capacity utilization,
and pricing decisions under lead time dependent demand. IIE Transactions
30 (2), 151–163.
Shah, A. May 2006. Corporations and Worker’s Rights, GlobalIssues.org, Retrieved
May 11, 2009, /http://www.globalissues.org/article/57/corporations-andworkers-rightsS.
So, K.C., Song, J.S., 1998. Price, delivery time guarantees and capacity selection.
European Journal of Operational Research 111 (11), 28–49.
Sonobe, T., Hu, D., Otsuka, K., 2002. Process of cluster formation in China:
a case study of a garment town. Journal of Development Studies 39 (1), 118–139.
Wang, J., Zhu, H., Tong, X., 2004. Industrial districts in a transitional economy:
the case of Datang sock and stocking industry in Zhejiang, China. In: Lagendijk,
A., Oinas, P. (Eds.), Proximity, Distance and Diversity: Issues on
Economic Interaction and Local Development. Ashgate, Burlington, Vermont,
pp. 47–69.
Zhang, Z., To, C., Cao, N., 2004. How do industrial clusters succeed? A case study
in China’s textiles and apparel industries. Journal of Textile and Apparel
Technology and Management 4 (2), 1–10.
Please cite this article as: Jiang, B., et al., Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town.
International Journal of Production Economics (2011), doi:10.1016/j.ijpe.2011.03.010

Purchase answer to see full
attachment

error: Content is protected !!