Tackling purchase order abuse
Purchase order abuse negatively impacts how fashion suppliers pay workers and manage their operations so fashion brands and retailers need to do better argues apparel sourcing expert, David Uricoli.
The only actual binding production contract between a buyer and their fashion supplier is the purchase order (PO). Although the PO represents a binding trade agreement between two parties, buyers may continue to adjust an order according to their needs. These changes can include shorter lead times, lower price adjustments, product changes, or even partially or entirely terminating the order, regardless of its progression.
The negative impact of purchase order abuse on fashion suppliers
Changing or (worse) cancelling POs wreaks havoc at the factory level. With financial considerations and delivery adjustments affected accordingly, they can avoid becoming abusive to suppliers as they usually incur hardship and increased risk. Moreover, PO abuse can negatively impact how factories pay their workers, occupational health and safety, working hours, worker social benefits and managing their operations.
POs play a crucial role in inventory management and finance as it specifies definitive order details, including price and delivery times. POs define the partnership between a buyer and supplier as a two-way street. When a buyer issues a PO to their supplier, that trade agreement necessitates the supplier to extend credit to the buyer allowing the transaction to move forward. There is no real investment in the order by the buyer. Codes of conduct and terms of engagement dictate behaviour and overall expectations of how you conduct business but do not affect the PO terms.
During the pandemic, fashion retailers, companies, and brands at the end of the supply chain were closed or suffering low sales having a devastating effect. Thousands of suppliers worldwide temporarily closed or went out of business because of delayed or cancelled POs, regardless of whether orders were ready to be shipped. The surviving fashion suppliers had no choice but to lay off workers or quarantine employees at home – in both cases, with no pay. These forced majeure practices did not go unnoticed. Many organisations, law schools and firms and labour NGOs took note. So much so, today there are laws and regulations pending adoption such as Responsible Purchasing Practices, the Sustainable Terms of Trade Initiative, the Responsible Contracting Project, and Uniform Commercial Code all with model uniform contract codes defining terms of purchasing and cancellations.
Treating fashion suppliers as partners
It is essential to acknowledge that many responsible companies inclusively treat their fashion suppliers as partners as a best practice. For example, during Covid, they paid for orders not shipped and assumed liabilities for materials not used. In addition, they regularly communicate with their suppliers, so expectations are clear.
Natural behaviours are misaligned when POs change, relationship expectations differ, and communication becomes erratic. A business partnership can become dominated by buyer disorganisation: with rash changes, faster order turnover expectations, lower price negotiations each season, or use of order cancellations as inventory management. The misalignment of the business partnership puts the supplier at such a disadvantage that they become reticent. They spend vast sums of money on testing, inspections, and certifications. Their natural behaviour is altered to accommodate their buyer, even agreeing to prices lower than their operational costs. Forget loyalty. It’s put up, shut up time, or lose the order and customer.
Fashion brands, retailers issuing purchase order numbers must do better
Grievance mechanisms have become a vital and accessible tool for fashion workers. But unfortunately, there is no grievance mechanism for factory owners and management. I have asked many factory owners and managers about these practices, and some have been embarrassed to discuss this. Usually, very discreetly, they would describe to me the hardships they have endured. We all can and need to do better.
The “onboarding process” is vital to establishing a positive mutual understanding of business practices and expectations. Transparent order forecasting, overall quality assurances on all supplier tiers, and open communication help to assure a proper business flow allowing for low worker impact and greater efficiencies. Financial accommodations for supplier low-cost, short-term loans against future business and loyal capacity monthly commitments is a great start. It will level business partner expectations and achieve a mutual understanding of order handling.
All POs have small print; half of the terms, clauses, or language is about forced majeure and order cancellation. The small print works both ways, and transparent arrangements and conditions apply to these when activated by both parties. These terms should be used to settle differences instead of holding back payment. If a partnership doesn’t work, a responsible transition and proper management of a customer’s exit from the supplier will help avoid a catastrophe.
I am not suggesting that suppliers are purposely deviant in their poor PO management. Still, they should be made aware of the havoc caused for suppliers. In fact, with proper communication of mutual expectations, buyers can better discuss required PO adjustments with suppliers. More so, such communication will permit buyers to truly understand the current manufacturing situation and make responsible change requests with attention to unintended consequences. In turn, it is also up to the supplier to present their challenges transparently with solutions at the ready.
In short, business partners will need to do better by working together on an agreed trade or eventually be forced to adhere to the many regulation recommendations being developed.
Main image credit: Pierre Teyssot / Shutterstock.com
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