Article
Navigating the fashion supply chain risk: mission impossible?
19 September 2024 | 5 minute read
Outsourcing production to more cost-effective locations has been the mainstay of fashion brands for decades, ensuring speed to market and financial growth. But with increasing pressure on brands to deliver responsibly and ethically, and in a very challenging economic climate, supply chains can expose fashion businesses to significant reputation risks and harm performance if they are not closely monitored.
As brands increasingly reassess strategies to optimise financial performance and profit margins, the focus on sustainability, social impact and workforce wellbeing may be sacrificed. However, short term gains may lead to increased risk and financial exposure.
Fashion's business media has reported on a number of high profile brands such as Boohoo for failings in their production houses and supply chain.
Fashion's business media has reported on a number of high profile brands such as Boohoo for failings in their production houses and supply chain, and H&M/Inditex on their 'sustainable' clothing lines. With savvy consumers making more informed choices about where they spend, greenwashing scandals and failure to live up to brand values can be extremely damaging.
While brands are protecting financial performance, scaling back impact strategies against stark human rights, pollution and climate warnings, they could be under fire in the eyes of the consumer and industry bodies. Major changes in strategy are difficult to navigate but may be necessary to future proof businesses and ensure brand loyalty for the longer term.
We outline areas of concern and actions you can take to protect your business and reputation.
Headline risk factors
Human rights and forced labour
Following the UN’s Guiding Principles on Business and Human Rights (UNGPs), a number of countries have or will soon be implementing legislation which will impact your business.
The EU has introduced the Corporate Sustainability Due Diligence Directive, as well as drafting a Mandatory Human Rights and Environmental Due Diligence Directive. Germany has introduced a supply chain law to protect human rights, the UK has the Modern Slavery Act, France has a Corporate Duty of Vigilance Law and New Zealand, Japan and Canada have all taken steps to implement human rights due diligence laws.
This will likely require significant due diligence and close management of all elements of the supply chain, from sourcing and production to global distribution.
Transitioning to more sustainable production
Reducing environmental impacts, consistent with the 2015 Paris Agreement objectives, has long been a focus area for brands, addressing calls from consumers and governments. New law is now being brought into force.
The challenges are vast. But there is clearly a route to success, and we have seen sustainability trailblazers such as Patagonia carve out global market recognition and increase revenues, by putting people and planet before profit.
A new Eco-design Directive includes a ban on the destruction of unsold clothing, accessories and footwear across the Union which is expected to have far reaching impact. This forms part of wider EU efforts to achieve carbon-neutrality and reduce environmental impact across the bloc to meet net zero targets.
In California, a bill has been approved which, if signed in, will force fashion businesses operating in the state to take responsibility for a recycling and circularity program. As landfills increasingly fill up with fast fashion, other states and countries may follow quickly.
The challenges are vast. But there is clearly a route to success, and we have seen sustainability trailblazers such as Patagonia carve out global market recognition and increase revenues, by putting people and planet before profit.
Technology can play a huge role in addressing environmental impact, from digital consumer specific retailing (reducing returns) to recycling fabrics, turning waste into yarn and using tech to forecast inventory requirements to reduce waste. The solutions are there, but the motivation and investment is lacking.
Brands seem to be backtracking. Recent reports of vast excesses in unsold inventory, following shifts in consumer demand and economic uncertainty, reflects the lack of alignment and flexibility in the industry, bringing environmental impact into sharper focus.
It has also been reported by industry media that some brands are now scaling back their sustainability strategies and teams, amid worrying financial forecasts from major luxury and international brands.
The question is, how much do brands really care about their impact, what will create the tipping point for change, and is there an opportunity for brands to get ahead? Patagonia would likely say there is.
Suspect or fraudulent activity in supply chains
Fashion production can be complex with many businesses and individuals involved, from factories in far flung countries to global logistics and distribution. Can you be sure that all checks and balances are in place to ensure that businesses are adhering to their contractual obligations?
The question is, how much do brands really care about their impact, what will create the tipping point for change, and is there an opportunity for brands to get ahead?
Managing and auditing these elements is often a costly and labour-intensive exercise. While this may be seen as an extra source of cost, an unattractive operational management and legal burden, the stakes are incredibly high. We have seen high-profile brands discovering wrongdoing in major areas of production, reported across fashion and business media. Auditing and reviewing corporate governance is absolutely fundamental.
The risk of investigation, and at worst criminal proceedings, is significant and can cause irreparable damage if not handled swiftly and appropriately.
Protecting your reputation
In an age where influencers with millions of followers can deliver a boost in sales or a damning review of a collection, the impact on a brand and its following can be very significant. Adding to that a whiff of things not going to plan, such as a change in creative director, pressure from shareholders or investors, or poor financial results, a grim picture can quickly unfold online. Managing your reputation proactively and avoiding digital crises must be central to the leadership agenda and protecting operations.
As a fashion brand, what action can you take?
To reassure investors, consumers and other stakeholders, assessing organisational performance on social and sustainability metrics is now a strategic imperative for companies, their founders and directors.
Don’t wait for the crisis to happen, consider all possible outcomes and get ahead of it proactively.
Don’t wait for the crisis to happen, consider all possible outcomes and get ahead of it proactively. At best, it can help you avoid a crisis altogether and, whatever the issue, you will be able to take informed action quickly to protect your business.
Businesses without existing sustainability and social responsibility frameworks should consider implementing their own governance policies and ensure alignment with relevant national and international standards. As a minimum, this should cover environmental impact, wage and working conditions, supply chain due diligence, active governance and establishing grievance mechanisms.
Risk management is essential. Identify areas where you may be most exposed and ensure you are actively engaged in monitoring performance and, crucially, acting swiftly where concerns are raised or reports are filed. Whilst this can be resource intensive, it will help to mitigate potentially seismic impacts on your reputation and operations.
Businesses without existing sustainability and social responsibility frameworks should consider implementing their own governance policies.
How we can help
- Guidance on Modern Slavery requirements and reporting
- EU CSRD requirements (reporting starting in 2025 for the 2024 fiscal year) and CS3DEmployment agreements and compliance
- Supply chain contracts, due diligence and internal investigations
- Supplier Codes of Conduct and contractual frameworks
- Identifying reputational risk, planning ahead and crisis management
- Technology partnerships, commercial agreements and associated due diligence
- Cross border corporate governance audits and reviews to meet new protocols and regulatory requirements.
Our global multi-disciplinary team with deep experience in the fashion sector are on hand to help address complex needs in this arena. Do get in touch if we can be of some assistance.
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