Supply Chain Consolidation and Restructuring
One of the most critical issues facing businesses, communities, and individuals and organizations concerned with good labor practices in today’s global economy is the circumstances and responses surrounding the restructuring or closure of factories.The FLA, because of its unique makeup that brings together companies, universities and colleges, and NGOs in a cooperative effort to improve conditions for workers, has sought to make responsible restructuring and/or closure of factories a priority and to provide our members as well as other interested parties with viable solutions and answers.
Responses to Economic Realities
In a free market economy, companies that procure goods domestically or internationally often shift sources of supply from one factory to another. These changes are generally driven by economic considerations, among them the ability of a factory to meet quantity and quality specifications, delivery schedules, and price. Sourcing shifts are an everyday occurrence: the structure of production and employment is constantly changing – regionally, nationally, and globally – as production and employment readjust after each shift.
Governments assist workers who are adversely affected by the loss of jobs associated with shifts in sourcing and production through different means, including employment services such as retraining, job search assistance, and relocation allowances. Domestic legislation in many countries mandates that notice be given to workers when their plants, factories, or mines may be closed or employment severely reduced; that employers consult with workers and their representatives on potential changes; and that certain payments be made to workers when they become unemployed because of production shifts. Domestic legislation often also prohibits retrenchment based on discriminatory criteria, including membership in a trade union.
There is also international labor jurisprudence on the subject, in the form of a convention adopted by the International Labor Organization in 1982 incorporating the main points of a Recommendation issued in 1963. In a limited number of countries, unemployed workers are eligible to draw unemployment insurance benefits for a set period of time. It is more common, however, for benefits for unemployed workers to take the form of mandated severance payments from the employer, scaled in some way to the length of tenure of the worker in the enterprise.
The fact that employers typically do not escrow to pay severance, and that such payments become due at the very moment when the enterprise is in financial difficulty -- because of loss of production orders, potential risk of bankruptcy, and impending downsizing or even closure -- raises serious concerns about the viability of severance payment schemes. Unemployment insurance systems, by contrast, are typically set up in the form of special funds through which multiple employers pool their contributions while the businesses operate and as such, the funds are available to workers if and when they are terminated.The Impact of the End of the MFA
Until recently, international trade in textiles and clothing (T&C) was heavily managed by a multilateral agreement (the Multi-Fibre Arrangement, MFA) that was first negotiated in 1974. During the over 30 years that it was in effect, the MFA and its system of country-specific quotas strongly determined – some would say skewed – patterns of trade and investment in T&C. It led to increased investment in countries that had little or no comparative advantage in T&C production, often by quota-seeking enterprises from highly competitive countries that had exhausted their own quotas and were seeking new export platforms for T&C products.
The expiration of the MFA on January 1, 2005, and the elimination of the quota system that governed international trade in T&C has been seen by many analysts as a watershed event that is likely to accelerate shifts in production and sourcing of T&C to China and other countries with low production costs. The fear among many is that these production shifts will severely impact the T&C industries of quota-dependent countries and create massive unemployment. In 2004, as the MFA expiration drew close, the FLA began its own assessment of the implications of changes in international trade in T&C and highlighted the effect that geographic shifts in the structure of such production could have on employment and income of workers and communities.
The FLA Board adopted a resolution in 2004 calling for company commitment to manage shifts in sourcing in a manner consistent with the FLA Charter, Code, and national law. The FLA also participated in the formation of the MFA Forum, which brings together retailers and brands, trade unions, NGOs, and national and multilateral public institutions to identify and promote collaborative strategies to support vulnerable national garment industries and greater respect for workers’ rights in the post-MFA period.
In addition, the FLA continues to provide guidance to FLA-affiliated companies whose suppliers or facilities may be involved in retrenchment and closures for operational reasons. At its core, the goal of this effort is to ensure that FLA-affiliated companies operate in a manner consistent with international labor standards, domestic law and the practices of company leaders in the labor compliance field, as well as to ensure that communities are not unnecessarily weakened by economic changes. For more information on this and related topics, see also: