H&M Consolidates Spend: Strategic Sourcing and Supply Risk Reduction 101

Usually when the business or trade press covers a procurement related issue, they miss out on the key “aha moments” or observations that really make the story worth reading from an expert and practitioner-oriented lens. But Quartz nailed it in a recent story covering H&M’s strategy to improve labor and working conditions in its supply chain. In the article, H&M has given suppliers a major incentive to actually pay workers more, the most interesting story is actually below the catchy headline: H&M is putting its procurement money where its mouth is by consolidating spend and committing to developing suppliers over the long haul. To wit:

“The H&M road map rests on strategic relationships with factories producing two-thirds of its products. For the pilot group of model factories in Bangladesh and Cambodia, H&M has committed to purchasing 100% of its production for five years. This represents a significant shift towards business incentives for improving working conditions, as opposed to a compliance model that focuses on inspections. To be sure, it will be easier for H&M to manage those incentives when it’s buying all of a factory’s production than it will be when H&M is one among several brands buying from a factory.”

Such a move is what we might call strategic sourcing and risk reduction 101. But it can be a leap of faith to engage with suppliers on a longer-term level in cases where vendors have not truly been in the “partner” quadrant to date. The story raises another broader question as well. And it’s on the role of individual organizations versus standards/bodies/groups/associations and formal supplier management consortia (Achilles, Hellios Information, etc.) in setting standards and policy for supplier behavior and practices – as well as driving compliance.

Given the nascent role that working groups and even for-profit firms have played in supplier compliance, Spend Matters recommends that companies  prioritize their own initiatives for supplier management, risk management, and corporate social responsibility (CSR) activity in the supply chain, rather than simply signing onto a broader effort. If a collective group can then support these individual requirements, all the better. But for now, H&M, unlike the typical longevity of its clothes, is pursuing a truly high quality supplier management program with these select suppliers.

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