Wal-Mart (NYSE: WMT ) claims it is committed to "[b]uilding a socially and environmentally responsible supply chain by monitoring and strengthening working conditions, community impacts, and environmental practices in the supply chain," but its actions suggest otherwise.
On the heels of a November fire at a Bangladesh supplier factory that killed 112 people, Wal-Mart recently announced that it's implementing a "zero tolerance policy" against companies that violate its global sourcing standards. However, in my view this approach ignores one of the fundamental causes of these unsafe working conditions -- the company's own unwillingness to cough up the cash required to maintain adequate wages and a safe environment for its suppliers' employees.
Cutting corners on worker safety
How does Wal-Mart offer low prices and maintain high profits? Part of the answer lies in its ability to use its size to gain leverage over manufacturers and force them to sell products at paper-thin margins. This forces suppliers to cut costs to maintain a profit.
Some critics have complained that manufacturers often respond to this pressure by cutting costs at the expense of fair compensation and worker safety. Here are some recent examples.
- One family filed a lawsuit against Wal-Mart after their relative, Romulo de Oliveira Santos, was electrocuted to death while tearing down walls at one of the company's stores. The Santos' lawyer claims that the contractors working for the Bentonville behemoth responded to cost-cutting pressure by using unlicensed and untrained workers, which compromised worker safety. The Santos family further argued that the conditions leading to Romulo's death are part of a larger pattern of unsafe working conditions at Wal-Mart construction sites.
- Earlier this year, the National Guestworker Alliance filed a complaint with the U.S. Department of Labor against C.J.'s Seafood, a supplier of Wal-Mart's crawfish until June of last year. The complaint alleges that C.J.'s violated the rights of guestworkers (employees working in the U.S. on temporary immigrant visas) by forcing them to work shifts up to 24 hours with no overtime pay, locking them in the plant, threatening them with beatings to encourage faster work, and threatening their families with violence after they complained to law enforcement officials. The Department of Labor later fined C.J.'s for 11 safety violations, including a blocked exit, failure to cover electrical outlets, and lack of fire extinguishers on the premises.
- The headline-making November fire was not the first case of workers dying from harsh working conditions in Bangladesh. The International Labor Rights Forum reports that more than 700 garment workers have died there since 2005. The country's harsh working conditions prompted several retailers, including Wal-Mart, Gap, Target, and J.C. Penney, to discuss some possible solutions. One proposal included the creation of a contractually enforceable memorandum requiring all signatories to pay Bangladesh factories high enough prices to cover safety improvements. But according to the meeting minutes, obtained by Bloomberg news, Wal-Mart chose not to participate, saying, "Specifically to the issue of any corrections on electrical and fire safety, we are talking about 4,500 factories, and in most cases very extensive and costly modifications would need to be undertaken to some factories. ... It is not financially feasible for the brands [Wal-Mart and Gap] to make such investments."
A better approach
Instead of a "zero tolerance" approach to suppliers that violate its global sourcing standards, I believe Wal-Mart should consider the role it plays in these tragedies rather than placing all of the responsibility and blame onto the suppliers. In the cases above, along with many other situations in which worker safety is compromised, Wal-Mart is the common denominator, and it should consider the role its cost-cutting efforts might play in putting its suppliers' employees at risk.
While Wal-Mart spokeswoman Brooke Buchanan reports that the company is discussing the possibility of offering loans to its suppliers to help fund safety upgrades, these manufacturers also have to make enough money to pay back the loans, which may be difficult unless they are also able to negotiate higher payments from the retail giant.
Instead, I submit that Wal-Mart should take a page from Apple's book and share the costs of safety upgrades with its suppliers. Regardless, we shouldn't expect employee safety to improve until the company is willing to shell out the cash required to eliminate the hazardous working conditions responsible for these tragedies.
The Foolish bottom line
In addition to the ethical concerns raised by these incidents, investors should consider how they reflect on Wal-Mart's supply chain management. As the Bangladesh fire and other safety issues demonstrate, "squeezing" suppliers can lead to serious repercussions, including bad PR, increased legal liability, and an inability to attract qualified employees in the U.S. and abroad.
For decades, Wal-Mart's purchasing power -- its ability to negotiate ever-lower costs from suppliers -- has been a key competitive advantage. Whether it's a sustainable one, however, is up for debate.
More expert advice from The Motley Fool
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.