When Cheap Prices Are Actually Too Dear

Last week, a Bangladeshi tragedy hit American news. A large, nine-story building housing several garment manufacturers collapsed; the death toll is at least 380. This may sound distantly tragic, but it hits closer to home than many of us might like to think.

Many well-known U.S. companies either use or have used the exact manufacturers residing in that building to manufacture their wares. That says a lot about how corporate America can soil its reputation and show a marked lack of moral fiber simply to deliver inexpensive merchandise to unwitting consumers. And of course, this also guarantees high profit margins for their income statements.

The dirt cheap merchandise Americans have come to expect often carries a far higher price than many realize -- a real human toll. "Supply chain" sounds like boring financial parlance, but it hides a lot of human dangers, indignities, and sometimes, tragedies.

Cracks in the foundations
CNNMoney pointed to the underlying story about the recent occurrence in Bangladesh, which not only involves loss of life but also unsafe working conditions. Cracks in the building had appeared just one day before it collapsed, but the factories' workers were told to go into a building showing deteriorating structural integrity anyway.

According to CNNMoney's report, Joe Fresh, which is supplying some products for J.C. Penney (NYSE: JCP  ) , uses some manufacturers in the building, and a factory there had shipped an order to Benetton just weeks before. There's a claim that one factory counts Wal-Mart (NYSE: WMT  ) as a buyer, which the retail behemoth denies.

This isn't even the first time a horrific tragedy has occurred at a Bangladeshi garment factory recently. A November fire trapped and killed 112 people and 200 more were injured. That factory definitely made items for Wal-Mart and Sears Holdings, although each retailer said they hadn't realized their connection.

Tragedy and transformations
Investors with long memories might recall that human-rights-related incidents can seriously hurt corporate reputations. As much as tragedies invoke horror and sadness -- and a wish that things like that didn't happen in the world -- at least some companies have responded to criticism on human rights issues, improving their supply chains by leaps and bounds.

For example, Nike (NYSE: NKE  ) has transformed its supply chain in recent years, reversing course after public outrage about sweatshop labor in the past. The general public, including the investing public, may not even realize it, but Nike now has strong policies in place for a positive supply chain, and it's even strengthening them.

Gap's (NYSE: GPS  ) business has presented its ups and downs for investors over the years, but the retailer's supply chain policy is one thing it's gotten right for a while now. The company has a Social and Environmental Responsibility department that employs 70 people, all of whom are dedicated to addressing issues like these. The retailer's Code of Vendor Conduct policy forbids use of child labor, discrimination, and forced labor, and requires its vendors to treat all workers with respect and dignity and pay fair wages. It also requires safe work conditions and reasonable working hours.

Speaking of human rights and supply chains, the war in the Democratic Republic of Congo has brought public attention to "conflict minerals," which are used in all manner of electronics and other consumer goods. The SEC has mandated that public companies provide conflict mineral disclosure regarding their supply chains.

Intel  (NASDAQ: INTC  )  is one electronics company that's admirably gotten ahead of the curve in dealing with and avoiding the use of conflict minerals, whose mining is often linked to violence and, basically, slave labor.

Suppliers: A silent but important stakeholder
Supplier issues represent a real risk to investors. That risk doesn't just relate to the public relations nightmares that these companies face, but also a very real hint that bottom-line thinking gone brutal can result in real brutality.

On the other hand, conscious capitalism, probably most vocally evangelized by Whole Foods Market's (NASDAQ: WFM  ) founder and co-CEO John Mackey, includes suppliers as one of companies' essential stakeholders. This explains Whole Foods' emphasis on its Whole Trade items, all of which give businesses, economies, and workers a leg up, fair wages, and better treatment than many suppliers previously hoped for.

In other words, there are better ways to do business. Whole Foods has hardly been a poor stock for investors. Many of its customers seem to understand that its goods often provide value to the world that goes far beyond the simple price tag.

The accident in Bangladesh was an avoidable tragedy, and it reminds us of the poor treatment and work conditions for many people in developing countries.

It's time that we investors acknowledge that many of our biggest companies rely on these suppliers in order to pass along the cheapest merchandise to customers and the highest profit margins for themselves.

Brutal bottom-line thinking is far more costly than many of us tend to realize. It's time to use our technology, know-how, and innovation to push for better ways to do business -- in every conceivable way.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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  • Report this Comment On May 03, 2013, at 4:53 PM, mdk0611 wrote:

    Interesting. An article in today's (5/3) Wall Street Journal reported that both WalMart and Levi Strauss had been backing away from using these manufacturers operating in multistory buildings but all I get here are unsubstantiated, unsourced claims to the opposite.

  • Report this Comment On May 04, 2013, at 3:56 PM, gskinner75006 wrote:

    The American consumer wants cheap merchandise. Period. In any event, I seriously doubt that Walmart, J.C. Penny, etc... go out of their way to look for child labor, etc...

  • Report this Comment On May 05, 2013, at 4:51 PM, TMFLomax wrote:

    mdk0611,

    That's interesting, I will look into it. I was at Ceres' conference on sustainability last week, so I had written this ahead, but at the conference I did learn that Levi Strauss has a revolutionary program tackling this.

    Best,

    Alyce

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