Can Brands Claim Ignorance? Unauthorized Subcontracting in Apparel Supply Chains

Abstract

Unauthorized subcontracting—when suppliers outsource part of their production to a third party without the retailer’s consent—has been common practice in the apparel industry and is often tied to noncompliant working conditions. Because retailers are unaware of the third party, the production process becomes obscure and cannot be tracked. In this paper, we present an empirical study of the factors that can lead suppliers to engage in unauthorized subcontracting. We use data provided by a global supply chain manager with more than 30,000 orders, of which 36% were subcontracted without authorization. We find that the frequency of unauthorized subcontracting across factories has a pronounced bimodal distribution. Moreover, the degree of unauthorized subcontracting in the past is highly related to the probability of engaging in unauthorized subcontracting in the future, which suggests that factories behave as if they choose a strategic level of unauthorized subcontracting. At the order level, we find that state dependence (i.e., the status of an order carrying over to the next one) and price pressure are the key drivers of unauthorized subcontracting. Buyer reputation and lead time also play a role. Finally, we show that unauthorized subcontracting can be predicted correctly for more than 80% of the orders in out-of-sample tests and for about 70% of suppliers. This indicates that retailers can use business analytics to predict unauthorized subcontracting and help prevent it. This paper was accepted by Vishal Gaur, operations management.

The hidden side of sustainable operations and supply chain management: unanticipated outcomes, trade-offs and tensions

“…For example, some studies have focused supply chain analysis toward vertical multi-tier supply chain management (e.g. Tachizawa and Wong, 2014;Carter et al, 2015;Meinlschmidt et al, 2018;Villena, 2019), thereby neglecting potentially vast horizontal complexities that may arise on single supply chain tiers through the practice of (unauthorized) subcontracting (Caro et al, 2020;Gold et al, 2020). The study in this issue by Nath et al (2020) shows an example of how unanticipated consequences can be identified by horizontally examining subsupplier relations.…”

Diffusion of labor standards through supplier–subcontractor networks: An agent‐based model

“…In this way, a supply network was simulated based on subcontracting, as described by Labowitz and Baumann‐Pauly (2014) as well as Caro et al. (2019).…”

“…Later on, the question of how sustainability spreads along supply chains and networks gained academic attention (e.g., Marshall, McCarthy, Claudy, & McGrath, 2019), although studies on the diffusion of sustainability along multiple tiers of supply chains remain scant. Even more limited is research that covers the phenomenon of subcontracting in supply networks (Caro, Lane, & Saez de Tejada Cuenca, 2019; LeBaron, 2018). This is astonishing since subcontracting represents a highly relevant phenomenon in the goal of sustainability in supply networks; such practice may substantially enhance complexity and blur the visible horizon of focal companies (Carter et al., 2015) even if only a few supply chain tiers are involved.…”

“…We drew on the conceptualization of power and network characteristics to examine subcontracting in the Bangladeshi garment industry, as described by Labowitz and Baumann‐Pauly (2014) and Caro et al. (2019). These authors studied the sector and found that different forms of subcontracting have long been essential features of this industry; they are particularly rooted in structural problems arising from exploitative pricing and procurement practices (Alamgir & Banerjee, 2019) and lead to severe violations of labor standards.…”

“…These authors studied the sector and found that different forms of subcontracting have long been essential features of this industry; they are particularly rooted in structural problems arising from exploitative pricing and procurement practices (Alamgir & Banerjee, 2019) and lead to severe violations of labor standards. Even though focal firms have strived to improve working conditions in supplier companies, for example, through supplier codes of conduct and auditing (Toffel, Short, & Ouellet, 2015; Villena, 2019), hidden subcontracting in apparel supply networks makes it impossible for foreign buyers to track where—and under which conditions—products are actually manufactured (Caro et al., 2019). Beyond the case of Bangladesh's garment industry, subcontracting is a common business model in supply chains across various industries.…”