Exclusive: After fire, Wal-Mart vows to tighten source safeguards

A factory fire that killed more than 100 garment workers in Bangladesh has led the world's largest retailer, Wal-Mart Stores Inc, to concede that it needs to do more to control its supply chain and keep unauthorized manufacturers out.

In an interview with Reuters, his first since the November 24 Tazreen Fashions fire, Wal-Mart Vice President of Ethical Sourcing Rajan Kamalanathan said the company's current controls could only go so far in preventing a factory Wal-Mart did not approve of from making its clothes, as was the case here.

"If a supplier or an agent chooses to subcontract without informing us, then that is a problem," Kamalanathan said. "We can put all kinds of controls in place, but if they don't tell us where they're putting our order, then that is a problem."

Wal-Mart has said repeatedly that its Faded Glory clothing should not have been in production at the Tazreen factory, a facility Bangladeshi authorities said was not safe for use. The building was not cleared to be used by any party manufacturing garments for the world's largest retailer.

Wal-Mart says that in 2011 alone it audited over 9,000 factories globally to check whether its standards were being met. But still, Wal-Mart acknowledges it only controls its supply chain up to a certain point. If suppliers hired by Wal-Mart in turn hire agents who then line up production, the seemingly tight controls Wal-Mart has put in place can fail.

"We have a contract with the supplier and that's where our control is and where our relationship is," Kamalanathan said.

The lack of control down the supply chain represents a challenge not just for Wal-Mart, but for the industry overall, Kamalanathan added.

Companies such as Bentonville, Arkansas based Wal-Mart must figure out how get more involved in the operations of factories in countries such as Bangladesh, rather than hoping that contact with suppliers and factory audits will suffice.

"We are actively thinking about how to better work with suppliers who work with agents," he said. "This is something we are talking about internally and across the industry."

Among other things, retailers and clothing designers have been talking about the possibility of fire safety codes that would be written into contracts with suppliers, although those efforts are still at the early stages.

MORE INDUSTRY WORK NEEDED

Wal-Mart established a factory certification program in 1992, focused on Bangladesh and China, currently the top two garment exporters in the world. Wal-Mart says the program, which was established amid pressure on the company over worker rights, is dedicated to improving standards for foreign labor.

Since then, Wal-Mart has taken measures such as increasing factory audits, expanding the program to other countries, setting stricter standards for suppliers and lengthening the penalty period for disapproved factories to one year from 90 days.

Kamalanathan's team now includes more than 120 employees, plus third-party audit firms, with people based in Bangladesh, China, India and elsewhere. Kamalanathan says he visits factories "quite often."

Still, such efforts matter little when companies push their Wal-Mart manufacturing off to agents who then link up with factory owners and choose not to fill Wal-Mart in on which factory is being used - a key part of the agreements Wal-Mart has with its suppliers.

"It is a must that they disclose factories they use for our production. Once we know who these factories are, then we initiate the process for an audit to occur," he said.

Factories must address problems highlighted in Wal-Mart audits, which assign a rating of green for minor to no violations; yellow for medium risk, orange for higher risk and red for the most serious violations, which lead the company to sever ties with the factory.

Factories with orange ratings can go through an "Orange School" program for Wal-Mart to show them how to fix high-risk violations and get at the cause of the problem.

Wal-Mart said a May 2011 audit found violations at Tazreen, which led to the factory getting Wal-Mart's "orange" rating, and a subsequent audit in December 2011 again found violations that led to an "orange" rating. Tazreen did not participate in the Orange School, Wal-Mart said.

Tazreen was no longer authorized before the fire. Wal-Mart said that was for a variety of reasons, including poor audit ratings. Tazreen owner Tuba Group has said it was not aware it was making clothes for Wal-Mart at the time of the fire.

PUSH TO CUT COSTS

Kamalanathan has been Wal-Mart's vice president of ethical sourcing since 2002. He sits on the board of the Global Social Compliance Program, which was formed in 2006 and now includes more than 30 companies that work on measures such as developing a clear and consistent message for suppliers.

Some industry groups claim the push from Wal-Mart and other retailers for low-cost merchandise pressures factory owners to pay workers little and to cut corners on fire safety training and proper exits that would cost them too much.

At a meeting held in Dhaka in April 2011, participants including government representatives, trade union leaders, the Bangladesh Garment Manufacturers and Exporters Association and buyers discussed rules that would require factories to be paid prices high enough to cover the cost of safety improvements.

Amirul Huque Amin, president of National Garment Workers Federation, was at the meeting and said that, when the question of financing was raised, Sridevi Kalavakolanu, a Wal-Mart director of ethical sourcing, strongly opposed the move, saying it was not possible for "us" due to the high cost.

Wal-Mart vehemently denies such charges and said her remarks were taken out of context. It points to efforts such as its audit program, rating system and work with the Bangladeshi government, industry groups and suppliers as proof that it has been proactive in raising fire safety awareness and increasing fire prevention.

Wal-Mart operates on the premise that running its business on a low-cost basis leads to low prices for its 200 million weekly customers. The 50-year-old chain, founded by Sam Walton, now has more than 10,000 stores and its annual sales rose nearly 6 percent to $443.85 billion last year.

Still, it contends that making factory improvements should not lead to sky-rocketing prices.

"Our policy is designed to create a supply chain that meets our standards and at the same time delivers high quality products at low prices. It is clearly possible to do both," Kamalanathan added.

(Reporting by Jessica Wohl in Chicago. Additional reporting by Serajul Quadir and John Chalmers in Dhaka. Editing by Ben Berkowitz and Andre Grenon)