We do not own or operate factories and Arcadia Group is rarely dominant in an individual factory. We have strong working relationships with our network of international suppliers, 51% of which have been with us for three years or more. Arcadia goods are manufactured in approximately 1,040 factories through 700 suppliers. The top 20 suppliers provide 44% of our goods.

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This year Arcadia products were made in 44 countries worldwide, although our top ten sourcing countries accounted for 91% and the top five for 73% of the goods we sold. These top five countries remain as China, Turkey, Romania, Mauritius and India. Our support of UK manufacturing continues with 54 factories producing our goods.

In terms of the BHS supply chain, the departments workwith approximately 520 suppliers, and the top 20 supply 35% of their goods.

This year BHS products were made in a similar number of countries to Arcadia and the top five accounted for 75% of the goods sold. These countries were China, UK, Bangladesh, India and Vietnam.

Fostering a socially and environmentally sound approach to doing business also makes good business sense, as our experience is that driving improvements in these areas enhances performance across the board.

We continue to receive and grade ethical audits of suppliers’ factories, an activity that is supported by our Code of Conduct Guidebook. This year we have set even stricter targets on audit grading, targeting out-of-date and orange audits, working towards achieving all factories operating with a green or yellow rating.

Working with other stakeholders continues to be an essential component of this pillar. Our joint endeavours with other retailers pool expertise and resources. Nongovernmental organisations (NGOs) and consultants also play a role in our efforts.

Our ethical trading work is wide ranging, multi-layered and involves many different stakeholders. We have a number of areas of activity which have seen progress this year.

  1. Ethical Audit Programme
  2. Country Risk Assessments
  3. RAGS - the Responsible and Accountable Garment Sector Project
  4. Joint Turkey Project
  5. Strategic Labour Priorities
  6. Code of Conduct Guidebook
  7. Management Systems
  8. Sumangali
  9. Prohibited Activities

1. Ethical Audit Programme

Under our ethical audit programme our brands must submit a third-party factory ethical audit (see audit process below) no older than a year to receive a grading for a new factory set-up. In order to help reduce audit fatigue we accept audit reports from the majority of recognised audit bodies as long as they are independent and non-modifiable.

We grade these audits on a scale of red, orange, yellow and green. If the audit is graded red, we will not allow the brand to use this factory until the issues have been resolved, irrespective of whether it is a new or current factory. ‘Red flags’ include serious breaches of our Code of Conduct and local laws, such as non-payment of minimum wage or locked fire exits.

We anticipate that our Code of Conduct Guidebook will continue to be useful in accelerating the resolution of problems identified during audits. Last year we introduced a new monthly update of audit statistics, which is sent to Brand and Buying Directors. The report continues to focus on out-of-date audits and orange audits as well as the proportion graded green.

This year we increased our targets to work towards fewer factories with out-of-date audits and 100% of our factories operating with a green or yellow rating. At the year-end, 80% of our factories were graded green or yellow and next year we need to do more to target orange grades.

Overall this year we reviewed 1,124 ethical audits for all brands except BHS (see BHS update below), which is a similar number to last year and affects approximately 286,000 workers.

Since our current audit programme began in 2007, of the audit reports and evidence reviewed, 1,420, or approximately 30% were follow-up audits. Of those 40% improved, 41% stayed the same and a further 19% deteriorated (in which case we expect the supplier to progress their corrective action plan).

Overall this year for BHS we reviewed 1,814 ethical audits. Of those, 430 were follow-up audits. 32% improved, 39% stayed the same and 29% deteriorated in which case we work with the supplier to progress their corrective action plan.

Although this work is the foundation of our ethical trading programme, we acknowledge that this is not enough to drive long-term change. This is why we work on the projects outlined below.

We have also begun to introduce a new ethical audit database called Valid8, developed to give us much tighter control over out-of-date audits and easier management of non-compliance closure, evidence review and feedback for suppliers and factories.

Valid8 improves efficiencies via:

  • online factory set-up;
  • automatic triggering and grading of audits;
  • continuous validation of suppliers and factories;
  • live reporting; and
  • instant communication with suppliers.

The database is now in use centrally with the ethical trading team and will be rolled out gradually to each brand and their suppliers.copy3_of_FashionFootprintEthicalAuditProcess.jpg

2. COUNTRY RISK ASSESSMENTS

There have been some terrible reminders over the last 12 months that some countries continue to present a higher risk than others in the sphere of ethical trading.

We were deeply saddened by the events suffered by garment workers in Bangladesh over the last year, first with the fire in November 2012 and then by the building collapse in April 2013. We signed the Accord on Fire and Building Safety in Bangladesh in September 2013 and take this commitment very seriously. We will continue to work locally to help bring greater protection for textile workers there.

Two senior members of the Ethical Trading team visited Bangladesh again in June as part of standard ethical trading factory visits. However, this provided us with an opportunity to underline efforts already in progress to work with factories on building stability and fire safety.

Although there are ongoing challenges around getting the right expertise there and ensuring the validation of paperwork, we have visited some factories accompanied by a civil engineer to review structural safety.

We recognise the benefits of joint efforts and so we are working with other retailers on joint information and encouragement of factories to improve.

While Bangladesh is not a dominant sourcing location for our brands, we have once again reviewed our Bangladesh supplier and factory set-up process, which we last revisited in 2010. A new four-point plan involves even stricter set-up criteria to add the supplier or factory to our roster. All factories must meet these new criteria.

As terrible as the Bangladesh tragedies have been, we remain mindful of the need to carefully prioritise, monitor and respond to issues in all sourcing countries.

3. RAGS

This year saw the completion of both phases of the Benefits for Business and Workers (BBW) project, part of the Responsible and Accountable Garment Sector (RAGS) Challenge Fund, set up by the Department for International Development (DFID), the UK agency for international aid.

Arcadia was one of six initial retailers (others were Marks & Spencer, Mothercare, New Look, Sainsbury’s and Tesco, subsequently joined by Ralph Lauren and Varner Group), that part-funded the project, which focused on improving the management systems of garment manufacturers and ‘for responsible and ethical production to become the norm in the garment manufacturing sector supplying the UK’.

Led by industry consultants Impactt, the aim was to improve the business practices of garment manufacturers as well as the day-to-day lives of their workers.

Working with factories in Bangladesh and India, the project aimed to demonstrate the business benefits of providing better jobs through: • establishing a more stable and satisfied workforce;

  • enhancing workers’ pay;
  • avoiding excessive hours worked; and
  • improving productivity and quality in the longer term.

73 factories took part in the programme including nine Arcadia Group factories and the results have been promising, benefitting over 106,000 workers. While there was wide variation in the pace at which factories adopted the new approaches, those where there were both high levels of buy-in from business owners and stable industrial engineering saw the greatest benefits.

Bangladesh results:

  • efficiency improved by 18%;
  • cut to ship ratio improved, meaning that factories saved £40,000 during the 6 month course, a return on their initial investment (ROI) of over 21;
  • worker absenteeism reduced by 34% on average, indicating that workers were more motivated to come to work each day;
  • worker turnover reduced on average across all factories by 52%. This means that fewer than half the number of workers were leaving every month than at the start of the programme;
  • overall, factories saw an increase in average take-home pay of 491 taka per month or 8% - equivalent to an increase in annual pay of £3.4 million across the workers employed by participating factories;
  • workers’ quality of life was also improved by significant reductions in working hours, with the percentage of workers working more than 60 hours per week falling by 43%; and
  • factories performed strongly on hourly pay, increasing this by 12% against a target of 5%.

India results:

  • efficiency improved by 26%;
  • cut to ship ratio improved enabling Indian factories to realise £25,000 of savings, a 6-month ROI of 13;
  • absenteeism reduced by 27%;
  • worker turnover was down by 26%;
  • average take-home pay increased by 265 rupees or 5%. This would be equivalent to an increase in annual pay of £614,000 across all the workers employed by participating factories; and
  • factories also performed well on hourly pay, increasing this by 8%.

Participants told us: “On the first day, I was thinking why do I, a production planning manager, need to attend an HR module? After attending I realize this is very important for production people to understand workers and their feelings. I learn how to talk to them and what makes them worried and what helps them to do quality work. Listening to others and working as a team is very important.” Production Manager.

“I feel lots of change in this factory in the last six months – there is less absenteeism, because of the attendance bonus. I am saving the extra money for my daughter’s future and using it for buying new things for the house. It is helping me through all my life.” Pilot line worker.

The tools and learnings from this project are now ours to share with factories and we intend to put these to good use.

4. JOINT TURKEY PROJECT

TOPSHOP and TOPMAN’s Assessment, Remediation, and Capacity building (ARC) programme is designed to move beyond the traditional auditing model while achieving compliance with retailers’ codes of compliance. It seeks to empower factory owners, managers and workers to create a fair working environment while reducing audit fatigue (repeated auditing of factories by numerous brands and retailers).

Last year we established a collaborative project called the Joint Turkey Project (JTP) with two other major high street retailers. Together we share the common goals of establishing mature systems of industrial relations and building the factories’ productivity to support a wage ladder. This inaugural phase included training for worker representatives, enabling them to lead participatory discussions with all workers.

Scoping work has taken place among the three partners – to shape the programme and define key performance indicators as well as baseline assessments in these core areas.

The three partners define the JTP as follows: ‘To develop and implement a strategic and holistic programme that will improve factory productivity, workers’ conditions, working hours, earnings and worker management dialogue. This will utilise proven processes of communication, training and industrial and other forms of engineering. The programme will benefit the workers, suppliers, factories, and retailers.’

Guiding KPIs have been identified to support effective worker/management dialogue, enhanced productivity and effective management systems.

A four-strong team seconded from the three partners has been established on the ground to run the project day-today. They have already completed baseline assessments on HR management systems in all three factories.

External stakeholders have also been put in place this year and the programme is working alongside the Geneva-based global union IndustriALL, its partner Accademic and Turkish non-Governmental organisation Social Development and Gender Equality Center (SOGEP). This group has completed worker/ management dialogue baseline assessments and the election of worker representatives began during August 2013.

The third phase of the programme is productivity and efficiency. An industrial engineering partner, REFA has been appointed and brings considerable expertise in this area and will deliver training to employees and senior management in factories.

Meanwhile, a half way programme review will also be held in September 2013 to measure success and gather learnings from the project to date.

5. STRATEGIC LABOUR PRIORITIES

a. Living wage
b. Freedom of association
c. Purchasing practices
d. Vulnerable workers

a | LIVING WAGE
Our major focus in this area over the last year has been as part of RAGS (see above). Our overall position on the living wage has not changed. Arcadia supports the position that all workers in our supply chain, including piece rate, subcontracted, informal, home and migrant workers, should always receive sufficient wages to meet their needs for nutritious food, clean water and other needs (shelter, transport etc) as well as a discretionary income, which is now a generally well accepted definition of a living wage.

The work of campaigning groups such as Labour Behind the Label (LBL) and the Asia Floor Wage Campaign influence our activities. Indeed, TOPSHOP and TOPMAN’s JTP (see above) has been developed around LBL’s four pillars: collaboration; worker organising and freedom of association; purchasing practices and developing a route map to a living wage.

There is no universal definition of a living wage and there are many practical difficulties to agreeing and implementing a living wage, which are common to all retailers. We believe the most effective solution would be for governments to increase the minimum wage, which would create a level playing field for all parties. Despite this, we have been pleased at the impact the RAGS project made in general to wages. We are keen to work with other retailers to use these learnings to encourage other factories to implement the techniques which worked and which can make a difference to workers’ wages.

b | FREEDOM OF ASSOCIATION
We believe worker representation and dialogue with management is fundamental to empowering workers to improve their working conditions and wages.

Ensuring freedom of association is guaranteed continues to be a significant challenge, with a small percentage of the factories our suppliers use known to have trade union presence.

However, we continue to communicate with suppliers and factories about the benefits of freedom of association and as a minimum we expect our suppliers to ensure that factories give workers the right to organise.

We have produced a ‘Right to Organise Guarantee’ (RTO) template, drafted with the help of the International Textiles Garment and Leather Workers’ Federation (ITGLWF), now IndustriALL. This is included in our Code of Conduct Guidebook (Part 4, pages 258-9: www.arcadiagroup.co.uk/fashionfootprint/code-ofconduct- and-guidebook/Guidebook-part-4.pdf).

This year we have had the RTO translated into Bangla, Hindi, Romanian, Turkish and Urdu, to add to our Chinese version, and have sent these to all relevant suppliers. These are also made available on our website and the extranet that we use to communicate with suppliers.

We have asked suppliers for the RTO to be posted on notice boards, explained and given to all workers twice yearly with a pay slip. When visiting factories we request to see this and when speaking with workers we ask them if they have had this guarantee communicated to them. Freedom of Association is an important part of worker/ management communications within the HR Management Systems Portfolio we have produced (see our section on Management Systems) and of the Joint Turkey Project (see above).

Freedom of Association is an important part of worker/ management communications within the HR Management Systems Portfolio we have produced (see our section on Management Systems) and of the Joint Turkey Project (see above).

c | PURCHASING PRACTICES
We believe that by improving the way we design and buy goods and by raising awareness amongst our teams of the potential effects on factory workers, we can have a positive impact on how suppliers’ factories manage their people, their production and their working environments.

An important element in this area is the development of training for all appropriate staff (everyone in design, buying and merchandising). Last year we had started this training and had hoped to finalise it by the end of 2012. We did not meet this target and the project has been delayed further this year by other projects.

However, the training has been updated recently to include new buying procedures and new policies such as that relating to Bangladesh. We have also been in discussion with a key supplier across a number of product lines and brands who would be willing to trial a joint project to better understand our buying impacts from a supplier perspective and, as such, we expect to refresh this training in the coming year.

d | VULNERABLE WORKERS
Our work in this area comprises:
(i) home workers;
(ii) migrant workers; and
(iii) contract workers.

(i) Home workers

Home working involves carrying out tasks on products at home. When managed properly this provides a way for individuals to balance their work and home life and we support factories that provide this option.

However, the lack of visibility of home workers, combined with their complicated employment status, has made them a vulnerable worker group. This is why we have been working on improving our understanding of the incidence of, and conditions for, home workers in our supply chain.

This year TOPSHOP and TOPMAN continued work on engaging with home workers by establishing guidelines and a toolkit. We have, however, faced challenges with the implementation and use of the toolkit. It has been particularly difficult to ensure engagement of middle management within the factories where the processes and procedures have been introduced.

In response, we have scaled back the scope of the project. By limiting our work to two suppliers, we hope to make it more manageable and focused so that the benefits can be assessed more effectively.

Regular feedback from contractors in this area has enabled us to focus on:

  • encouraging contractors to work with an NGO, raising awareness of the importance of using the toolkit and ensuring home workers are paid correctly and on time;
  • raising awareness with the contractors and home workers of membership schemes providing access to free medicine and advice on general health and hygiene; and
  • raising awareness of the value of passbooks and purchase orders to home workers when dealing with contractors and factories.

In order to gain transparency on wages for home workers we have selected limited locations and suppliers. We hope this will help us gain traction and start to drive change and improve conditions for home workers.

(ii) Migrant workers

In recent years Arcadia Group has been active in the area of improving the recruitment and working conditions of migrant workers who travel from one country to another for employment. This migration is generally beneficial but the people involved can be in a vulnerable situation, and can be exploited by unscrupulous agents, for example.

This is why we developed our Migrant Workers’ Guidelines which are available in Part 4 of our Code of Conduct Guidebook (www.arcadiagroup.co. uk/fashionfootprint/code-of-conduct-andguidebook/ Guidebook-part-4.pdf).

This year, we will be going back to those suppliers to verify that the best practice standards remain in place, what challenges remain and what further work we need to do to in the recruitment process as this is the first key step that migrant workers take.

(iiI) Contract workers

TOPSHOP and TOPMAN’s work in the area of contract workers continues in partnership with two other high street retailers. We feel the work carried out to date has provided us with valuable awareness of the priorities and the challenges faced by contract workers.

We have learnt about the recruiting practices used by factories and contractors and by working with both parties we have been able to establish the root cause behind those practices and the resultant problems. The output is a set of guiding principles on recruitment practices.

We have pinpointed a small number of factories with which to work on implementing the guiding principles and raising awareness of the business case for factories to hire employees directly and not on contracts.

6. CODE OF CONDUCT GUIDEBOOK

Our Code of Conduct Guidebook extends practical guidance to suppliers and factories on how to improve labour standards based on our Code of Conduct.

Key suppliers producing in the UK and China have been issued with a copy in either English and/or Chinese. We had planned to extend the different language versions to include Hindi, however, while this is still something we would like to do, it has not been possible this year.

This year we have taken the decision to review Part 3 of the Guidebook: ‘Health & Safety and the Environment’. We have shared its contents with external experts in order to conduct a review of our position on fire safety.

Our Code of Conduct Guidebook can be found at: www.arcadiagroup.co.uk/fashionfootprint/code-ofconduct- and-guidebook

7. MANAGEMENT SYSTEMS

We continue to build on our Code of Conduct Guidebook by further developing Part Four: Human Resources Management Systems. Last year we expanded this to cover all areas of traditional and strategic Human Resources Management Systems.

This involves:

  1. The link between worker engagement and a successful business;
  2. How to reach these benefits;
  3. The role of the HR department; and
  4. Examples and templates of practical tools and how to implement them.

Management systems are often in place for production but can be inadequate for areas such as employment and worker welfare. A simple example is a proper contract for employees. Part Four of the Guidebook includes examples of practical tools such as training slides and trainer notes, policy statements and template contracts and handbooks, so that factories can use these as a guide to creating their own versions.

Underpinning all areas are the following fundamental drivers of worker engagement, which all organisations should develop:

  1. leadership that clearly transmits vision and values – this means being transparent and including workers in leadership’s goals;
  2. ‘engaging managers’, i.e. managers who facilitate and empower rather than control and restrict their staff, showing appreciation, respect and commitment to developing and rewarding capabilities;
  3. workers voices: an effective way for workers to voice their views and concerns; and
  4. behaviour throughout the organisation that is consistent with stated values leading to trust and integrity.

The Portfolio has been written and tested in two factories (one in Bangladesh and one in India). It is now an extension of Part Four of the Code of Conduct Guidebook while the templates within it will be used as part of ARC/Joint Turkey Project (see above). The Portfolio will be published for all suppliers once testing within factories has been completed.

8. SUMANGALI

Sumangali schemes involve young female migrant workers in poor rural areas of Southern India in particular, who become at risk of exploitation when they take up residential contracts to work in a garment factory or cotton mill.

Under a Sumangali scheme workers are attracted by the prospect of paid work, safe accommodation and a final lump sum payment (often used to pay for a dowry, which remains general practice despite being prohibited in India). NGOs have reported that some of these schemes involve excessive working hours for minimal pay, pressure to stay on to the end of the contract period and withholding of the lump sum payment at the end.

Arcadia was among the international retailers represented at a conference hosted by the Ethical Trading Initiative (ETI) in India in March 2012 to discuss these issues with local communities.

We remain committed to the elimination of such labour rights abuses despite incidents of these being very difficult to identify due to them relating more to mills than garment factories. We have communicated these expectations to suppliers and expect any workers in our suppliers’ factories in Southern India or anywhere else, to apply our Code of Conduct.

9. PROHIBITED ACTIVITIES

There are a number of activities which Arcadia prohibits. This list includes policies to protect animal welfare, the sandblasting technique, the use of Uzbek cotton and mulesing of sheep. All these bans remain in place and our new ethical audit database (Valid8) will improve our verification process to ensure that factories comply.

Sandblasting – a process used to give denim a worn or faded look – was banned in 2011 due to the potential health hazards faced by workers if they breathe in the fine silica particles used. Uzbek cotton was banned in 2008 due to concerns about forced and child labour in Uzbekistan during cotton harvesting. Mulesing refers to a sheep husbandry practice used in the Australian wool industry to remove skin from sheep (often without anaesthetic) to prevent flystrike.

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