Kuyichi in China How to develop a sustainable supply chain

Kuyichi in China How to develop a sustainable supply chain By Yvet Breedveld International Fashion & Management Amsterdam Fashion Institute Research Report for Kuyichi Europe B.V. Amsterdam, June 2008 EMBARGO 2011

Kuyichi in China How to develop a sustainable supply chain I, Yvet Breedveld, hereby declare that this work is my own and is expressed in my own words. Any use of another author in any form, are properly acknowledged at their point of use. A list of references is included. By Yvet Breedveld International Fashion & Management Amsterdam Fashion Institute Research Report for Kuyichi Europe B.V. Amsterdam, June 2008 EMBARGO 2011 ii

This report has been printed on Biotop paper. This paper is FSC certified, indicating that it is produced in a sustainable manner; the trees used for this paper come from responsibly managed forests. Biotop paper is bleached without the use of chlorine and has not been treated with optical whiteners, giving the paper its natural tone. The cover of this report is made of spare metal that is prevented from being wasted by reusing it. iii

Preface This research report was written as the final assignment of the International Fashion & Management course of the Amsterdam Fashion Institute (AMFI). The subject of research was assigned by Kuyichi Europe BV. I would like to thank the following people: Bert Bruinink, Margreet van Dijk, Neeltje Steenbakkers, Celica Hummel, Piet den Toom and everybody else at Kuyichi for their help and support during the past twenty weeks. My AMFI process coach Marco Mossinkhof for his guidance in conducting the research and in structuring and writing the report. My parents and friends for supporting me throughout the International Fashion & Management Course and especially during the past twenty weeks in preparing this report. iv

Table of Content Executive Summary...1 Introduction.3 1. Kuyichi 4 1.1 Kuyichi 1.1.1 Vision 1.1.2 Mission 1.1.3 Identity 1.1.4 The Product 1.1.5 Strategy 1.1.6 Current Performance 1.2 Partners 1.2.1 MADE BY 1.2.2 Solidaridad 2. Corporate Social Responsibility.14 2.1 Trends and Developments 2.1.1 Corporate Social Responsibility 2.1.2 Development 2.1.3 CSR in Fashion 2.2 Labour 2.2.1 SA8000 2.2.2 Other Standards 2.3 Sustainable Materials 2.3.1 Organic Cotton 2.3.2 Other Sustainable Materials 3. Relationship Management 27 3.1 Marketing Channels 3.2 Relationships within the Marketing Channel 3.3 Dependency 3.4 Power within the Marketing Channel v

4. China...34 4.1 General 4.2 Current Suppliers 4.2.1 Current Performance 4.2.2 CMT Companies 4.2.3 Fabric Suppliers 4.3 Potential Suppliers 4.3.1 Potential CMT Companies 4.3.2 Potential Fabric Suppliers 5. Conclusion.47 6. Recommendations.. 48 6.1 General Recommendations 6.2 Specific Recommendations 7. Endnotes.53 8. Sources.54 9. Appendices 59 Appendix I: Appendix II: Appendix III: Appendix IV: Appendix V: Appendix VI: Appendix VII: Appendix VIII: Interview with Karin Reimerink...59 Implementation of the SA8000 Standard.. 62 Interview with Gerhard Schäuble...63 Certification Process of Organic Materials...63 Question List Current Suppliers...65 Outcome Question List Current Suppliers....67 Cultural Difference Between China and The Netherlands.71 Question List Potential Suppliers.74 vi

Executive Summary Kuyichi is a style conscious jeans brand. Its mission is to provide fair trade and organic denim and fashion to the audience. Part of the brand s collections are produced in China, a country that is regularly in publicity for violating human rights in many different forms and that is rated as one of the least environmentally sustainable countries. Unfortunately Kuyichi has not yet been able to reach its goals and objectives in China either. This report researches the possibilities for Kuyichi to improve its performance in China. Kuyichi states to provide fair trade, but in fact does more than that, by aiming to provide a fair, humane and safe working environment for all people involved in the supply chain. Next to using organic cotton, Kuyichi also uses other sustainable materials such as recycled cotton and vegetable tanned leather. Kuyichi collaborates with organizations MADE BY and Solidaridad to reach its goals. MADE BY is an umbrella label that supports Kuyichi and other brands in cleaning up their supply chain. This is done by setting up networks of suppliers, organic cotton farmers and NGOs and by helping the brands to set up strategies and plans of approach. MADE BY also evaluates its member brands annually on their performance and communicates the scores in its annual report. Non governmental organization Solidaridad is the founder of Kuyichi. During its activities in the coffee and fruit industry, Solidaridad noticed the negative effects of the conventional cotton industry on people and planet and decided to try and change this. After unsuccessfully approaching existing brands to improve the situation, Solidaridad decided to take matters into own hands by starting up its own label. Since then, Solidaridad has been occupied in supporting and persuading other brands to clean up their supply chain. Together MADE BY and Solidaridad are also active in China, by aiding brands in improving labour conditions and increasing the use of organic cotton. Recently a Regional Expertise Centre has been started, from where the brands can be assisted even better and a more elaborate network can be set up. Kuyichi has not yet collaborated with the two organizations in improving the situation in China. Corporate Social Responsibility (CSR) is at the heart of Kuyichi s philosophy and is an important tool for differentiation. An increasing amount of businesses are also realizing that they have a responsibility towards people and planet; all the more reason for Kuyichi to ensure that its goals are reached. The mission of ensuring fair social circumstances is in practice realized through the implementation of certification and monitoring systems. There are various different methods available to ensure the ethical treatment of personnel, but Kuyichi aims at working with the SA8000 standard. Other widely used and recognised systems are also accepted and applauded. 1

To reduce the negative effects on the environment, Kuyichi aims to use only organic cotton, which is produced without the use of hazardous chemicals. Next to organic cotton, other sustainable materials such as hemp, bamboo and recycled cotton are also used. The challenge in reaching these goals is not in implementing standards or using materials, but to get another to implement the standards and use the materials you want them to. According to Louis W. Stern, Adel I. El Ansary and Anne T. Coughlan, this can be achieved by exerting power. There are different sources and methods of using power; when to use which source and how, depends on the relationship and dependency between the two parties involved. China does not have a good reputation when it comes to human rights, working conditions or environmental consciousness. However the rules and regulations that are applicable in the country are quite sufficient and are similar to the requirements set by the different labour standards. The challenge is to monitor and control whether factories comply to these rules and regulations. Not all of Kuyichi s Chinese suppliers are currently compliant; two factories have a social standard and one factory has implemented other methods of ensuring fair labour conditions. Organic cotton is not widely used by the producers. However, most have found organic cotton suppliers and are open to start working with the yarn in the future. Other sustainable materials are also available. Kuyichi is quite dependant on its Chinese suppliers, but the other way around this is not the case. Because of this, Kuyichi cannot easily persuade them to implement standards or start using sustainable materials. Besides volumes and revenues, other sources of power can be very useful in stimulating the Chinese partners to show desired behaviour. Kuyichi should become more aware of these sources and implement them more consciously, considering the effects they have on the other party. Next to this, Kuyichi should invest in the relationships with the different partners, so that all parties are aware of what the other is aiming to accomplish. Another method to increase compliance, is by starting a cooperation with companies that have already implemented social standards and sustainable materials. However most of the compliant companies found are very large, leading to yet another unequal relationship. The use of sustainable materials can more easily be increased by making use of the stock fabrics of the suppliers. If suitable suppliers are not yet available, Kuyichi can introduce CMT companies to suppliers of sustainable materials. 2

Introduction Kuyichi aims at providing fair trade and organic denim and fashion to the consumer. Clothing that is created with respect to the people and the environment involved in the process. Part of Kuyichi s collections are, however, produced in China, a country that is not exactly known for its ethical treatment of people and environmentally friendly production techniques. Unfortunately, Kuyichi has not yet been able to proof this general opinion wrong; Kuyichi is not working in compliance with its objectives in China. This raises the following question: What actions should Kuyichi take in order to ensure that its Chinese partners will work in compliance with Kuyichi s goals and objectives? To answer this question, the following subsidiary questions will be answered: What is Kuyichi and what are the goals and objectives it is trying to achieve? What do these objectives mean in practice? What does the available theory say about this matter? What is the actual situation in China? How should this situation be handled in order for Kuyichi to reach its goals? The final product of this research is a set of recommendations, advising the activities and actions that Kuyichi should take in order to reach its goals and objectives in China. This report focuses on organic materials and fair labour at sewing companies. Other factors that influence the environment, such as transportation methods or dyeing processes, are not taken into account. The labour conditions at cotton farmers or other yarn and fabric producers are not included in this research either. The report analyses four different suppliers that Kuyichi is currently working with. Due to the magnitude of this report, the other Chinese suppliers are not discussed. Due to the low response on the inquiries sent out to potential suppliers, the analysis of potential suppliers is limited. The data in this report is derived from both desk and field research. The desk research comprises literature from the Internet, articles, books and Kuyichi s administration and is mainly used to collect information on Kuyichi, its goals and objectives, the applied theory and the general situation in China. Field research was performed in the form of interviews with experts in the subjects at hand, conversations with the staff at Kuyichi that is confronted with the issues discussed, and questionnaires held amongst Kuyichi s partners in China. 3

1. Kuyichi Kuyichi is having difficulties to work in accordance with its objectives in China. But what exactly is Kuyichi, and what are the ideals and goals that Kuyichi is trying to achieve? The following chapter will introduce the brand Kuyichi, its vision and its goals. It will also discuss the strategies and objectives for the coming years and how the brand is currently living up to these. The final section of this chapter will discuss Kuyichi s most important partner organizations: MADE BY and Solidaridad. 1.1 Kuyichi Kuyichi was founded in 2001 by Dutch NGO Solidaridad. Solidaridad had been active in improving labour and environmental conditions in the coffee and fruit industry in Latin America, when they noticed how damaging the effects of the cotton and textile industry were on the people and the environment involved. After deciding to try and change this, several Dutch fashion companies were approached, but non were interested in taking on this challenge. That is when Solidaridad decided to take matters into own hands by starting their own fashion label: Kuyichi. 1.1.1 Vision Kuyichi believes in two basic principles: fair trade and organic materials. Kuyichi s vision on trends and fashion is not influenced by this. Innovative design is as important to us, as social equity for the people and the environment involved. [1] Kuyichi was the first brand to combine fashion with fair trade and organic materials. We find it strange our vision still differs from most other fashion brands. We want more fashion brands to become more environmentally and socially aware and we are happy to see that more and more brands join the organic revolution! [2] 1.1.2 Mission Kuyichi s mission is to design, produce and distribute fair trade and organic denim and fashion to an international audience. Kuyichi aims to show other brands that using fair labour and sustainable materials can be commercially successful without compromising in style and quality. 4

Another goal Kuyichi has, is to involve different people and organizations with the brand: Kuyichi strives at being a stakeholder oriented company, which include customers, producers, employees throughout the whole supply chain [3] 1.1.3 Identity Kuyichi is a style conscious jeans brand.[4] We create style. We are conscious of how we create it [5]. Kuyichi provides jeans and fashion that are put together with respect to planet and people involved in the process. 1.1.4 The product The collections consist of a denim line and a non denim line of tops, bottoms, outerwear and accessories. All items are jeans related and can be described as tough and sexy with a cool, street wise look and feel to them. 5

The collections are divided in basic, contemporary and trend items: The basic line consists of simple styles, with subtle branding and design. The entire basic line is made of organic cotton. The contemporary items are commercial and mainstream, but are still innovative and have a strong Kuyichi feel to them. The trend line consists of fashionable and innovative items, with distinct and refreshing designs and fits. Kuyichi uses as much high quality, organic cotton as possible. Next to cotton, Kuyichi uses linen, nylon, vegetable tanned leather viscose and various wool blends. The organic and fair trade stories are hidden treasures most consumer find out later. [6] 1.1.5 Strategy Kuyichi s strategies and objectives are divided in three main categories. The first is the increase of the use of organic cotton. The possibilities of using other sustainable materials such as recycled cotton, recycled polyester and soy bean are being researched and integrated into the collections. The second category is fair trade. Kuyichi aims at working with CMT 1 companies that treat their employees fairly and respectfully. In practice, this means working with companies that are certified against a social standard, indicating that workers are treated fairly and are paid a living wage. For now, Kuyichi s efforts are focussed at CMT companies, as this is the part of the supply chain where most human labour is involved. The third category of Kuyichi s strategies, is transparency. Kuyichi wants its supply chain to be transparent, not only for the company to know what is going on and what needs to be changed or improved, but also for the consumer to be able to find out what steps their garment goes through before it ends up in their closet. The tool used to make this possible is MADE BY s Track&Trace system, which allows customers to trace the supply chain of their product on the internet. This system will be described in more detail in chapter 2.2.1. In cooperation with partner organization MADE BY, Kuyichi sets up its strategy and step by step approach, towards its goals and objectives. The following objectives have been derived from Kuyichi action plan 2008 by MADE BY. 1 CMT company: Abbreviation for Cut Make Trim company. A CMT company receives instructions from the customer (usually a head tail company) and produces the actual product. The customer will then sell and distribute the goods to its own cusomers. 6

Organic cotton Kuyichi has set the following objectives concerning the use of organic cotton: 2008: 50% organic cotton in cotton collection 2009: 65% organic cotton in cotton collection 2010: 80% organic cotton in cotton collection To reach these objectives, the following measures will be taken during the years 2008 and 2009. The effects of these actions will become clear in 2009 and 2010. - Kuyichi will set up an organic supply chain in India; - The possibilities for organic production in China will be investigated; - The organic concept will be introduced to the Indonesian supplier; - Kuyichi will research the possibilities of environmentally friendly printing and denim washing techniques. Social Circumstances Kuyichi aims to provide fair working conditions throughout its supply chain. This is reached through implementation of standards or certification processes. The aim is to work with CMT companies that comply to the SA8000 standard. Next to the SA8000 standard, several other standards and monitoring systems are recognised by Kuyichi. Partner organization MADE BY has analyzed these standards and categorized them into three classes (class A,B and C) according to their quality. The objectives set for social circumstances, both aim at increasing the percentage of certified factories and at developing these to class A certified factories. The objectives for the coming years are as follows: 2008: 10% of the collection produced in class A certified factories 20% of the collection produced in class B certified factories 2009: 15% of the collection produced in class A certified factories 25% of the collection produced in class B certified factories 2010: 30% of the collection produced in class A certified factories 40% of the collection produced in class B certified factories To reach these objectives, the following actions will be taken in 2008 and 2009. The effects will become clear in 2009 and 2010. - Start producing part of the collection with Indian CMT company Tubeknit, which is SA8000 certified; - Start the SA8000 certification process with the main denim supplier in Tunesia; 7

- Introduce social programs to the top 5 of key suppliers. Traceability The transparency of the supply chain is achieved through the traceability of the goods through MADE BY s Track&Trace system. Following are the objectives with respect to the traceability of the collections: 2008: 30% of collections traceable 2009: 50% of collections traceable 2010: 75% of collections traceable Following actions will be taken in 2008 and 2009, showing the first effects in 2009 and 2010: - Visualizing the supply chains of organic cotton of several Turkish suppliers; - Implementing the Track&Trace system at these suppliers; - Implementing the Track&Trace system at Indian CMT company Tubeknit. 1.1.6 Current performance Kuyichi states that it ensures fair working conditions within their factories and that it works with materials that do not harm people or planet. But to what extent is Kuyichi currently living up to these statements? The following paragraphs are based on the figures from 2007. Sustainable Materials During the year 2007, 35% of the cotton used in Kuyichi s collection is organic cotton. A large portion of this cotton is used in the T shirt and denim collections, which have both grown in size and increased the use of organic cotton. Kuyichi is currently testing other sustainable materials, such as recycled cotton and polyester, linen and bamboo. Working conditions Kuyichi s score on working conditions during the year 2007 was as follows: Non certified: 88% Class C certified: 12% Class B certified: 0% Class A certified: 0% 8

The score of 2007 was lower than that of 2006. There were several reasons for this: Kuyichi was forced to terminate the relationship with a certified supplier in India, due to the low volumes that were being produced. Difficulties at the Peruvian supplier Limatex, which was in the process of certification, forced Kuyichi to decrease the produced quantities, further lowering the score. This company filed bankruptcy at the beginning of 2008. Kuyichi s major denim supplier SCS was exploring the possibilities of SA8000 certification, but this could not be included in the score. SCS is expected to be certified in 2008. Traceability During the year 2007, 14% of Kuyichi s collections were traceable. Volumes During the year 2007, Kuyichi produced 385.253 pieces. 233.933 (39,3% of total collection) of these pieces were part of the denim collection. Within the fashion collection, 233.933 (60,7% of total collection) pieces were sold. The collections were produced in seven different countries: The Netherlands, Turkey, Peru, Tunis, China, India and Macau. 39% Denim Non denim 20% 4% 27% The Netherlands Turkey Peru India Macau Tunis 61% China 30% Figure 1.1: Division of collections 16% 0% 3% Figure 1.2: Origin of collection 1.2 Partners MADE BY and Solidaridad are Kuyichi s most important partners in the process towards the achievement of Kuyichi s goals and objectives. The following paragraphs will describe the roles and activities of these organizations (more specifically in China) and how Kuyichi collaborates with these organizations. 9

1.2.1 MADE BY MADE BY is an umbrella label for sustainable production. Members are fashion brands that use organic cotton and fair labour; production takes place at companies that comply with a social code of conduct. MADE BY is the first initiative in fashion that focuses on the environmental and labour conditions throughout the supply chain. Activities MADE BY stimulates and supports fashion labels in cleaning up their supply chain [7]. To achieve this, MADE BY works together with the brands in setting up strategies and action plans. These action plans are adjusted and evaluated on a yearly basis and improvement is monitored. MADE BY cooperates with Solidaridad in building sustainable supply chains and networks of organic cotton projects, spinners, CMT companies, but also trade unions and local NGOs. Through this network, MADE BY can introduce brands to possibly suitable partners. They assist brands in educating and informing their suppliers, both on labour and environmental issues. At the moment, MADE BY is working on an interactive database, in which the suppliers, manufacturers or other partners of the brands will be collected. The member brands can access this intranet type of system to search for suitable partners on specific criteria, post messages and have discussions with other brands through the online forum. The database will be aired within a couple of months. MADE BY also provides its member brands with useful information and guidelines for the different aspects involved in improving the supply chain. Each year, MADE BY publishes annual reports, evaluating the activities of the brands in terms of social and environmental compliance. These reports help to create transparency of the brands and their supply chains. According to MADE BY, being open about a company s activities is the starting point for improvement of processes and production throughout the chain.[8] MADE BY uses three main indicators to measure and evaluate companies: Labour All MADE BY labels aim to work with factories that comply with the minimum requirements set by the International Labour Organization (ILO). These factories guarantee health and safety for their employees, do not use child labour, pay living wages, work humane working hours and give employees the right to form unions. The MADE BY norm for socially responsible production is SA8000, but MADE BY also recognises five other major standards that are widely used in the apparel industry. After extensive research, the six standards have been classified in three levels. These levels are taken into account during the annual evaluations. Organic Cotton MADE BY stimulates the use of organic cotton. Other types of sustainable materials are also applauded. To proof the authenticity of the organic cotton yarn, certifications are necessary. Please see appendix IV for the certification process of organic yarns. 10

Track&Trace The Track&Trace system allows the consumer to see where their garment is coming from. Who picked the cotton, who spun the yarns and who sewed your jeans together? By entering the MADE BY code that is printed on the carelabel in the garment, the process can be traced on the MADE BY website. MADE BY aims to make the total collection of all its member brands traceable. Activities in China During its first year, MADE BY was not active in China at all. According to Karin Reimerink, supply chain manager at MADE BY, this was based on the opinion that the situation in China was very bad, not sustainable at all and therefore not what MADE BY was looking for. Later we realized that this actually offered great potential and that we could really accomplish something here. [9] Different brands also requested MADE BY s assistance on improving processes in China. It would be a pity if they could not join MADE BY or if we could not do anything to assist them. Please see appendix 1 for the full interview with Karin Reimerink. Last year, MADE BY and Solidaridad cooperated in setting up the Expertisecentre China in Hong Kong. From this office, two cotton projects have been started and in the future, other projects or activities can be run from this centre. MADE BY has also started improvement processes for several suppliers. Cooperation between MADE BY and Kuyichi As for all its labels, MADE BY sets up action plans for Kuyichi. These plans indicate when which levels of compliance should be reached and how this can be done. Currently, MADE BY is assisting Kuyichi in increasing the traceability of its collections by training several different factories in Peru as well as in Tunisia. Secondly, MADE BY is playing an important role in the SA8000 certification process that one of Kuyichi s major denim suppliers in Tunisia is currently going through. MADE BY also supplies useful information concerning processes or possible partners. 1.2.2 Solidaridad The Inter Church Foundation for Action for Latin America, Solidaridad, was founded in 1976. The main objective of the organization is to support the attempts of churches, groups and people in Latin America, Asia and Africa, that aim at changing existing social structures. Solidaridad is a joint venture between various different Dutch churches, which are represented in the foundation s board. Solidaridad has made it their mission to combat structural poverty and to promote peace and justice.[10] Solidaridad works with the principle of fair trade, and believes that donating and lending money is not the solution for developing countries. By stimulating and investing in local initiatives for changing the current economy and social structures, people can become independent and self providing. In general, people in developing countries do not like to receive money for nothing and would much rather work in order to earn 11

their own income. Solidaridad helps small scale and underprivileged farmers in finding access to the market and stimulates corporate social responsibility with respect for people and planet. Solidaridad constantly develops new initiatives to stimulate fair trade and sustainable production and stimulates large scale companies to integrate corporate social responsibility in their company management and to produce their products in a sustainable method. Solidaridad has developed programs in many different industries which are important in different developing countries. Next to the fashion industry, Solidaridad is also active in the coffee, cacao and tea, tourism, fruit, soy and biomass industry. Fashion The fashion program of Solidaridad is aimed at improving the living conditions of cotton farmers and workers in the textile industry and at making the fashion industry as a whole more sustainable. Within the fashion program there are many different initiatives, the first being the foundation of Kuyichi in 2001. Since then, Solidaridad has set up MADE BY, the brands M Braze and 100% Organic Cotton and has continuously been attempting to persuade other brands to take their Corporate Social Responsibility. In 2007, Solidaridad spent approximately 1.5 million euros in the fashion program alone. Projects within this the fashion program are spread across the world, from South America, to Asia and Africa. Activities in China Solidaridad has been active in the fashion industry in China since 2006. The organization considers China to be a country where a lot is wrong, but that also shows great potential for improvement. Solidaridad has been cooperating with local as well as international partners to better the labour and environmental conditions. During the past year, Solidaridad has mainly worked together with MADE BY on its activities in China, as 9% 14% 86% Figure 1.3: Expenditures Solidaridad 91% Figure 1.4: Expenditures fashion Fashion Others China Other countries 12

described earlier. The most important accomplishment has been the foundation of the Chinese office, from where the two cotton projects and the other activities in China will be managed. Solidaridad has also started training several production facilities in cooperation with US certification company Social Accountability International (SAI). In total, Solidaridad invested 136.313,00 in its Chinese program during the year 2007. Conclusion Kuyichi claims to work towards fair trade and the use of organic cotton. The chapter above has shown that Kuyichi in fact does more than that. Aside from making trade fair, Kuyichi aims to provide a safe, respectful and fair working environment for all people active in Kuyichi s supply chain. A better description would be fair labour. Next to organic cotton, Kuyichi is also testing and introducing alternative sustainable materials into the collections. To put it simply: Kuyichi has truly integrated Corporate Social Responsibility (CSR) into its company philosophy and management and has turned it into a Unique Selling Point (USP) by being the first to combine it with fashion. Unfortunately, Kuyichi has not yet been able to reach the CSR objectives that the brand has set for itself. Kuyichi s most important partners on the journey towards a fair and clean supply chain are Solidaridad and MADE BY. These organizations are actively supporting Kuyichi and other brands in reaching their CSR goals. The projects that Kuyichi, MADE BY and Solidaridad are currently undertaking (both in cooperation with each other and independently), promise to improve Kuyichi s scores in the future. 13

2. Corporate Social Responsibility Corporate Social Responsibility (CSR) is a very important aspect for Kuyichi. In fact, the style conscious concept is an important tool of differentiation for Kuyichi. This is also the reason that Kuyichi wants to pay special attention to the conditions of the activities in China. The following chapter will discuss the topic of CSR in more detail and will describe what the goals and objectives that Kuyichi has set for itself actually come down to in practice. The first paragraph will describe the development of CSR and the position it has in society today. The second part of this chapter will in turn describe the two main aspects of Kuyichi s CSR policies: Fair labour and sustainable materials. The SA8000 standard will be discussed in depth, as this is the standard that Kuyichi strives for. The other standards that are recognised by MADE BY will also be discussed briefly. The main source of sustainable materials for Kuyichi is organic cotton, which will be discussed first. Other sustainable materials are constantly being developed and gaining in importance. These alternatives will be discussed in the final section of this chapter. 2.1 Trends and Developments Corporate Social Responsibility has an important role in the management of many companies nowadays, including that of Kuyichi s. In fact, it has an important role in society as a whole. But what is CSR exactly? Why and how did CSR become so popular and important in society nowadays? What role does CSR play in the fashion industry? The following paragraphs will answer these questions. 2.1.1 Corporate Social Responsibility Corporate Social Responsibility, Corporate Responsibility, Corporate Citizenship, Responsible Business; all these terms describe the same concept: The continuing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. [11] Simply put, CSR is about being aware of the effects that you businesses activities have on the people and the environment involved, keeping the negative effects at a minimum and aiming at improving the lives of the people involved. At the same time, the business should remain financially sound and profitable. The financial, social and ecological aspects of company business must be balanced. These aspects are also indicated with the three Ps: People, Planet and Profit. 14

People Sustainability Profit Planet Figure 2.1: Sustainability As the figure above illustrates, sustainability or sustainable development, is what occurs when the three Ps are combined successfully. The original definition of sustainability was formulated by the Brundtland Commission (formerly known as The World Commission on Environment and Development) in 1987: Development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. [12] This can be achieved by treating people fairly, recognising and providing their needs, maintaining stable levels of economic growth and using natural resources carefully and protecting or enhancing the environment. In other words: by taking ones Corporate Social Responsibility. 2.1.2 Development Corporate Social Responsibility is not new. In the past, companies like Philips provided housing and social funds for their employees and their families. Reasons for this were fears of unrest, the desire to keep out unions and the entrepreneur s sense of responsibility (dictated by political or religious convictions). With the development of public social services, the focus of CSR shifted towards problems outside of the factories. During the past decades, everything in our society, including corporate social responsibility, has developed rapidly. The Dutch top advisory board on social economic policy, the SER, published an advise concerning CSR. In this advise, the SER recognises several social developments since World War II. These developments are recognisable throughout western Europe, where the economical and social developments were fairly similar. 15

1. The improved educational system and increase in disposable income has increased the role of individual perceptions and preferences; 2. The increased prosperity has lead to a shift in needs from material to immaterial; 3. The economy has shifted from capital and production intensive, to knowledge and service intensive; 4. Both companies and social organization have gained in influence and power, causing a new division in responsibility between government, market and society. These trends have caused the responsibility for sustainable development to move away from the governments, on to companies and organizations. Several different sources influence these to take this responsibility: what must be done (laws and regulations, but also society s expectations), what should be done (ones personal beliefs) and what pays (what serves ones own self interest, for example a stronger reputation). Must An important expectation that society has of companies is that they explain, proof and back up their CSR statements. The consumer does not settle for the claims that companies make. Transparency and openness are very important for a company to be considered sincere. The division between the internal company and the external surroundings become less clear. A company needs to confirm with society s opinion. The Internet allows consumers to inform themselves and each other of prices, quality and companies CSR performance. (Negative) publicity can easily be generated, which can serve as a very strong tool for consumers to command certain behaviour. People are noticing more and more that governments are not able to solve all problems, and are implicitly or explicitly asking companies to take their responsibility to contribute to the world s prosperity and welfare. Companies are becoming social partners of governments. Should What companies feel they should do is related to the entrepreneur s or management s opinions. Managers translate their personal mission to that of the organization, which improves a company s commitment, especially when this concerns corporate social responsibility, as this usually comes from a strong personal opinion of giving back to society or personal ethics. Pays What pays differs from company to company. Three factors are influential: Unethical behaviour can lead to legal actions, causing negative publicity. Companies that take their Corporate Social Responsibility find it easier to recruit and hold on to employees. This is caused by the fact that people tend to choose a company that meets their personal norms and values. 16

Customers collectively influence companies to run their business ethically. In the past, price determined sales. After quality and uniqueness, consumers are now asking for products produced in an ethical manner, by ethical companies. European companies in general are taking the lead when it comes to CSR as an integral part of company management. The American concept of CSR is much more a philanthropic model, where companies take their responsibility by donating to charity. CSR has only recently begun to shift to the more strategic role that it has in most European companies. 2.1.3 CSR in fashion Corporate Social Responsibility is also playing an important role in the fashion industry. Could Solidaridad not find one fashion brand interested in producing fashion in a more sustainable manner in 2000, anno 2008 virtually every brand has some kind of CSR policy. Main reason for this is the influence that CSR has on a company s or brand s image, which is of great importance in the fashion industry. Big players like Nike and H&M are decreasing their ecological footstep by using organic cotton for a small portion of their cotton collections. This may not sound like much, but in relation to the huge quantities of cotton that these brands are using, the smallest percentage is still a lot. These large, well known brands are also setting an example that other brands must follow to keep their position and reputation in the market. Many brands have implemented standards and certification systems in order to improve working conditions throughout their supply chains. According to US organization Organic Exchange, the organic cotton market has since 2001, grown with 600%, from $245 million in 2001 to $2.7 billion in 2007.[13] Scandals often stir up the discussion of CSR. All Dutch newspapers covered the story of Dutch denim brand G Star, that was working with an Indian production company where employees were confronted with sexual intimidation, violence, unpaid work and low wages. G Star immediately stopped its production at the plant. After mediation (requested by Dutch and Indian government and led by former Prime Minister Ruud Lubbers), the relationship was restored at the beginning of this year. According to G Star, the conditions in the factory have been improved and are now in compliance with Indian law, international standards and G Star s Code of Conduct. The adequate response by G Star has definitely kept the damage to a minimum. The corrective actions taken, and finally restoring the relationship has probably even improved the brand s reputation on the subject of CSR. 2.2 Labour Many different organizations have set up standards, certification and monitoring systems, with the common goal of improving labour conditions worldwide. Kuyichi has chosen to work with the SA8000 Standard and is 17

aiming at working only with factories that have attained the SA8000 certificate. The first paragraph of this chapter will discuss this standard. Aside from SA8000, MADE BY recognises six standards that are widely used and accepted in the fashion industry. After thorough research, analysis and benchmarking, MADE BY identified three levels of standards. These alternative standards will be briefly described in paragraph 2.2.2. 2.2.1 SA8000 The SA8000 Standard is a voluntary verification system focussing on the human aspect of the workplace and the supply chain. The standard is based on norms of the International Labour Organization (ILO), the Universal Declaration of Human Rights and United Nations Rights Conventions and is designed to ensure that companies comply with the highest ethical standards in labour conditions. Currently, over 1,300 suppliers are certified in 63 countries and 70 industries. Following is the official summary of the content of the standards (quote): 1. Child Labor: No workers under the age of 15; minimum lowered to 14 for countries operating under the ILO Convention 138 developing country exception, remediation of any child found to be working 2. Forced Labor: No forced labor, including prison or debt bondage labor, no lodging of deposits or identity papers by employers o or outside recruiters 3. Health and Safety: provide a safe and healthy work environment; take steps to prevent injuries; regular health and safety worker training; system to detect threats to health and safety; access to bathrooms and potable water 4. Freedom of Association and Right to Collective Bargaining: Respect the right to form and join trade unions and bargain collectively; where law prohibits these freedoms, facilitate parallel means of association and bargaining 5. Discrimination: No discrimination based on race, caste, origin, religion, disability, gender, sexual orientation, union or political affiliation, or age, no sexual harassment. 6. Discipline: No corporal punishment, mental or physical coercion or verbal abuse 7. Working Hours: comply with the applicable law but, in any event, no more than 48 hours per week with at least one day off for every seven period; voluntary overtime paid at a premium rate and not to exceed 12 hours per week on a regular basis; overtime may be mandatory if part of a collective bargaining agreement 8. Compensation: wages paid for a standard work week must meet the legal and industry standards and be sufficient to meet the basis need of workers and their families; no disciplinary deductions 9. Management Systems: facilities seeking to gain and maintain certification must go beyond simple compliance to integrate the standard into their management systems and practices. (unquote) [14] 18

Social Accountability International (SAI) The SA8000 standard was developed by Social Accountability International (SAI). SAI is an international nonprofit organisation with the mission to improve working conditions around the world. Our mission is to promote human rights for workers around the world as a standards organization, ethical supply chain resource, and programs developer. [15] SAI consists of a Board of Directors, consisting of 9 members, responsible for evaluating the performance of SAI and its management, and a 26 member Advisory Board. The Board consists of experts from various different parties such as trade union, human rights organizations, retailers and manufacturers. The task of the Advisory Board was to develop a set of standards that could be used to asses and evaluate working conditions in the workplace and ensure fair treatment of all employees. This resulted in the establishment of the SA8000 standard in 1997. Since then, the Advisory Board is continuously working on evaluating and improving the standard. The standard was last revised in 2001. Implementation There are two different methods for implementing the SA800 standard. Please see appendix II for a description of the different procedures. Both procedures finish with an audit against the standard. This audit is performed by a Certification Body, an organization that is accredited and monitored by Social Accountability Accreditation Services (SAAS). This accreditation agency was founded in 1997 as a department within SAI and established as an independent non profit organization in 2007. SAAS is responsible for assessing and accrediting qualified organizations as Certification Bodies for various different certifications, including the SA8000 Standard. Costs The costs of certification vary, depending on the size of the company. The larger the company and the larger the workforce, the more time is needed for the audit. Costs may also vary between certification bodies. According to Gerhard Schäuble, managing director of SA8000 auditing bureau Fair & Human GmbH, the costs of certification are mostly paid by the customer. We always try to share the costs because of advantages both sides have. But mostly it is the importer who pays. [16] Please see appendix III for the full interview with Gerhard Schäuble. Kuyichi generally doe not pay for audits or certifications, because it believes that the initiative and efforts should come from the company itself. If a company is not motivated or willing to implement a standard itself, this indicates that it is not fully committed to ensuring ethical treatment of its employees. 19

Criticism on SA8000 Like any other standard or certification program, the SA8000 standard is not perfect. Following are the major disadvantages of this standard: In theory, non governmental organizations can be accredited by SAAS, but currently only commercial quality control organizations have been accredited. The factories that are audited, pay these certification bodies directly. This questions the independence of the certification bodies; Factory employees do not always trust in the independence of the auditors either. This causes them to be afraid to speak freely about subjects such as discrimination and harassment. It is debatable whether it is possible to declare a company SA8000 compliant based on a one day audit. When a company is SA8000 certified, it remains unclear whether the supply chain of the company is also certified. The responsibility of certification lays with each individual member, instead of with the company on top of the supply chain. Certification as well as corrective actions need to be paid by the factories. 2.2.2 Other Standards As indicated previously, Kuyichi s and MADE BY s norm for social compliance is SA8000. However, there are other standards that are widely used and accepted in the fashion industry. MADE BY has researched and benchmarked the six most commonly used initiatives and classified them in three levels, class A being the highest, class C the lowest. Of course, a certificate in any of these classes is better than no certification at all. Class A Ethical Trading Initiative (ETI) The Ethical Trading Initiative (ETI) is a multi stakeholder initiative comprising companies, NGOs and trade unions. The initiative was developed in 1998. Member brands must monitor their supply chain regularly, the frequency is dependant on the capacity and choice of the brand. The progress made is reported to ETI. Most brands rely on third parties for these audits. ETI is the only standard that includes subcontractors, supplier and homeworkers. Content wise, the ETI standard is comparable to the SA8000 standard. Fair Wear Foundation (FWF) The Fair Wear Foundation (FWF) was founded in the Netherlands in 1999. The multi stakeholder organization of trade unions, NGOs and companies currently has 28 members. The FWF is only active in the apparel industry. Member brands report annually on the progress made in their supply chain. They are required to audit all their suppliers within three years. Unannounced external audits are carried out in approximately 3% of the facilities per year. The auditors are local teams that are trained by the FWF. The FWF standard includes 20

suppliers and subcontractors; homeworkers are not included. The content of the standard is comparable to the SA8000 standard. Class B Fair Labour Association (FLA) The Fair Labour Association (FLA) is a non profit organization that was founded in 1997. The FLA is a multistakeholder organization, with stakeholders from universities, NGOs and companies. The FLA currently has twenty members, from within as well as outside of the textile industry. Member brands report on their progress to the FLA. They are required to audit their suppliers every three years. A small percentage is audited unexpectedly by a third party. The standard addresses the suppliers of member organizations and subcontractors, homeworkers are not included. The FLA standard is less strict than the SA8000 standard. Wages are required to be at industry or local law level, compared to the living wage required by SA8000. FLA is less strict on freedom of association and collective bargaining, forced and child labour and health and safety. Business Social Compliance Initiative (BSCI) BSCI was developed in 2003 by the Foreign Trade Association (FTA) and currently has 109 members (mostly retailers) from ten countries. The board of BSCI lies with FTA; no unions, NGOs or other stakeholders are involved. BSCI uses a monitoring system and the member brands report to BSCI on their progress. Unannounced audits are conducted by third party certification bodies, which are accredited by previously mentioned SAAS. BSCI addresses social conditions at suppliers and subcontractors. Homeworkers are not included. The BSCI standard requires organizations to pay their employees the minimum wage, instead of a living wage, which SA8000 requires. Class C Worldwide Responsible Apparel Production (WRAP) The Worldwide Responsible Apparel Production (WRAP) organization works with the Apparel Certification Program. This standard was developed in 1998 and since then, over 600 facilities have been certified. As the title indicates, WRAP is only active in the apparel industry. WRAP is a multi stakeholder organization consisting of company, NGO, government, and university representatives. WRAP uses a certification system. After all requirements are met, a certificate is issued. The audits are conducted by third parties. After certification, unexpected audits are executed once a year on average. The standard addresses subcontractors and suppliers, homeworkers are not included. WRAP is not very strict on several different issues. Concerning wages, only compliance to local law is required. Young workers are not specifically protected and the standard is less strict on forced labour. 21

2.3 Sustainable Materials To decrease or eliminate the negative environmental and human effects of its activities, Kuyichi aims to use organic cotton in its cotton collections. The following chapter will explain what damage the conventional cotton industry does to the environment and the people working in it and how the organic cotton industry is different. The last part of this chapter will discuss some other alternatives to conventional cotton. Environmental damage can also be decreased by altering or eliminating washing processes of fabrics or garments. This aspect will not be covered in this research report. 2.3.1 Organic Cotton Conventional cotton 50% of the world s textile is made of cotton. Cotton is considered a natural fibre, but it is also the fibre that damages the environment and the people growing it the most. Approximately 3% of the world s cultivated land is used for cotton farming, but 25% of all insecticides and 10% of all pesticides used worldwide, are used on cotton. The effects are enormous: people are poisoned and may even die due to the hazardous chemicals used to protect the plants. If the chemicals themselves do not harm the farmers, the water they use will. The chemicals end up in the ground water, which eventually ends up in the food chain. The irrigation of water needed for the cultivation, causes the rivers and lakes to dry out. The water that is left, is heavily polluted. Eventually, the plants and the insects become resistant to the chemicals used, leading to higher doses of chemicals, or even more poisonous chemicals to be used. Cotton farmers are dependent on their cotton harvests and use their fields for growing the same fibre year after year, leaving the field barren and infertile. The answer for many cotton producers seemed to be genetically modified cotton seeds. These seeds are resistant to pests and insects. However, new seeds need to be purchased annually at very high prices, causing many farmers to get into debt. The long term effects of genetically modified cotton seeds is unknown. The fear is that pollens from the plants will spread uncontrollably, mixing with traditional cotton plants. Organic Cotton Organic cotton farmers work with organic fertilizers and natural crop protection. In order to keep the fields healthy and fertile and to prevent insect plagues, the fields are alternatively planted with cotton and other crops. These methods support biodiversity, improve the quality of the soil and often use less water. The costs of organic cotton are higher than conventional cotton, however in the final price, the use of organic cotton will not have such a great effect. Cotton accounts for approximately 5% of the total price. Organic cotton is approximately 20% more expensive. The final product will only be 1 or 2% more expensive. The yield 22

of organic cotton can be smaller than that of conventional cotton. However, the money that is usually spent on herbicides and pesticides can be greatly reduced, decreasing the effects of the lower yield. For a thorough description of the different processes of organic and conventional cotton farming, please see http://www.cyarn.com/products/spun yarn/why buy2.html. To be able to claim that cotton is organic and for a company to back up the claim of using organic cotton, the yarn needs to be certified. It is in fact obliged by law to certify the cotton up to yarn level. This is not only applicable to organic cotton, but is the case for any organic fibre. Please see appendix IV for an explanation of the certification processes. 2.3.2 Other Sustainable Materials Next to organic cotton, there are many other materials that are a suitable alternative to conventional cotton. There are other natural fibres that cause far less damage to the environment and recycling used materials is also being used more commonly. The following overview offers just a glimpse of all the developments that have taken place and are still taking place today. Bamboo Bamboo is a good alternative to cotton: The yarn is strong and resilient, but the fabric is very soft, has a silky appearance and is very durable. The fibre absorbs moist very well; it can retain up to three times its weight in water (3 4 times more than cotton) keeping the body dry and comfortable. Bamboo is anti static, anti fungal and anti bacterial, even after multiple washings. These qualities help reduce bacteria in clothing, which causes unpleasant odours. In addition, the bamboo fibre has insulating properties, keeping the wearer cool in summer and warm in winter. Bamboo fabric can be dyed in bright colours and can be draped smoothly. It is suitable for use in several different product groups, from knits to woven shirts. A disadvantage of bamboo is that large amounts of bleach are needed to get the fabric white. This is why many companies choose to leave the fabric in its unbleached state. The bamboo plant is the fastest growing plant in the world, due to the fact that it absorbs water so well. The plant reaches its maximum height within three months and spreads very rapidly. It improves the soil quality in degraded and eroded areas. Herbicides or pesticides are not necessary, because the plant produces an antibacterial substance itself. 23

Hemp Hemp is the easiest textile crop to grow organically. The plant easily grows up to 5 meters high and has a thick layer of leaves, blocking the growth of weed. No insecticides or herbicides are needed. Growing hemp requires far less water than is needed for growing cotton, due to the long roots of the plant. Hemp has been used for thousands of years, traditionally as a coarse fibre, making it very suitable for ropes and sails. Developments in the growing and handling of the plant and fibres made it possible to create finer and softer fibres which are ideal for clothing. Clothing made of hemp is strong and durable and has good insulating and absorbent properties. The fibre can last three times longer than cotton fibres and is mostly used for durable, woven fabrics. Hemp can be dyed in virtually any colour, but due to the plant dyes that are often used on hemp products, it has the undeserved reputation of being dull in colour. China is currently the number one producer of hemp and has been growing the crop for over 6000 years. The demand for hemp in clothing textiles has almost disappeared in western markets, but is currently increasing in popularity due to the discussion on the environmental effects of the cotton industry. Soy Soybean yarns are made from the waste of the manufacturing of tofu. Soy can be grown organically or non organically, but is in either way less damaging to the environment than other textile crops. Soybean fibre has excellent properties and is sometimes referred to as vegetable cashmere.[17] Fabrics have a lustrous, silky appearance and drape very well. They have a soft and smooth handfeel and are light weight. Soy absorbs moist as well as cotton and transmits it even better. The fabric can be dyed well and is colourfast. It is an easy care fabric that does not shrink or crease and dries quickly. It also has antibacterial properties. Soy fibre is ideal for products that are worn close to the skin, such as underwear, nightwear and sportswear. When combined with other fabrics, the soy fibre improves the properties. For example, when combined with wool, soy will decrease the shrinkage and make the fabric more easy care. When combined with silk, it will prevent the fabric from sticking to the skin when wet. 24

Recycled Cotton Cotton can be recycled in two ways: either pre consumer or post consumer. Post consumer recycled materials, or reclaimed materials, are cotton textiles that are discarded after use and then cut up and made into, for example, cleaning cloths. Another possibility is reselling or reusing garments. In the clothing manufacturing industry, pre consumer recycling is used. During spinning, weaving and cutting, a lot of fabric is wasted or rejected. Instead of getting rid of these textiles, they are collected, re spun and reused in fabrics. Due to the fact that many different types of cotton are combined together, recycled cotton has an irregular look and colour. This is usually not considered as a flaw, but rather as a differentiating property. Recycled cotton has the same properties as virgin cotton. Recycled Polyester The recycled polyester fibre mostly comes from used PET beverage bottles. The bottles are collected and subsequently flaked, chipped and spun into new yarns. Recycled polyester is not necessarily eco friendly. Polyester is a synthetic fibre made from oil, and the process of creating the polyester fibre is a toxic one that consumes energy and emits CO2. More durable production methods are being developed, but have not been widely implemented yet. Of course, using recycled polyester is a much better alternative than using virgin polyester. The recycling process uses much less energy and emits less CO2 and decreases the demand for oil. Recycled polyester has the same properties as virgin polyester Others The search for new sources of textiles continues and new developments occur on an ongoing basis. An example of possible future are chicken feather and rice straw fabrics. Chicken feathers will have similar properties as wool, and are likely to be blended with wool. The structure makes it very suitable for warm jackets or sweaters. Rice straw is comparable to linen or cotton. 25

Conclusion The ultimate goal of CSR is sustainable development; conducting business without harming people or planet. CSR is not a new phenomenon but has definitely gained in importance over the last years. Our emancipated society also demands the fashion industry to take its responsibility for the effects of their activities. Kuyichi is definitely not the only fashion brand that does this anymore. Kuyichi s objectives with respect to labour conditions are in practice realized and backed up through standards and certification or monitoring systems. There are many different initiatives available to ensure the ethical treatment of the employees of the companies one cooperates with. Some of these initiatives are more demanding then others. Overall, most initiatives cover the same subjects, but the requirements on these subjects may differ. Overall, the six initiatives discussed strive for the greater goal of ensuring fair, safe and humane conditions for labourers worldwide. Although some standards are rated and valued higher, obtaining any one of these is a great accomplishments towards a fair supply chain. The negative effects of the conventional cotton industry are beyond dispute. The organic cotton industry does not damage the environment or the people involved and therefore forms a good alternative. Aside from organic cotton, there are several other, sustainable alternatives that are becoming more common and widely applied. 26

3. Relationship Management There are many sources available that describe the processes and procedures necessary to attain a certain certificate, standard or desired situation. The actual challenge is to get your partners to follow these procedures and to start the processes toward implementing social standards or the use of sustainable materials. In Kuyichi s case, partners not only need to implement the standards, but the content needs to be integrated in the company s philosophy and vision. The following chapter will introduce the theory of Louis W. Stern, Adel I. El Ansary and Anne T. Coughlan, discussing how dependency and power can be used to obtain certain behaviour from another. This theory has been derived from the book Marketing Channels (5 th edition, 1996) 3.1 Marketing channels Kuyichi and its partners make up a marketing channel. According to Stern, El Ansary and Coughlan in their book Marketing Channels (1996), marketing channels can be described as sets of organizations that depend on one another in the task of making products and/or services available for consumption by end users. The figure below visualizes the marketing channel of Kuyichi. Kuyichi Cotton farmers Spinners Fabric suppliers CMT companies Kuyichi Retailers Consumer Figure 3.1: Kuyichi's marketing channel 27

Kuyichi designs the items and develops the collections. The sketches, measurements and trimming instructions are communicated to the selected CMT company. The CMT company develops the actual patterns, orders the required materials and trims and combines these in the production of the goods. The ready made garments are transported to Kuyichi s warehouse, where they are checked and distributed to retailers. At this point the consumer gains access to the goods. 3.2 Relationships within the marketing channel The members within a marketing channel all have individual relationships with each other. Different types of situations and goals, require different types of relationships. Relationships depend on two factors: Relationship nature: with what frequency do parties cooperate? Are these independent situations, or do the parties continuously work together? Relationship purpose: What is the dependence on the relationship? Is it strategically important, or does the relationship concern the exchange of goods and/or service (operational). The following figure indicates the four different types of relationships: Ad Hoc Relationship Nature Ongoing Relationship Purpose Strategic Alliance Partnering Relationship Relationship Transaction Cooperative Operational Relationship Relationship Figure 3.2: Typology of relationship marketing. Adapted from, Jagdish N. Sheth, toward a theory of relationship marketing. Handout at the Relationship Marketing Faculty Consortium, Center for Relationship Marketing, Emory University, 1994. 28

Transaction Relationship: Relationship in which both parties focus on the timely exchange of basic goods against competitive prices. Cooperative Relationship: Long lasting relationship between parties, which exchange basic goods amongst each other. Alliance Relationship: Special, brief relationship, in which strategically important products are exchanged against higher prices. Partnering Relationship: Strong, long lasting and in depth relationship that can only be achieved over time. In general, Kuyichi strives to build partnering relationships with its partners: In order to attain a sustainable supply chain, Kuyichi needs committed partners in the supply chain. [18] The norms of Kuyichi need to be fully integrated in the supplier s company philosophy for it to truly become success. If a company complies with a certain standard solely because it feels obliged to do so, instead of feeling ethically responsible to do so, the company will only do what is necessary to obtain the certificate. If the content of the standard is not part of the company s philosophy, there will be a tendency to stop working in compliance in between audits. Full commitment is needed, which can only be achieved when there is a long lasting, partnering relationship between the parties. Building up a partnering relationship is not an easy or quick solution. Both parties must agree on objectives and procedures and should be open to experimenting with or implementing new working methods. A true partnering relationship has strong economical, social and technical ties. The time and effort invested in a partnering relationship will eventually pay off in terms of higher volumes, turnovers and profits, as well as trust and commitment from both parties involved. 3.3 Dependency To get products to consumers how, when and where they want it, the different parties involved in marketing channels need to work together. They depend on one another to make the final product as good as possible, which will result in higher customer satisfaction, and will eventually lead to higher volumes, turnovers and profits for all parties. 29

A relationship is characterized by its purpose: is the relationship strategically or operationally important? Or in other words: how dependent are both parties on the relationship? Following figure illustrates the possible situations: Seller Buyer Figure 3.3 Different situations of dependency Situation 1: Seller has high dependency, buyer has low dependency Situation 2: Both parties have high dependency Situation 3: Both parties have low dependence Situation 4: Seller has low dependency, buyer has high dependency Which level of dependency is desirable, depends on the goals of the two parties and the type of relationship between them. Equal dependence is usually preferred: both parties depend equally on each other in achieving their goals and objectives. Unequal power is only positive when you are the party that is less dependent than the other. Even if this is the case the situation is not ideal, as the more dependent party may easily feel abused. Several aspects determine the level of dependency that different parties have. Some of these can be influenced, others cannot be influenced directly by one of the independent parties. Branding: Dependence is higher when it concerns a branded product as opposed to a generic product. If your name or brand is attached to a product, the final product and its quality is much more important, leading to a higher dependency on the party providing it. This factor cannot be influenced. 30

Complexity: The complexity of the product determines the effort necessary to develop and produce the final product. The only way to control this, would be through simplifying a product, which is not very realistic in practice. Transaction Specific Investments: What are the costs involved in developing the item? The higher the costs, the more parties will want to continue production and thus the relationship. In fashion, transaction specific investments could entail the costs of developing patterns and producing various samples and other trial items prior to actual bulk production. This aspect may relate to the complexity of the product and is often difficult to control. Alternative exchange possibilities: How easy is it to find another partner? What are the costs involved of switching partners? If finding another partner is easy and inexpensive, dependence is lower. Revenue and Profit: How much will the product sell and how much money will it make? The higher, the more a partner will want to keep you as a paying customer. This aspect is difficult to control. The saturation level of the market is of influence, as well as the design and quality of the product and whether this meets market demand. Role performance: How well are parties behaving? If a partner is pleasant to do business with, the other party will not feel the need to terminate the relationship and might even have the goodwill to stick with you through difficult periods. Role performance can very well be influenced. This aspect has to do with how parties behave in relation to each other, and how and which sources of power are utilized. 3.4 Power within the marketing channel To optimize the outcome of the marketing channel as a whole, relationships and interdependence need to be managed. Channel members do not usually coordinate their activities optimally themselves, because something that is beneficial for one member, is not necessarily beneficial for the other. The way to manage marketing channels and its members is through exerting power. Power can be defined as the ability of making another do something it normally would not have done. Power often evokes negative connotations, but when used correctly it can optimize the outcome of the marketing channel, eventually having a positive effect on all members in the form of higher profits, as well as higher customer satisfaction. There are many different ways of explaining or conceptualizing power. One method is the Five sources of power model. This model was developed by sociologists John R.P. French Jr. and Bertram Raven in 1959 and is now recognized as one of the most important classic models in this field. Following is a brief description of the different sources of power. 31

Reward Power: Source of power that rewards good behaviour. A reward is an advantage that an organization gains for showing good behaviour. These rewards are often financial, but may also have other forms (assurance of repeat orders etc.) An important factor for this source of power is that the party upon which power is exerted, believes that the promised reward will eventually be paid. Coercive Power: Source of power that punishes negative behaviour. This is the exact opposite of reward power. Organizations are punished for not changing behaviour of not obeying to requests of the other party. Coercive power is a source of power that is easily used, but is also least effective when the aim is to build a lasting relationship. On the short term, organizations can be less sympathetic in the cooperation, in the end it can lead to a situation where this party feels less devoted to the relationship. Legitimate Power: Source of power that plays a role when an organization feels obligated to show certain behaviour. As a result of contracts as well as working relations and values, the other party is inclined to confirm to a request of the one exerting power. Referent Power: Source of power that is applicable when an organization is/wants to be able to identify itself with another organization. The targeted organization feels part of the identity of the other, or wants to feel as if it is part of it. Expert power: Source of power that is based on the fact that the one exerting power has special and valuable knowledge that the other party does not have. The image of the source is very important in this source of power. He or she must be trusted and his opinion and interpretations perceived as valuable. This source of power is difficult to preserve, as it can be easily transferred, decreasing the position of power. The following methods can be used to keep this to a minimum: By only providing small portions of information, always leaving enough to keep the other party dependent; By continuously investing in education, the organization will always have new, important information that can be shared with other parties; By only giving specific information, making sure that it cannot be used for other goods or services. Information Power: This source of power is part of expert power and was added in a later stage. The difference between the two is small. An organization with information power is well informed of the current situation and has the ability to convince others. The image of the provider is less important. As the explanations above make clear, each source of power has a different effect on the receiver and on the relationship between the receiver and the one exerting power. This is why it is important for organizations to consider the type of relationship is most suitable and what types of power can best be used to obtain this relationship. 32

After discussing the theory above with a small group of Kuyichi employees, all agreed that reward power was the best source of power. Indeed, suppliers are complimented when goods are delivered on time and in good shape. More indirectly, suppliers are rewarded with the allocation of more styles and hopefully higher order quantities during the following season. In contrast, Coercive Power is another used power source. For example, when suppliers deliver late, goods may need to be shipped by air transport instead of by sea transport. When the delays are too long, the extra costs that are incurred are recovered from the supplier. What the maximum term of delay is, is not determined in advance. If goods are not delivered in good shape or show serious defects, Kuyichi will negotiate a discount or penalty with the supplier in question. In some occasions, Kuyichi also uses Expert Power. An example of this are the Track&Trace trainings that are provided by Kuyichi and MADE BY to several Peruvian suppliers, and the support that Kuyichi, MADE BY and Solidaridad are currently offering the key denim supplier in Tunis. Conclusion It is not easy to make a marketing channel or a specific member to behave in a certain way, or in Kuyichi s case, to make them implement specific standards, use certain materials and to even make them change or extend the company s philosophy so that it includes this Corporate Social Responsibility. It is important to identify what the goal of a certain relationship is. Is it a party you plan to work with only once or sporadically, or do you want to build a long lasting relationship? Do you want the partner to eventually comply with your company s vision and objectives? The actions that need to be taken, the behaviour and attitude that needs to be shown, or which source of power should be used in a certain relationship, is affected by the interdependency between the parties involved. When the products provided by a partner are not very important to a company and there are alternative exchange possibilities, dependency is low and there is no reason to build a long lasting, partnering relationship. If the relationship is based on a one time cooperation, it is not necessary to use great forces of reward power or expert power and exerting coercive power is not likely to cause (long term) problems. Regardless of the nature or goal of the relationship, power should always be exerted with care. Currently, Kuyichi is not using its power sources very consciously, or optimally. There are no set directions for when which type of power is used. Suppliers, for example do not know when to expect coercive power to be used in some way. Kuyichi also has a very strong source of expert power, which is not used to its fullest extent. 33

4. China Kuyichi has not yet been able to reach its goals in China. But what are the actual problems that Kuyichi is specifically facing in this country? And how can the previously described theory be applied to this situation? The first paragraphs will describe the general situation in China and those subjects that are affecting Kuyichi. The second section of this chapter will introduce the parties that Kuyichi is currently working with. The relationship and dependency is analyzed and the theory will be applied to the specific situations. The final part of this chapter will introduce possibly suitable parties that Kuyichi could work with in the future. 4.1 General Protests and violations of human rights in Tibet, the highest number of executions in the world and people being evicted to make place for the 2008 Olympics in Beijing. It is not strange that the public opinion of the situation in China is negative. The following paragraph will provide some general information of the situation in China and the factors influencing Kuyichi and its suppliers. Politics There are two political entities using the name China: The first is the People s Republic of China (PRC), commonly known as China, comprising of mainland China, Hong Kong and Macao. The second is the Republic of China (ROC), commonly know as Taiwan, controlling Taiwan and several nearby islands. This chapter is based on the People s Republic of China, which will be referred to as China. The People s Republic of China was founded in 1949 by the Communist Party of China (CPC), which is still in control of the state and provincial and local governments. In the early 1990s, Chinese government began its reforms to turn China into a socialist market economy. This has resulted in an increase of economic institutes that are not managed or influenced by the communist party. All capital activities are still strictly regulated by the government. Economy Since the economic reforms of 1978, the Chinese economy has grown explosively. In an attempt to awaken a dormant economic giant [19], Chinese government encouraged the foundation of rural enterprises and private businesses, liberalized foreign trade and investments, relaxed control of some prices and invested in industrial production and workers education. These measures were successful and the annual economic growth went up from 6% before 1978, to more than 9% after 1978. Some years even had peak growths of 13%. 34

Chinese government has in recent years taken measures to prevent the economy from overcharging itself, but these have not been very effective, as growth numbers are still very high. Wages China s income per capita has increased with 8% over the last decades. As this occurred, the differences in wages between sectors, types of ownerships and regions increased as well. Wages were highest in shareholding, foreign owned or state owned companies and lowest in locally funded companies. The gap between rural and urban wages increased, from urban wages being 2,57 times higher in 1978 to 3,27 in 2006. This gap has caused a wave of migrant workers leaving the rural areas in search of a better life in the urban areas. Chinese Labour Law established the first minimum wage system in 1994. It states that the minimum wage is designed to ensure that the lowest wage earned by a worker is still sufficient to support their daily needs. [20] The law also specifies that the standard workweek is 40 hours and that overtime may not exceed 3 hours per day or 26 hours per month. Overtime should be paid at a premium rate of at least 150% of the normal wage, 200% on Sundays, and 300% on national holidays. Wages should be paid on a monthly basis and handed over to the employee personally. Deduction or delay in wages is not allowed. Wages should be paid as normally during national holidays, marriage and funeral leave. In spite of these rules and regulations, many employers often pay late. Overtime occurs on a regular basis and is often not paid at a premium rate or sometimes not paid at all. Some factories do not pay the first month s salary as some sort of insurance that the worker will not quit. When they officially quit their jobs, this salary will be paid. As official termination hardly occurs, this salary is often not paid at all. Disobedience is often punished with harsh and unreasonable fines which are deducted from the salary. Child Labour In 1998, China ratified ILO convention 138, which concerns the minimum age of workers. Chinese government then stated that the minimum age of employment is 16. Workers between 16 and 18 years of age (juvenile workers) are protected by several different laws. In August 2002, China also ratified ILO convention 182 on the worst forms of child labour. Even though China has ratified these convention and has drawn up laws prohibiting it, an increasing number of children are currently working long hours. Because of the insufficient investments in education (2.7% of BNP, instead of the minimum of 5% which the United Nations advise), Chinese parents have to incur high costs for their children s schooling. Most parents do not have this money and pull their children out of school. Although official publications state that 2,5% of children leave school, this percentage is actually much larger and in some poor regions even reaches 40%. There are no official figures on the number of children working, but estimates say that of the 10 million children that have dropped out of school, half is working in factories. 35

Trade Unions The All China Federation of Trade Unions (ACFTU) is the single national trade union of China. It is the largest trade union in the world with almost 170 million members, divided over 1,324 million trade union organization. The unions work in accordance with the Trade Union Law and Constitution of Trade Unions. The major tasks of the trade unions is to organize workers and fight for labour rights. [21] The ACFTU encourages the trade unions to protect its member on their own initiative and act as a voice for the workers. The ACFTU is under the control of the Chinese government and can therefore hardly be described as independent. Attempts of starting up independent, national trade unions are oppressed and initiators are often arrested. Many organizations therefore criticise China for its trade union policy. Environment One of the negative consequences of China s rapid growth is the increased pollution and degradation of natural resources. Solid waste is not properly disposed, water pollution causes illnesses across the country and air pollution causes premature deaths. China is ranked 133 out of 146 countries by Yale University and Columbia University s environmental sustainability index of 2005. Corporate Social Responsibility Chinese government is actively encouraging CSR and many different governmental bodies, research institutions and organizations are publishing CSR research reports, case studies and guidelines. This theoretical knowledge is not used in practice very much. Many companies are still learning and it seems as if too many independent organizations are promoting the issue without any coordination. The interest in international standards and certification systems is increasing and seminars or other types of meetings are organized around the country. There are indications that Chinese government and some other organizations are planning to establish China s own set of standards and certification processes. According to Mike Lam, Kuyichi s account manager at production company Prime Asia, CSR is becoming more important, especially amongst the new generation managers, but that available standards and certifications are still relatively unknown amongst them. Cotton in China 24% of the world s cotton comes from China, making it one of the most important cotton producing countries. Cotton is the most important crop of the country, benefitting a large rural population. There are three main areas in China housing the cotton fields. These are the Xinjiang Autonomous Region, the Yangtze River Basin region (including Jiangsu and Hubei) and the Huang Huai region (Including Hebei, Henan and Shandong). The region of Xinjiang is the region most suitable for the production of organic cotton. The continental climate, light, soil and environment make the region very suitable for cotton production. 19% of the organic cotton produced globally, comes from China. 36

4.2 Current suppliers Kuyichi is currently working with two independent factories and one agent responsible for several factories. The following paragraphs will discuss these parties and their relationships with Kuyichi in more detail. First of all, Kuyichi s performance in China is discussed. The second paragraph will introduce a selection of current Chinese suppliers that Kuyichi wants to continue working with in the future. Their current performance with respect to working conditions and the use of sustainable materials, and the working relations with Kuyichi will be discussed. The relationship will be analyzed and the theory of chapter 3 will be applied. 4.2.1 Current performance During the year 2007, 19,6% of Kuyichi s products were produced in China. As indicated previously, 39,3% of the total production were products from the denim collection. Of the non denim collection (60,9% of the total collection), 32,2% originated in China. 1,19% of the products from China were made from organic cotton. It should be noted that the production in China uses many different materials. The organic cotton percentage is in relation to the complete collection. 4.2.2 CMT companies Following are four of the suppliers that Kuyichi is currently working with, and aims to continue working with in the future. The suppliers were asked to fill out a question list, which required general information of the company and the cooperation, as well as the company s opinion towards the use of sustainable materials, the importance of (fair) labour conditions and the implementation of social standards. Please see appendix V for the original question list and appendix VI for the outcomes of the question lists. The information from the question lists was combined with the experiences of Kuyichi employees on the cooperation and working conditions. With this information, an analysis is made of the current relationships and the interdependence. An advise is given on how the imbalances in dependency can be managed and/or restored. Please note: the collections at Kuyichi are developed ahead of the seasons. For example, the collections for 2008 are developed in 2007. If a company has cooperated with Kuyichi since 2007, this means that the first developed and produced collections are those of 2008. 37

South Pacific Fashion Ltd of Dongguan General Information Location: Dongguan City, China Product: Knitwear Partner since: 2007 % of business provided by Kuyichi 0,001% Number of employees: 800 Kuyichi and South Pacific have been working together since 2007 and the young relationship has so far been very positive. South Pacific is a large company, and although the volumes ordered are large for Kuyichi s standards, the brand only provides 0,001% of South Pacific s business. This does not cause South Pacific to treat Kuyichi, its staff or its orders as inferior: goods are usually delivered on time and in good shape. Communication between both parties is good. South Pacific is WRAP certified (valid until September 2008), and uses organic cotton in its products. All this combined, makes South Pacific a very suitable company to continue to cooperate with. Dependency Seller Buyer Figure 4.1: Interdependence South Pacific Kuyichi The figure above visualises Kuyichi s (buyer) dependency of South Pacific (seller). Kuyichi is highly dependent of South Pacific, whereas South Pacific hardly depends on Kuyichi. This is influenced by the following factors: Branding: Products supplied by South Pacific usually have subtle Kuyichi branding, but can clearly be recognized as being Kuyichi products. This increases Kuyichi s dependency. Complexity: The complexity of the products vary. Most styles have simple shapes and constructions, some are more complex due to the use of knitting patterns. This sometimes requires more extensive communication between the parties, increasing both parties dependency. 38

Transaction Specific Investments: The costs incurred by South Pacific for the development of the products are not very high. This lowers dependency from South Pacific s side: loosing Kuyichi s orders will not mean a great financial loss in the form of previously incurred costs. Alternative Exchange Possibilities: Kuyichi does have alternative parties it could turn to for the production of knitted goods. However, the quality of the products supplied by South Pacific, the fact that the company Pacific is WRAP certified and that it uses organic cotton, make it difficult to find a comparable partner. This increases Kuyichi s dependency of South Pacific. Revenue and Profit: For Kuyichi, South Pacific s products will generate considerable revenues. The other way around, this is not the case. This, again, increases Kuyichi s dependency of South Pacific. Kuyichi should make sure that each season, several commercial styles are allocated at South Pacific. Role Performance: Both parties fulfil their roles in the cooperation. Even though Kuyichi is not a large or important client, South Pacific always behaves correctly and does whatever is necessary to supply a good product. Because of the low dependence from South Pacific s side, it is important that Kuyichi continues to perform and behave correctly as well; South Pacific can easily drop Kuyichi because of its low dependency. South Pacific is a strategically important partner for Kuyichi. This makes it even more important for Kuyichi to manage the interdependence by exerting power. Because of Kuyichi s high dependence, this should be done with great care. It should also be taken into account that Chinese culture is different from Dutch culture. For example, the Dutch are usually very direct, whereas the Chinese communicate in a much more subtle way. Please see appendix VII for more information about the cultural differences between The Netherlands and China. Prime Asia General Information Location: Office in Hong Kong Factory in China Trims/accessories Product: Partner since: 2007 % of business provided by Kuyichi 3% Number of employees: Hong Kong 6 China 85 Prime Asia provides Kuyichi with a large part of its branded labelling and trims. In previous seasons, Prime Asia has also provided accessories like bags, wallets and hats. Due to the relatively high prices caused by the labour intensity of the products and the limited washing possibilities, the accessories of the Spring/Summer 2009 collection that is currently being developed, will not be produced by Prime Asia. 39

The cooperation between Prime Asia and Kuyichi is very pleasant. Account manager Mike Lam is considered to be a rather progressive Chinese, with a modern, western like view of products and Corporate Responsibility. Prime Asia currently does not use organic cotton, is open to do so in the future, but expects difficulties because of the high lead times and necessary certifications. Prime Asia does not have any social certifications, but has signed agreements with several of their US customers concerning labour conditions. These organizations organise unannounced, third party inspections. Cooperation is terminated if the conditions are not as agreed. Prime Asia has indicated that it is interested in fair labour and environmentally friendly production, as many companies under young generation management, but that the standards and supportive systems are still relatively new and unknown to them. Dependency Seller Buyer Figure 4.2: Interdependence Prime Asia Kuyichi Kuyichi s and Prime Asia s interdependence is relatively equal. This is caused by the following factors: Branding: the products provided by Prime Asia are branded, but usually only used as a small detail in other products. In the worst case, a generic product could be used, causing the final product to have a less rich feel. Complexity: Most of the products produced by Prime Asia are not very complex. Transaction Specific Investments: The specific investments needed, differ per product. Printed labelling does not require high investments, metal accessories on the other hand, usually ask for the development of a mould, increasing the investment costs. Alternative Exchange Possibilities: Next to Prime Asia, Kuyichi works with another trim supplier that it could turn to if the cooperation between Kuyichi and Prime Asia would fail. Alternative exchange possibilities are high, lowering Kuyichi s dependency. Revenue and Profit: The revenues that Kuyichi generates for Prime Asia are relatively small in relation to the total revenues. On the other hand, most of Prime Asia s products do not directly generate revenue for Kuyichi either. 40

Role performance: Both parties carry out the tasks when and how they should, resulting in a very pleasant cooperation. The relationship between Kuyichi and Prime Asia is currently a cooperative relationship, where basic goods are exchanged on an ongoing basis. However, Prime Asia has the potential of becoming a strategically important partner if the factory could replace the unofficial agreements for one of the recognised standards. Kentex Trading Kuyichi cooperates with several Chinese producers through agent Kentex Trading. The agency is located in Hong Kong and has from there been functioning as a middleman for Kuyichi since 2002. Through the years, cooperation with some of the companies has ended, others have been introduced and some have been producing Kuyichi s collections for several years now. The cooperation between Kuyichi and Kentex is positive, although language sometimes forms a barrier. Kentex management is not a great supporter of the use of organic cotton and believes that it is more of a trend, instead of an inevitable source of material for the future. However, when Kuyichi asks for organic materials or other types of sustainable materials, Kentex will try and find possibilities. IZ Direct Enterprise General Information Location: Office in Hong Kong Factory in China Woven tops and bottoms Product: Partner since: 2006 % of business provided by Kuyichi 5% Number of employees: Hong Kong 35 China 280 Kuyichi has been cooperating with IZ Direct since 2006. Kuyichi currently provides 5% of IZ Direct s business; the other way around, IZ Direct provides 2,9% of the total collection, or 4,8% of the non denim collection. For the year 2008, this percentage is expected to increase. Communication with IZ Direct occurs indirectly through Kentex. During development trips of Kuyichi, IZ Direct will usually come to the Kentex office to work with the Kuyichi team. During these trips, cooperation is pleasant. IZ Direct does not focus on labour conditions in the factory. Organic cotton is hardly used, but can be supplied upon customer demand. 41

Dependency Seller Buyer Figure 4.3: Interdependence IZ Direct Kuyichi Even though Kuyichi provides a relatively high percentage of the company s business, Kuyichi is still more dependent of IZ Direct than the other way around. Branding: The products provided by IZ Direct are all branded garments, which are therefore clearly recognisable as Kuyichi products. This increases Kuyichi s dependence. Complexity: The garments produced by IZ Direct are moderately complex. The company mainly produces Kuyichi s shirt collections, which require more complex patterns than, for instance, a T shirt. Transaction Specific investments: Investments are relatively low, as the patterns that need to be developed are often basic patterns, on which all pieces in one season s collection are based. Alternative Exchange Possibilities: IZ Direct is currently the only supplier of woven shirts in China that Kuyichi is working with. Alternative exchange possibilities within China are therefore low. Revenue and Profit: Both for Kuyichi and IZ Direct, revenues generated through this relationship are reasonable. Role Performance: As IZ Direct and Kuyichi work together through Kentex, role performance is less influential than it would be in case of direct cooperation. Kuyichi and IZ Direct currently work together in a more or less cooperative relationship. The goods that are being exchanged are not of strategic importance since no organic cotton is used and labour conditions are not monitored or addressed in the factory producing the goods. IZ Direct has indicated to be open to the use of organic cotton, which would give the relationship the potential of developing into a strategically more important partnering relationship. 42

Fairtol Industrial Limited General Information Location: Southern China Product: Jackets, coats and vests Partner since: 2002 % of business provided by Kuyichi Unknown Number of employees: 122 Kuyichi and Fairtol have been working together since 2002. It is unclear exactly what percentage of Fairtol s business is provided by Kuyichi, but this percentage is low. Only 0,8% of Kuyichi s total collection or 1,2% of the non denim collection is provided by Fairtol. However the relationship is worth to continue investing in, as the factory complies to the BSCI code of conduct. Kuyichi was not aware of this compliance. Next to this, the relationship has lasted many years already; Fairtol believes in Kuyichi and is still very hopeful that the order quantities will rise in the future. Fairtol is currently not using organic cotton, but is open to do so in the future. For the 2009 Spring/Summer collection, Fairtol will supply recycled polyester garments. Dependency Seller Buyer Figure 4.4: Interdependence Fairtol Kuyichi The following factors are also of influence the interdependence between Fairtol and Kuyichi. Branding: All products are branded, increasing Kuyichi s dependency of Fairtol. Complexity: The garments are relatively complex, as jackets often require quite complex and detailed patterns and measurements to ensure a good fit. 43

Transaction Specific Investments: The transaction specific investments are higher, due to the fact that the products are more complex. This also results in the factory being willing to take on smaller bulk order; if the order is not produced, the money invested in the development will be wasted. Alternative Exchange Possibilities: Kuyichi could turn to other producers for jackets, but the fact that Fairtol complies to the BSCI standard, makes the relationship of strategic importance for Kuyichi. This causes the alternative exchange possibilities to decrease. Revenue and Profit: Kuyichi s orders do not provide Fairtol with large profits. The other way around, Fairtol s products do not generate large revenues for Kuyichi either, lowering interdependency. Role Performance: Kuyichi cooperates with Fairtol through Kentex Trading. Fairtol meets Kuyichi at the agency during development trips. Both Kuyichi and Fairtol take their responsibilities for realizing a high quality product. The fact that Fairtol has stuck around all these years indicates that Kuyichi has shown good role performance. Fairtol has turned out to be of strategic value for Kuyichi. The fact that the company is BSCI compliant, is open for the supply and use of organic cotton and that they are currently using alternative sustainable materials make it a very suitable match for Kuyichi to build a closer relationship with. 4.2.3 Fabric Suppliers Only one of Kuyichi s relations in China currently uses organic cotton in Kuyichi s products. This organic cotton is provided by Esquel Enterprises Limited, located in Fuzhan in the Guangdong region. Esquel Group produces high quality cotton shirts and has production facilities in China, Vietnam, Malaysia, Sri Lanka and Mauritius. The company is vertically integrated and the entire product is produced in house, from the raw cotton yarn, to trims, packaging and design. CSR is an integral part of company management and the organization has initiated many different projects aimed at improving human and environmental conditions. Esquel own several organic cotton farms in the Xinjang province. The raw organic cotton yarn is certified and can be purchased by external parties. IZ Direct also uses very small amounts of organic cotton. Which company supplies this organic cotton is unknown, but IZ Direct indicates that certificates can be provided upon request. Fairtol does not yet use organic cotton in its products. The company is however, open to the using organic cotton and the supply of organic cotton. Kuyichi is currently developing garments made of recycled polyester for the Spring/Summer 2009 collection at Fairtol. 44

4.3 Potential suppliers In order to find potentially suitable partner for Kuyichi to cooperate with, question lists were also send out to several other companies. Unfortunately, response was very low. The following paragraphs will in turn introduce possible new CMT companies and fabric suppliers that can be interesting for Kuyichi to work with. The final paragraph will discuss how Kuyichi should behave in the early stages of these possible new relationships. 4.3.1 Potential CMT companies Yee Tung Garment Yee Tung Garment was founded in 1985 in Hong Kong and has since developed into an internationally operating manufacturer of knitted garments. Yee Tung has factories in Jordan, Saipan, Vietnam, Philippines, Hong Kong, China and Cambodia. Yee Tung is a member of the Fair Labour Association and most of the production facilities are WRAP certified, or in the process of certification. The company is committed to providing good working conditions for all employees. The company introduced organic cotton to its collections earlier this year, upon the request of a company and an environmental NGO from China. The organic cotton is certified against European standards. Yee Tung has expressed to be interested in collaborating with Kuyichi in developing fair labour and organic T shirts. When Kuyichi s average order volumes were mentioned, this did not scare off the company. Esquel Group Esquel Group provides production company South Pacific with organic cotton. However, this vertically integrated company also produces cotton shirts for well known brands such as Tommy Hilfiger, Abercrombie & Fitch and Nike. Esquel was established in 1978 and has since developed into a 47.000 employee organization with production facilities in China, Malaysia, Vietnam, Mauritius and Sri Lanka. The facilities in China are situated in Guangdong, Xinjiang, Changzhou, Ningbo and Hong Kong. Next to working with organic cotton, the organization is very active in providing fair working conditions and even in organizing, sponsoring and supporting initiatives in the communities in which it is active. 4.3.2 Potential Fabric Suppliers Most of Kuyichi s Chinese suppliers are either using organic cotton at this moment, or are open to do so in the future and have found parties that can supply them with the yarn. The same is applicable for other sustainable cotton yarns such as bamboo and recycled polyester. Following are some alternative parties that could be approached for the supply or sustainable yarns or fabrics. 45

Shanghai Fashionorganic Co. Ltd. This company provides various different types of sustainable textiles. Their product range consist of ready made fabrics of organic cotton, bamboo, hemp and soybean. The organization offers a lot of information on the reasons for using sustainable materials and seems committed to decrease the negative effects of the textile industry on the environment. Solidaridad s cotton project As mentioned earlier in this report, Solidaridad and MADE By have set up two cotton projects from where the first harvests are expected at the end of this year. One of these projects will produce organic cotton immediately, the other will first focus on the human aspect of the cotton industry. Cooperating with these projects is very interesting, both for Kuyichi to increase the use of organic cotton and to support this initiative to become a success. Conclusion The first paragraphs of this chapter have show that the rules and regulations influencing labour in China are quite sufficient. The major problem is monitoring and controlling whether these are followed and complied with. Another major problem is the closed attitude of Chinese government, making it very difficult to find out what the actual situation is within the factory and Chinese society as a whole. From the question lists filled out by the Chinese suppliers, it became clear that not all CMT companies that Kuyichi works with are using organic cotton, but all are open to do so in the future. Many also use other sustainable materials such as bamboo and recycled polyester. Concerning labour conditions, two factories have implemented standards. One company shows that it is already working on providing fair labour conditions for all employees and shows potential for certified social compliance. In general, Kuyichi is relatively dependent of its Chinese suppliers. Unfortunately, this is not the case the other way around, leading to an imbalance in dependency. This is mainly caused by the fact that Kuyichi s order quantities are relatively low. As the question lists indicate, even sales figures that are considered high by Kuyichi s standards, are tiny for Chinese standards. Kuyichi is not considered to be an important client, and is often placed last in line. This makes it impossible for Kuyichi to demand factories to attain certifications whatsoever. Kuyichi needs to be more careful and creative in how this interdependence is managed and how power is exerted. Of course there are companies in China that can provide fair labour and organic garments. However, these are mostly very large companies, working for large, internationally operating brands. For these companies, Kuyichi will be a very small client, resulting in yet another relationship with imbalanced interdependency. The advantage is that the company has already implemented your standards and objectives, so it is not necessary anymore to influence the other party with power. 46

5. Conclusion Kuyichi s mission is to provide style conscious denim and fashion. The brand aims to create garments that do not only look good, but that have also been produced with respect to the people and the environment involved in the process. Kuyichi has integrated Corporate Social Responsibility into its vision, mission and identity and turned it into a Unique Selling Point. Support in the process of cleaning up the supply chain, comes from partner organizations MADE BY and Solidaridad. Both organizations actively support and guide different brands towards a more sustainable supply chain. In spite of the support received from these two parties, Kuyichi has not been able to reach all of its objectives during its production activities in China. Kuyichi s objectives with respect to labour conditions are in practice realized and backed up through certification or monitoring systems. There are various standards available to ensure the ethical treatment of employees, all of which aim at providing a fair, safe and respectful working environment for employees. The standards mostly cover similar subjects, but differ on the requirements set on these subjects. To decrease or eliminate the environmental damage caused by the conventional cotton industry, Kuyichi strives at using only organic cotton in its cotton collections. The development of other sustainable materials continuous and new developments are tested and introduced into the collections every season. The challenge is not to implement standards or follow procedures towards social and environmental compliance, but to get another to implement the standard or follow the procedures. According to Stern, El Ansary and Coughlan, this can be achieved by managing your partners and the interdependency between yourselves, through exerting power. The source of power that should be used, depends on the type of relationship that is desired and by the interdependency between the parties. In general, Kuyichi is highly dependent of its Chinese suppliers. The other way around this is not the case, Resulting in an imbalance in interdependency. The most important reason for this unequal dependency between Kuyichi and its Chinese suppliers are the low quantities that Kuyichi orders. As Kuyichi is unable to fall back on sales, revenues and profits, the different sources of power that Kuyichi has access to will have to be used in a more creative way. Reward power is a very useful source that has proven to be effective with Kuyichi s Chinese suppliers. These rewards do not need to be financial, but can be as simple as complimenting a supplier on the condition of the goods and the timely delivery. Coercive power should be avoided because of the low dependence on the supplier s side. If they feel mistreated, the relationship may quickly deteriorate or be terminated because of the fact that you are so unimportant. Expert power can also be a very strong tool in Kuyichi s case. With the help of MADE BY and Solidaridad, useful information, trainings or education can be offered to the supplier, influencing them into showing desired behaviour. 47

6. Recommendations Following are the recommendations that have resulted from this research report. First, some general recommendations are given on how Kuyichi can improve its performance in the activities in China. The second section will give more detailed, concrete recommendations. 6.1 General recommendations The first recommendation that has resulted from the conducted research, is that Kuyichi should use its sources of power more consciously and carefully. Power can come from other sources than volumes and revenues and Kuyichi has quite some sources of power that are currently not optimally used. By being aware of these sources and planning in advance how and when to utilize them, Kuyichi s role in a relationship with a supplier can be strengthened. Another recommendation, that is more specifically applicable to Kuyichi s activities in China, is to be aware of the cultural differences between Dutch and Chinese culture. As appendix VII shows, the differences are significant and this requires a more careful approach. The last general recommendation is to invest in the relationships with suppliers, ensuring that all are aware of the goals and objectives that are being strived for, both by Kuyichi and the supplier. 6.2 Specific recommendations South Pacific The cooperation with South Pacific is of strategic importance for Kuyichi: South Pacific is working in accordance with Kuyichi s standards and provides high quality products. Exerting power is in this case not necessary to influence South Pacific into complying to Kuyichi s objectives, but instead to manage and control the great difference in dependency on the relationship. Because of this large difference, investing in the relationship remains to be important. 48

Reward Power: Reward power can be used in any relationship, also in the relationship between Kuyichi and South Pacific. This rewarding does not necessarily comprise money, simply complementing the factory on the quality or timely delivery of goods is very effective in cooperating with Chinese culture. Coercive Power: Coercive power should be avoided as much as possible. Because of the low importance of Kuyichi, South Pacific may easily decide to terminate the collaboration when it feels mistreated. Of course, there are situations in which coercive power can and should be used and by setting up rules about this in advance, a hostile reaction from the supplier can be prevented. Legitimate Power: The more Kuyichi does for South Pacific (e.g. provide trainings or introduction to MADE BY network), the more South Pacific will feel morally obliged to confirm to Kuyichi s demands. This will decrease the large difference in dependency. Referent Power: Referent power is not yet a strong tool for Kuyichi on its own, but when combined with MADE BY, it can be much more influential. As a certified supplier, South Pacific could be introduced to the MADE BY network, offering a large group of potential customers. Expert Power: Kuyichi can use its expertise in the field of fair labour and sustainable materials to educate and inform South Pacific of the possibilities and developments in the field. As it is part of Kuyichi s objectives, the attempt should be made to stimulate South Pacific to implement higher classified labour standards. Prime Asia The cooperative relationship between Kuyichi and Prime Asia has the potential of evolving into a strategically important partnering relationship, if Prime Asia can be influenced to implement one of the recognised labour standards. Unfortunately, if Prime Asia were to be certified, this would not be included in MADE BY s annual scorecards for Kuyichi, because the products are not the final product that is being sold. On the other hand, as it is Kuyichi s goal to clean up the entire supply chain, this should not stop Kuyichi from supporting Prime Asia in this aspect. The following interpretation of the sources of power is aimed at developing a strategic partnering relationship. Reward Power: Next to complimenting positive behaviour, Prime Asia should be rewarded if they put effort into improving labour conditions, by allocation more products, preferably in other product groups. This will be positive for both parties: bags, caps and other accessories are taken into account during the annual scorecard calculations by MADE BY. Coercive Power: The use of coercive power should be kept at a minimum and situations in which it will be used should be established in advance. Legitimate Power: As Kuyichi invests time, effort and money in Prime Asia, Prime Asia in return, will feel obliged to demonstrate positive behaviour. Referent Power: After the implementation of the standards, Prime Asia can be introduced to the MADE BY network, which allows Prime Asia to get in contact with a large, growing group of potential customers. 49

Expert Power: In this case, expert power is the strongest source of power. MADE BY, Solidaridad and Kuyichi should cooperate in informing and educating the company management about the content, procedures and advantages of implementation of a social standard, as Prime Asia has indicated that it needs guidance. When Prime Asia decides to go ahead with the implementation, the company should be assisted by Kuyichi, MADE BY or Solidaridad throughout this process. IZ Direct Developing the cooperative relationship between Kuyichi and IZ Direct into a partnering relationships seems to require the most time and investments. It is therefore recommended to first focus on the first step: convincing IZ Direct to increase the use of certified organic cotton, or at least for Kuyichi s collections. If the products produced by IZ Direct would be made of organic cotton, the percentage of organic cotton in the total collection would increase with at least 3%. Reward Power: If IZ Direct is able to implement organic cotton in Kuyichi s collection, this should be rewarded by complimenting them, but also by allocating more products at the company. Coercive Power: The use of coercive power should be kept at a minimum and situations in which it will be used should be established in advance. Legitimate Power: By showing effort in improving the relationship and in educating IZ Direct, the sense of moral obligation from IZ Direct s side will increase. Referent Power: IZ Direct could be introduced to the MADE BY network. It should however be noted, that many brands or companies will not be interested in cooperating with IZ Direct until it is also socially compliant. Expert Power: By informing IZ Direct of the advantages of organic cotton and convincing company management of the future importance and role of organic cotton, IZ Direct may slowly come to realize the importance and competitive advantage of using organic cotton. Fairtol The fact that Fairtol is BSCI compliant came as a great surprise. It has made it even more interesting to invest in this relationship. The cooperation between Kuyichi and Fairtol is the longest lasting relationship of all; the fact that Fairtol has stuck around for the last six years, even though the quantities ordered are small, shows trust and faith in the concept of Kuyichi. This is a good starting point to breathe new life into this relationship. Reward Power: The fact that Fairtol is BSCI compliant should be rewarded by increasing amount of styles allocated at the company. Coercive Power: The use of coercive power should be kept at a minimum and situations in which it will be used should be established in advance. 50

Legitimate Power: Currently, Kuyichi does not have legitimate power to rely on. This can be improved in the future, when more styles are allocated at the company and, hopefully, volumes increase. Kuyichi should also aim to allocate commercial styles, that are expected to generate higher sales, at Fairtol. Referent Power: Now that it has become clear that Fairtol is BSCI compliant, the company can be introduced to the MADE BY network, exposing the company to a large audience of potential customers. Expert Power: Kuyichi should use its knowledge of the organic cotton industry to inform and educate Fairtol of the possibilities of organic cotton and how this should be integrated into the normal collection. Potential Suppliers The easiest solution to Kuyichi s problems in China would seem to be to start working with companies that have already integrated Kuyichi s standards into its management systems and company philosophies. However, the organizations that were come across during this research were very large companies. Cooperating with these companies, is likely to result in an unequal relationships. As the cooperation with South Pacific has proven, this is does not necessarily have to be a bad thing, as long as this is recognised and taken into consideration in cooperation, communication and exerting power. The initial contact with Yee Tung Garment seemed promising. Kuyichi s standards are implemented in the companies management system and daily operations, it is interested in working with organic cotton and in cooperating with Kuyichi. The company was not scared off when the order volumes were mentioned. It is recommended for Kuyichi to explore the possibilities of cooperating with Yee Tung Garment. The MADE BY database will, once aired, also provided a useful source for potential partners. Materials This report has shown that there are many sustainable alternatives to conventional cotton. This is also the case in China. Most suppliers have indicated that they are willing to work with sustainable materials, have suppliers for these materials and sometimes have sustainable fabrics on stock. Those companies that have not found suitable suppliers in their area, can be put in contact with suppliers such as Fashion Organic and the cotton program from Solidaridad. Also for this purpose, the MADE BY database can be useful. MADE BY and Solidaridad The cooperation between Kuyichi, MADE BY and Solidaridad is positive and promises improvements in Kuyichi s accomplishments for the future. This cooperation can be intensified and optimized even further. MADE BY and Solidaridad can actually form an important source of expert power for Kuyichi. The knowledge and expertise of both organizations can be used to a greater extent to inform, educate and train Kuyichi s suppliers. Kuyichi should pay close attention to the MADE BY database and the Expertise Centre China and utilize the opportunities that present itself. For example, Kuyichi could try to stimulate its suppliers to use organic cotton from Solidaridad s cotton project, or try to benefit from or take part in initiatives set up by other brands. 51

Instead of for finding suitable suppliers or CMT companies, the MADE BY network and database can also be used to find other brands that share Kuyichi s philosophy and sense of style and are suitable to cooperate with. Working together with other brands in approaching a supplier or production company, will create more leverage, solving the problem of low volumes. By joining forces, there will be a stronger case in getting others to show desirable behaviour. Taking this one step further, would be to work together with other MADE BY brands in finding, working with and developing a small, underprivileged sewing company into a successful, socially and environmentally compliant production company. An initiative like this has different advantages for all parties involved. First of all, the production company will be given an opportunity to become a successful player in the textile industry. The social circumstances in the factory will be improved and the damage on the environment is decreased by the stimulation of the use of sustainable materials. The brands will come closer to reaching their goals and their MADE BY scores eventually increases. This factory could be used as an example to show the fashion industry and the consumer how (fashion) businesses can and should be run and that this is also possible in China. This initiative has the potential of generating a lot of publicity, improving Kuyichi s name and reputation in the market. A difficulty in setting up an initiative like this is to find a group of brands that produce the same type of product and style. For example, Kuyichi wants to produce goods with a denim feel, other brands aim to produce a cleaner style. Some product groups will be more suitable for accomplishing consensus than others. The possibilities offered by finding a group of united brands makes this worthy of being explored. 52

7. Endnotes [1] http://www.kuyichi.com/kuyichi/?page_id=448 [2] http://www.kuyichi.com/kuyichi/?page_id=448 [3] Social Accountability 8000, general information for Kuyichi employees, by Piet den Toom, March 2008 [4] http://www.kuyichi.com/kuyichi/?page_id=448, March 2008 [5] http://www.kuyichi.com/kuyichi/?page_id=448, March 2008 [6] http://www.kuyichi.com/kuyichi/?page_id=450, May 2008 [7] http://www.made-by.nl/downloads/madebykort.pdf, March 2008 [8] http://www.made-by.nl/download/madeby_principles.pdf, March 2008 [9] Interview with Karin Reimerink, supply chain manager at MADE-BY, May 2008 [10] Jaarverslag Solidaridad 2007, March 2008 Available at: http://www.solidaridad.nl/pdf/2008/jaarverslagnl2007.pdf [11] Making Good Business Sense, by the World Business Council for Sustainable Development, January 2000. Available at: http://www.wbcsd.ch/docroot/iunspdikvmyh5hjbn4xc/csr2000.pdf [12] From: http://pcsd.neda.gov.ph/susdev.htm, April 2008 [13] Annual Report Organic Exchange 2007 Available at http://www.organicexchange.org/documents/annual07.pdf, April 2008 [14] http://www.sa-intl.org/index.cfm?fuseaction=page.viewpage&pageid=473, March 2008 [15] http://www.sa-intl.org/index.cfm?fuseaction=page.viewpage&pageid=472, March 2008 [16] From interview with Gerhard Schäuble, managing director at Fair & Human GmbH [17] http://www.organictextiles-atsource.com/soy-textiles-wholesale.html, April 2008 [18] From Social Accountability 8000, general information for Kuyichi employees by Piet den Toom [19] http://www.imf.org/external/pubs/ft/issues8/index.htmhttp://www.imf.org/external/pubs/ft/issues8/ index.htm, April 2008 [20] http://www.china-labour.org.hk/en/node/100206, April 2008 [21] A brief introduction to All China Federation of Trade Unions, 20-09-2007, Available at http://www.acftu.org.cn/template/10002/file.jsp?cid=63&aid=156, April 2008-05-18 53

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9. Appendices Appendix I: Interview with Karin Reimerink, Tuesday, May 13 th 2008 In its annual report, Solidaridad indicates that they have worked together with MADE BY in setting up a network of organic cotton suppliers in China. Can you tell me something more about this? Our team in China is currently working on two cotton projects in China. These are quite different than the projects we have done before in other countries, due to the rules and regulations set by the government. Both projects are situated in the North Western area of the country because of the suitable climate. The first project has been set up with one very large farmer that owns a large piece of land, which is farmed by several smaller farms. This project is getting along quite well; the first cotton seeds will be purchased within a couple of weeks. This project will produce organic cotton from the start. The second project has been set up in cooperation with a small town, where our team consults with the head of the town. Our aim was to start with organic cotton and than later focus on the social aspects involved. However, the town is doubting whether or not they want to start producing organic cotton straight away. They think the risk is quite high and are not sure if they are willing to take this chance. They are currently focussing on the human aspect involved. You mention a team that is working on these projects. Is this part of the Regional Expertisecentre China? We are currently supporting a local team in China. The team works from the office that we have recently set up in Hong Kong, the Expert centre China. We now have seven people working from this office. The centre is led by Martin Ma, who has a lot of useful knowledge about the issues at hand. Since about nine months the team has been reinforced by Bob and Jane, who are specialized in the social aspect of the supply chain. And recently two people have started working for the centre at the cotton projects. Prior to this centre in China, a regional centre has been set up in India. This centre does not only focus on the fashion industry, but is also active in the food industry for example. It is a multi disciplinary centre. We are now researching whether we can set up a similar centre in China, and how we should approach this. The Chinese centre will first focus on the Chinese market, in the future, it may become a regional centre, also active in other countries in the region. Due to its small volumes, most suppliers are not very eager to purchase raw organic cotton for Kuyichi s products. Do other brands run into this problem too and how do they solve it? We have noticed that sometimes suppliers do not really understand what it entails to use organic cotton in its collections. They were unsure of the extra costs that would be involved and how these extra costs should be calculated and included in the price of the final products. There is definitely some fear involved. If this is a problem that Kuyichi is experiencing, MADE BY can definitely help by educating the suppliers on this subject. 59

Could you name some other ways in which MADE BY could help Kuyichi in improving its supply chain? We could introduce you to suppliers that have some type of social certification or standard, or that work with organic materials and that may be suitable for you to work with. However, there must always be a click between the parties. Sometimes parties do not match personally, sometimes a supplier does not understand the style of the brand. We can also assist in improving the situation at the suppliers Kuyichi is currently working with. We can support a company in the process of certification, or by training them in the use of the Track&Trace system. What other projects are currently running in China? Is there a possibility for Kuyichi to join in these projects? The cotton project is definitely the biggest project. Next to this we have also started up an improvement project for several suppliers. We are currently also working on setting up a supplier database. This database will include all the (certified) suppliers in the MADE BY network. It will be an interactive database that can be accessed by all members and can be used to search companies per region, whether or not they use organic cotton or are using some type of social standard. As you said before, China offers great possibilities and potential for improvement. I personally think it would be great if some sort of joint venture of MADE BY brands could be set up, where these brands work together on developing a model factory. This could show the world how it is also possible and that it should be like this everywhere. If it can be done in China, then why not anywhere else? What are the possibilities to work together with MADE BY in accomplishing this? I think there are two ways in which this could be initiated. The first is with use of the database that I just told you about. It will be set up as a type of intranet, including a forum where ideas like this can be posted and discussed. In October we are organizing an event for all our members, with workshops and discussion groups on several different subjects. We could also introduce and discuss this plan there. There has been an initiative like this before, only then it concerned the development of an organic denim fabric. This project eventually did not succeed, as the demands and wishes of the different brands could not be combined. This will be less of a problem with your idea, because you could run different type of products in one factory. Our member labels are very diverse, and it may still be difficult to unite these in one factory. Appendix II: Implementation of the SA8000 standard There are two methods for implementing the SA8000 standard: certification or participation in the Corporate Involvement Program (CIP) Certification to SA8000 60

Certification to SA8000 is the process during which organizations are audited against the standard. This audit is performed by a Certification Body, an organization that is accredited and monitored by Social Accountability Accreditation Services (SAAS). This accreditation agency was founded in 1997 as a department within SAI and established as an independent non profit organization in 2007. SAAS is responsible for assessing and accrediting qualified organizations as Certification Bodies for various different certifications, including the SA8000 Standard. The Certification Bodies asses individual facilities and organizations. If the requirements set out in the standard are met, it earns a certificate proving the compliance. Certified and accredited organizations are reviewed and revisited twice a year. Corporate Involvement Program (CIP) The second method of implementation is participation in the Corporate Involvement Program. Companies occupied with selling or selling and producing goods can join the three level programme. The Introductory Level (level 1) gives organization as overview of all aspects of CSR in the specific workplace and throughout the supply chain. This program is suitable for organizations that are new to CSR as well as for organizations that want to compare and evaluate their current activities and systems. The fee for the Introductory Level Program is $3,000 per year. The Explorer Level (level 2) leads organizations into a more active implementation of CSR, through more sophisticated and interactive assistance from SAI. Companies can use their level 2 membership to illustrate their progress to stakeholders. SAI verifies this by reporting on the organization s performce annually. When applying to the Explorer Level Program, the The annual costs of the Explorer Level Program are dependent on the organizations turnover. Organization s Annual Turnover Explorer Fee $0 $100 million $5000 To $1 billion $9,500 To $10 billion $25,000 Greater then $10 billion $37,000 At Signatory Level (Level 3), the organization works together with SAI in implementing the SA8000 to (parts of) the supply chain. In cooperation, strategies on improving social performance are developed and implemented. The annual costs of the Signatory Level Program are dependent on the organizations turnover. 61

Organization s Annual Turnover Explorer Fee $0 $100 million $12,000 To $1 billion $22,000 To $10 billion $60,000 Greater then $10 billion $77,000 For a more detailed description of the Corporate Involvement Program, please go to http://www.saintl.org/index.cfm?fuseaction=page.viewpage&pageid=527&c:\cfusionmx7\verity\data\dummy.txt Appendix III: Interview with Gerhard Schäuble (Monday, May 5 th 2008) What do you believe to be the Unique Selling Point of SA8000? What sets it apart from other certification standards and what are the advantages? I don't believe that SA 8000 is in an USP situation. You see other competitors like ETI, FLA, BSCI. Advantage is that SAI is a UN based association with the roots of ILO. The SA8000 standard states that employees should have freedom of association and right to collective bargaining. In China the right to form trade unions is limited by law. What would be a good alternative according to the SA8000 standard? SA 8000 has created "parallel means" as part of his standard. That means where rights to FOA are restricted under law, companies are not exempt from negotiating with worker collectively and that it is the company's responsibility to make sure workers know they are free to organize themselves. The company needs to make clear to workers that they are willing to engage workers in dialogue through some representative structure and that they are willing to provide them with the opportunity to do so, if workers so wish. Only about this chapter you can write books and you will become a millionaire if you find an all satisfying solution. When a factory decides to have their factory audited, without taking part in the Corporate Involvement program, what would the costs of auditing and certification approximately be? Are these costs paid annually? Who is customer? He pays. We always dry to share the costs because of advantages both sides have. But mostly it is the importer who pays. Costs depend always to the size of auditing company. We Fair & Human have a rule of thumb to calculate time we normally need on site. 62

For example: 20 workers = 4 days 1000 workers = 13 days 7000 workers = 21 days...on site. How is the SA8000 standard adjusted to the norm of the country in which the audit takes place? Generally SAI says that the more stringent shall apply. Case in point: Thailand allows 36 hours overtime per week. China allows 36 hours per month. SA 8000 allows up to 12 hours per week on an exceptional basis. Thus a company in Thailand should comply with SA8000 rather than local law Appendix IV: Certification process of organic materials To proof that organic cotton, or any other organic fibre, is in fact produced without harm to people and planet, it should be certified. The following paragraphs will discuss the different standards and certificates that are used. The information has been derived from MADE BY s Guidance to Organic Certification that was provided to Kuyichi in March 2008. Kuyichi will use this report as a guide towards organic certification. There are two different standards against which organic cotton can be certified: Standard 1: Certification standards of organic fibre The organic (cotton) fibre is certified on farm level. MADE BY recognises the following standards: - International Federation of Organic Agriculture Movements (IFOAM) - US Department of Agriculture National Organic Program (USDA NOP) - European Union (EU) 2092/91 regulations There are only minor differences between these three standards. All three restrict the use of artificial fertilizers, pesticides, insecticides and herbicides. The standards regulate the growth of organic fibre, as well as organic food. Standard 2: Certification standards of organic processes The organic cotton fibre is used throughout the supply chain, and converted into yarns, fabrics, finished and dyed fabrics and eventually to ready made garments. These processes can be certified against two standards: 63

- Conditions set by Organic Exchange (OE) - Global Organic Textile Standards (GOTS) These standards do not apply to farm level, but certify the processes that the certified fibres go through. There are three different standards: - Organic Exchange 100 Standard: This standard is used by companies seeking third party control of the organic fibre in their products. - Organic Exchange Blended Standard: This standard ensures that the percentage of organic cotton used is correct. - GOTS: Standard is based on the use of organic cotton, but also sets criteria on other processes in the chain, such as dyeing, printing and waste water. When compliance to either one of the standard types has been determined, two types of certificates can be issued: Type 1: Scope certificates This certificate states that a company or farm is able to grow or process the specified fibre or product in accordance with the standard. The certificate is valid until a specific date, which can be extended after another audit. Type 2: Transaction certificates This certificate is issued when the goods change ownership and are supplied at the request of the by buyer or seller. The certificate indicates the standard, the certifying agency, the seller, the buyer and the amount of products. When goods are imported into the European Union, the inspection certificate may also be called a certificate of inspection. Even when the packing list contains similar information, a transaction certificate is an important tool in backing up the claim of using organic cotton. Secondly, the certification body deducts the quantities used from the supplier s stock. This way, the seller is not able to commit fraud. Transaction certificates are compulsory by law up to yarn level and have to be enclosed with the shipment. Later on in the process, the transaction certificate is not obligatory. The final certification is issued by an accredited certification body. Examples of suitable certification bodies are Dutch company Skal, and Organic Food Development & Certification Center of China. 64

Appendix V: Question List Current Suppliers Corporate Social Responsibility and sustainability are becoming more and more important in industries and countries across the globe. Kuyichi was one of the first to combine this with fashion. Established in 2001, Kuyichi made it its mission to combine fashion with fair labour and organic production. To reach these goals, Kuyichi is continuously working on improving labour conditions and increasing the use of sustainable materials throughout the supply chain. In order to set up action plans, Kuyichi needs to map the current situation within the supply chain and with its partners. To this extent, we would like to ask you to fill out the following form. The questions are divided over two parts: labour and sustainable materials. General Information Supplier name: Location: Specialized in: Partner of Kuyichi since: What percentage of your business is currently provided by Kuyichi? Part 1: Labour Employment 1.1 Number of employees: 1.2 Average age of employees: 1.3 Age of oldest employee: 1.4 Age of youngest employee: 1.5 What measures are taken to ensure that young workers get a proper education? 1.6 How many days a week does the factory operate? 1.7 How many hours is the average working week? 1.8 How many free days do the employees have per 7 day period? 1.9 How often do employees work overtime? Wages 1.10 What method is used for paying wages? 1.11 How often are wages paid? 1.12 What is the minimum wage paid? 65

1.13 How are wages for overtime paid? Health and Safety 1.14 What measures are taken to ensure safety of the employees? 1.15 Do employees receive trainings? 1.16 If yes, how often and on which topics? 1.17 Are dormitories provided for employees? 1.18 If yes, please describe the facilities and (if possible) include pictures. 1.19 Chinese law limits the possibilities for forming trade unions. What alternative forms of employee representation are offered? 1.20 Is fair labour an issue that is currently integrated in the company s management system? 1.21 If yes, how? 1.22 Which certificates concerning working conditions does the factory posses? 1.23 What is the factory s opinion towards working in accordance with the SA8000 standard? Part 2: Materials Organic cotton 2.1 Are you currently using organic cotton in your production? (Kuyichi + non Kuyichi products) 2.2 What percentage of the used cotton is organic cotton? 2.3 Do you have stock fabrics made of/with organic cotton? 2.4 Which companies supply the organic cotton? (Company name + Location) 2.5 Is the organic cotton certified? If yes, against which standard? 2.6 If you are currently not the using organic cotton, are you open to do so in the future? 2.7 Are you open to the supply of ready made, organic fabrics? Other sustainable materials 2.8 Are you using any other types of sustainable materials? 2.9 If yes, what materials are these? 2.10 Do these materials have any type of certification? Thank you for your cooperation! 66

Appendix VI: Outcome Question Lists Current Suppliers South Pacific General Information Supplier name: South Pacific Fashion Ltd of Dongguan Location: China Specialized in: Knitwear Partner of Kuyichi since: 2007 % of business Kuyichi: 0.001% Labour Number of employees: 800 Average age: 22 Oldest employee: 45 Youngest employee: 18 Operational days: 5 6 days per week Working week: 60 hours Free days per week: 1 Overtime: 2 3 times per week Payment method: Monthly, cash Minimum wage: RBM 770 (minimum Dongguan 450 RBM) Overtime pays: weekdays 150%, weekend 200%, Sundays/holidays 300% Trainings Health and Safety Training Course (2x per year)* PPE Training Course (1x per year) First Aid Training Course (2x per year)* Fire Drill (2x per year) Local Law Seminar* Human Right Seminar* C TPAT training* Trainings indicated by * are provided to all new employees. 67

Dormitories Size: 27 m2 People per room: 4 6 Facilities : toilet, bathrooms and hot water Fair labour According to the company, Chinese law does not limit the forming of trade unions. The company states that it has integrated the issue of fair labour in its management system. To this extent, the top management of the company has meetings with the trade union two times a month. The company is WRAP certified. The certificate is valid until 10/09/2008. Materials Using organic cotton: Yes Organic cotton %: 10% of total cotton production Organic stock fabrics: Supplier: Esquel Enterprises Limited, Fuzhan, Guangdong, China Certified: yes, raw yarn is certified Other sustainable materials: No South Pacific uses organic cotton for some European customers, but not on a regular basis. They are willing to use organic cotton, but whether it is possible or not depends on price, availability and leadtime. Prime Asia General Information Supplier name: Prime Asia Development Co. Ltd Location: Hong Kong, factory in China Specialized in: Trims / accessories design and production Partner of Kuyichi since: 2006 % of business Kuyichi: 3% Labour Number of employees: Hong Kong: 6, China: 85 Average age: 25 Oldest employee: 55 Youngest employee: 20 68

Operational days: 6 days per week Working week: 45 48 hours Free days per week: 1 Overtime: Depends on period Payment method: Monthly, cash Minimum wage: RBM 800 Overtime pays: RBM 20 per hour Trainings Each employee receives a technical training for several days before starting their work. Mainly because of the US companies that Prime Asia works for, there are annual check ups of the factory, by an external party Dormitories Prime Asia does not provide dormitories. Fair labour According to Prime Asia, the government has a special department occupied with complaints from workers. This department has the power to close down a factory immediately if they feel this is necessary. Prime Asia is actually having difficulties caused by the fact that employees are protected more than the employer. According to Prime Asia, the SA8000 standard is almost completely covered by Chinese law. The difficulty is monitoring the factories. Prime Asia checks its factory on a regular basis and requires some kind of guarantee that no child labour is used. It is not clear what this guarantee entails exactly. Prime Asia works with several US companies, with whom they have an agreement concerning working conditions. External parties check the factory unannounced. If the conditions do not comply with the agreement, the cooperation is terminated. According to Prime Asia, the interest in CSR is increasing, especially amongst new generation factory managers. However, the different standards are a relatively new tool for accomplishing a fair working environment. Materials Using organic cotton: No Organic cotton %: Organic stock fabrics: Supplier: Certified: 69

Prime Asia is willing to work with organic cotton, however indicates that the certification of organic cotton is difficult and lead times are long. This is often not accepted by companies. Prime Asia uses certified recycled paper and soybean ink in their activities. IZ Direct Enterprise General Information Supplier name: Location: Specialized in: Partner of Kuyichi since: 2006 % of business Kuyichi: 5% Labour Number of employees: Office 35 Factory 280 Average age: 28 Oldest employee: 45 Youngest employee: 21 IZ Direct Enterprise Office Hong Kong Factory China Woven tops and bottoms Operational days: 6 days per week Working week: 50 hours Free days per week: 1 Overtime: Every other day, depending on work load. Payment method: Monthly, cash Minimum wage: RBM 1000 1500 Overtime pays: Depends Trainings Fire safety Safety use of machinery 70

To ensure the safety of the employees, there is a proper floor plan and sufficient training and education for the employees to work in a safe manner. Proper tools are used for the specific jobs. Dormitories People per room: 4 6 Facilities : toilet, bathrooms and cafeteria Fair labour IZ Direct does not pay special attention to the working conditions in the factory. Trade unions are not involved in the factory. No comment was given when asked for the company s opinion towards working in accordance with the SA8000 standards. Materials Using organic cotton: Seldomly Organic cotton %: Less than 1% of total cotton production Organic stock fabrics: Supplier: Unspecified local supplier Certified: Certifications can be provided upon order Other sustainable materials: No IZ Direct has not yet actively used organic cotton in its products. They do however, have suppliers that can provide them with ready made organic fabrics. The company is open to work with organic cotton upon customer s request. Appendix VII: Cultural differences between China and The Netherlands To be able to conduct business with a different culture, like that of the Chinese, it is important to know which norms and values exist within that culture. The following chapter will give an overview of the basic differences between the Dutch and Chinese cultures by means of the Five Cultural Dimensions model. The first paragraph will introduce this model, the second paragraph will apply this model to Dutch and Chinese culture, indicating the differences between the two. Hofstede s Five Cultural Dimensions The Dutch professor Geert Hofstede gained worldwide recognition and respect through the formulation of his Five Cultural Dimensions model. By collecting and analyzing information from more than 100.000 individuals from 50 countries he identified five dimensions that indicate culture and cultural differences. His work clarifies 71

differences influencing the functioning of organizations. (governments, families, companies) in different cultures. The model provides an insight in cultural differences, making it easier to bridge the gap. Power Distance Index (PDI): This dimension indicates how well less powerful members of organizations cope with differences in power and inequality. The level of inequality in a society is influenced both by the leaders and the followers. Individualism (IDV): This dimension places individualism on one side, and collectivism on the other. It illustrates the degree to which individuals are integrated into groups. On one side are societies in which people look after themselves and their close relatives only. On the other extreme we find societies in which people are integrated into close groups of direct as well as extended families, to which the individual is unquestionably loyal. Masculinity (MAS): This dimension refers to the degree in which cultures value the traditionally male or female values. Feminine cultures place value on relationships and quality of life, whereas masculine cultures value competitiveness, ambition, wealth and materials possession. In masculine cultures, the differences between gender roles are more strict and less fluid than in feminine cultures. Uncertainty Avoidance Index (UAI): This dimension illustrates how well people cope with uncertainty. Cultures that have a high level of uncertainty avoidance try to minimize this by implementing many laws and regulations. These people are more emotional and motivated by an inner nervousness. Cultures with a low level of uncertainty avoidance, uncertainty accepting cultures, tolerate different opinions more and try to limit the rules and regulations as much as possible. Long Term Orientation (LTO): This dimension compares perseverance in the development and implementation of innovations (long term orientation) with the urge for truth and immediate result (short term orientation) 72

Chinese Culture VS. Dutch Culture 100 90 80 70 60 50 40 30 20 10 0 PDI IDV MAS UAI LTO Figure 9.1 China s cultural dimensions 100 90 80 70 60 50 40 30 20 10 0 PDI IDV MAS UAI LTO Figure 9.2: The Netherlands cultural dimensions Power Distance Index (PDI): The power distance index shows that Dutch society is more equal than Chinese society and that there is less emphasis on power and wealth. Chinese society values power and wealth much more and has a much stronger hierarchy. While doing business, this hierarchy is an important factor to pay attention to. Individuality (IDV): On individuality, China and the Netherlands are each other s opposites. China scores very low, as the Communist government emphasises a collective society and ties between groups are very strong. Loyalty is of the utmost importance. The Dutch on the other hand, are very individualistic and maintain relatively loose bonds with only closest relatives. Chinese businesses are influenced by this, as companies will not change their partners easily, fearing the effect this may have on relationships. Immediate loyalty is given to new partners. Masculinity (MAS): The Netherlands hardly distinguish between men and women, and both sexes are treated equally. The Chinese score much higher on masculinity, meaning that there is a bigger difference between the two. Uncertainty Avoidance (UAI): Both China and the Netherlands score averagely on uncertainty avoidance. Both have a tenancy to reduce uncertainty by implementing laws and regulations. It should be noted that in Chinese society, social control is very strong. Reputation and respect within the community are valuable, and loosing face can be much more detrimental than breaking a law. 73

Long Term Orientation (LTO): As all Asian countries, China scores high on long term orientation. Society believes that with perseverance, will and strength, all obstacles can eventually be overcome. The Dutch score average on long term orientation. This indicates that the Chinese valua long term commitments and traditions much more than the Dutch. Appendix VIII: Question List Potential Suppliers Corporate Social Responsibility and sustainability are becoming more and more important in industries and countries across the globe. Kuyichi was one of the first to combine this with fashion. Established in 2001, Kuyichi made it its mission to combine fashion with fair labour and organic production. To reach these goals, Kuyichi is continuously working on improving labour conditions and increasing the use of sustainable materials throughout the supply chain. To this extent, we would like to ask you to fill out the following form. The questions are divided over two parts: labour and sustainable materials. General Information Supplier name: Location: Specialized in: Currently producing for (other brands: Part 1: Labour Employment 1.1 Number of employees: 1.2 Average age of employees: 1.3 Age of oldest employee: 1.4 Age of youngest employee: 1.5 What measures are taken to ensure that young workers get a proper education? 1.6 How many days a week does the factory operate? 1.7 How many hours is the average working week? 1.8 How many free days do the employees have per 7 day period? 1.9 How often do employees work overtime? Wages 1.10 What method is used for paying wages? 74

1.11 How often are wages paid? 1.12 What is the minimum wage paid? 1.13 How are wages for overtime paid? Health and Safety 1.14 What measures are taken to ensure safety of the employees? 1.15 Do employees receive trainings? 1.16 If yes, how often and on which topics? 1.17 Are dormitories provided for employees? 1.18 If yes, please describe the facilities. 1.19 Chinese law limits the possibilities for forming trade unions. What alternative forms of employee representation are offered? 1.20 Is fair labour an issue that is currently integrated in the company s management system? 1.21 If yes, how? 1.22 Which certificates concerning working conditions does the factory posses? Please include a copy of the certificate. 1.23 What is the factory s opinion towards working in accordance with the SA8000 standard? Part 2: Materials Organic cotton 2.1 Are you currently using organic cotton in your production? 2.2 What percentage of the used cotton is organic cotton? 2.3 Do you have stock fabrics made of/with organic cotton? 2.4 Which companies supply the organic cotton? (Company name + Location) 2.5 Is the organic cotton certified? If yes, against which standard? 2.6 If you are currently not the using organic cotton, are you open to do so in the future? 2.7 Are you open to the supply of ready made, organic fabrics? Other sustainable materials 2.8 Are you using any other types of sustainable materials? 2.9 If yes, what materials are these? 2.10 Do these materials have any type of certification? If yes, please give the names of these certifications. Thank you for your cooperation! 75