Fundamentals of Operations Management

Int. J. Production Economics ] (]]]]) ]]]–]]]

Contents lists available at ScienceDirect

Int. J. Production Economics

0925-52

doi:10.1

n Corr

E-m

talluri@

Pleas Inter

journal homepage: www.elsevier.com/locate/ijpe

Improving supplier’s situation through supplier cooperation: The case of Xintang jeans town

Bin Jiang a, Srinivas (Sri) Talluri n,b, Tao Yao c

a Department of Management, The Charles H. Kellstadt Graduate School of Business, DePaul University, Euromed Management Marseille, USA b Department of Supply Chain Management, Eli Broad Graduate School of Management, USA c The Harold and Inge Marcus Department of Industrial and Manufacturing Engineering, Pennsylvania State University – University Park, USA

a r t i c l e i n f o

Article history:

Received 12 November 2009

Accepted 9 March 2011

Keywords:

Supplier cooperation

Game theory

Labor conditions

73/$ - see front matter & 2011 Elsevier B.V. A

016/j.ijpe.2011.03.010

esponding author.

ail addresses: [email protected] (B. Jiang),

bus.msu.edu (S. Talluri), [email protected] (T.

e cite this article as: Jiang, B., et al., I national Journal of Production Econ

a b s t r a c t

Inferior labor conditions in developing countries have raised Western customers’ awareness of

sweatshops. Developing countries’ suppliers are facing growing pressure from Western clients on

ethical issues associated with the production of low-cost goods at the expense of worker health, safety,

and welfare. Inferior working conditions not only adversely affect worker well-being, but also

negatively impact performance and productivity, which is detrimental to the entire supply chain in

the long-run. In this paper, we consider the case of Xintang International Jeans and Textile City, the

largest manufacturing base of jeans in China, which sought to shed its sweatshop image. Working

closely with the administration of this manufacturing base, we applied operations research techniques

to analyze local suppliers’ possible operations strategies based on considerations of price and delivery

guarantees, two critical dimensions of competition in the apparel and textile industry. Our analysis

highlighted the fact that local suppliers’ cooperation may be an effective way for improving labor

conditions in the long-run. Our work has significant implications for societal improvement in

developing countries through better labor conditions and increased cooperation while maintaining a

healthy level of competition.

& 2011 Elsevier B.V. All rights reserved.

1. Background

China’s advantages in the global apparel and textile market- place are moving well beyond cheap equipment, materials, and labor. Industries in China are leveraging economies of scale and low labor costs in an effort to achieve a global competitive advantage via a new form of industrial organization referred to as ‘‘factory town’’, which is akin to an industrial cluster. In an apparel factory town, all materials and processes needed to make the final products exist in a single location. Garment factories are located close to textile mills and other suppliers of various components, including yarn dealers, sewers, pressers, packagers, and freight forwarders. Purchasing from factory towns is a highly attractive proposition to Western buyers, since such a one-stop- shopping approach reduces transaction costs and enhances pur- chasers’ bargaining power due to stringent competition among suppliers (Frenkel and Scott, 2002). There are a total of eight primary apparel factory towns in China, generating massive volumes to supply global and domestic markets (see Fig. 1).

ll rights reserved.

Yao).

mproving supplier’s situatio omics (2011), doi:10.1016/j

Located near Hong Kong, the Xintang International Jeans and Texture City is a well-known base of jeans production because of its large scale operation. There are over 2600 jeans factories and related enterprises with about 100,000 workers and over 1000 registered global and domestic jeans brands. More than 250 million pairs of jeans were manufactured in 2006 at Xintang and approximately 85% of them were exported.

The apparel industry has faced significant criticism over its sweatshop image mainly in its East Asian factories. In May 1998, a panel of experts raised issues relating to violation of worker rights and inappropriate working conditions in a variety of garment and sportswear factories of leading transnational companies (Shah, 2006). In the same vein, one of the main issues with Xintang jeans town is that it was notorious for its sweatshop image with low worker wages and long overtime hours. In manufacturing a pair of blue jeans that was sold for $30 in the US, local workers received less than 90 US cents (based on the exchange rate in 2005). They usually worked 24–30 h of overtime in a week. Overtime work was more flexible and cheaper than investing in new production technology or hiring more workers, because most apparel work- ers were not paid by working hours but by finished pieces. Without an overtime premium, local jeans manufacturers had no direct financial incentive to reduce long hours. However, the negative effects of poor working conditions on worker welfare, safety, health, and general well-being were quite evident.

n through supplier cooperation: The case of Xintang jeans town. .ijpe.2011.03.010

Fig. 1

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]2

In order to improve working conditions, local governmental law specified a normal working day of 8 h and a 5-day working week of 40 h, and established a minimum wage which ranged from a high of 780 Yuan/month (US $96.18) in cities to a lower rate of 450 Yuan/month (US $55.49) in rural regions. However, there were no meaningful overtime or minimum wage enforce- ment mechanisms. Migrants from the countryside form a readily exploitable labor pool with few legal protections (Harney, 2008). With the pressure from Western clients on acceptable labor standards escalating, the Administration and Board of Directors of Xintang International Jeans and Texture City (ABDX) began to take steps to demonstrate concerns for ethical issues facing local suppliers. In 2005, the Guangdong Provincial Department of Labor and Social Security (DL&S) and the ABDX worked together to resolve the societal concerns and ramifications associated with poor labor conditions in this jeans town. Their primary goal was to increase worker compensation and provide better conditions for improving worker health and safety.

Based on Western purchasers’ suggestion, the DL&S consultant team and the ABDX established a strict auditing system to monitor jeans manufacturers’ working practices. The audit at a factory was carried out by a panel including representatives of that factory’s Western client(s) and ABDX auditors. A typical audit involved a factory inspection, discussions with managers, worker interviews, and document checks. At the end of the audit, the audit panel presented the factory managers with a list of issues to be addressed. The factory was required to correct the identified problems and support any follow-up audits. If problem areas continued to exist, the factory was subject to sanctions in the form of financial payments from the ABDX and/or a withdrawal of its client’s business.

Translating the audit results into a real change on the factory floor, however, was a major challenge (Jiang et al., 2009). Mr. Chen Kangqiang, the Chairman of ABDX, communicated to

Please cite this article as: Jiang, B., et al., Improving supplier’s situatio International Journal of Production Economics (2011), doi:10.1016/j

the DL&S consultant team, ‘‘By law, jeans manufacturers are supposed to provide time-and-a-half pay after 8 h on weekdays and between double and triple the pay for Saturdays, Sundays, and holidays. Complying with labor codes definitely raises fac- tories’ operating costs. However, the price Western clients pay has not increased one penny over the past ten years.’’ On the one hand, pressure from Western export markets, which originally led to the establishment of higher supply chain labor standards, is a major impetus for improving working conditions in China. On the other hand, pressure from Western firms to implement higher labor standards is intended to protect their corporate and brand images. Such Western clients ‘‘are not necessarily interested in Chinese labor issues. They are interested in public concern in the West, and in responses that can deliver visible signs of short-term improvement’’ (Crijns and van der Putten, 2005, pp. 17).

Facing potential overhead increases and Western clients’ squeezing pressure on cost, Xintang’s managers felt that they had little choice but to present false data. It was not surprising to see audit fraud in Xintang escalate to a higher degree. In order to pass the audit as well as not significantly increase operating costs, Mr. Chen believed that a majority of jeans manufacturers resorted to falsified book-keeping to a certain extent. Factories were becoming increasingly sophisticated in their dual book-keeping practices and in coaching workers to provide acceptable responses during worker interviews.

As factory’s methods to mask problems became more sophis- ticated, so did audit detection methods. Xintang audits started to become unannounced so as to catch managers off guard; worker interviews were conducted off site to encourage worker open- ness; and auditors made surprise visits to factories late at night to investigate whether factories were operating on unrecorded over- time. Although these methods helped the ABDX learn more about the real conditions in factories, this further aggravated hostility between the ABDX and factories. Such tensions made it difficult to

n through supplier cooperation: The case of Xintang jeans town. .ijpe.2011.03.010

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]] 3

achieve any sustainable change. For example, while the strict audit program in Xintang dramatically reduced overtime work, this jeans town regularly lost workers to other factory towns that did not strictly enforce restrictions. The reason was that many workers were eager to put in longer hours in order to earn more income. In 2005, the average worker turnover rate in Xintang was more than 140%.

2. The new direction

The DL&S consultant team found that the average profit margin in Xintang had reduced from 30% to 5% over the past decade because of the fierce competition among factories. The harsh economic realities made it exceedingly difficult to achieve both low prices and humane working conditions.

Several reasons accounted for the fierce competition in Xin- tang. First, the entry barrier to the apparel industry was very low in terms of capital and technology. A factory operation could begin with just a few manually operated sewing machines (Zhang et al., 2004). At the same time, there was almost an endless supply of cheap labor. Large numbers of farmers left the inland countryside in droves preferring to take their chances in the new factories near Hong Kong. Second, the government granted very flexible policies for the growth and operation of these emerging apparel firms. They were much less restricted by the rules and regulations when compared to the state-owned enterprises (Sonobe et al., 2002). Third, as these firms were started by farmer-entrepreneurs in towns and even in villages, they set examples as role models to others. This resulted in a tremendous increase of such firms with same work methods and similar products being sold in the same markets (Wang et al., 2004). To increase their market shares, factories vehemently waged price wars. This cannibalistic competition among Xintang jeans manu- facturers resulted in razor thin profit margin for firms.

Besides the fierce competition, Xintang jeans manufacturers also faced pressure from global buyers, particularly in terms of squeezing prices and tight lead times. Local factories were in a subordinate position in buyer-driven value chains where small suppliers tended to be dependent on larger, dominant buyers. The bargaining power between global buyers and local jeans manu- facturers was unequal, allowing the powerful buyers to relinquish many of the responsibilities for product and process improvement at local factories (Browning et al., 1995; Frenkel, 2001). For example, global buyers often deliberately deferred a decision until the last minute in order to better understand what their competitors’ strategies are in reacting to consumer demand, either in terms of volume or product specification. Therefore, final samples of products were often subject to revisions, even after production was underway. Generally, buyers were mainly concerned with getting the right quality product at the right price and suppliers are concerned with supplying the right quality product at a profitable price (Fynes and Voss, 2002). As a result, suppliers have to pass on the pressures of buyers’ demanding requirements to workers. The buyers’ requirements on cost reduction forced jeans manufacturers to minimize wage expen- ditures and buyers’ late sample approvals resulted in expanding working hours to meet the tight delivery deadline.

The DL&S consultant team believed that the cannibalistic competition among jeans manufacturers and the power imbal- ance between local factories and Western clients were the root causes of poor labor conditions in Xintang. Instead of imposing labor codes on factories, the ABDX should help factories improve their economic realities; otherwise, there would be little or no concrete sustainable improvements in labor practices. The consultant team suggested that everyone in this factory town

Please cite this article as: Jiang, B., et al., Improving supplier’s situatio International Journal of Production Economics (2011), doi:10.1016/j

genuinely employ a strategy of cooperation instead of competi- tion, the cannibalistic competition would be eliminated and the local jeans manufacturers’ negotiation power over western clients would increase. Under the strategy of cooperation, Xintang jeans manufacturers could charge Western clients higher prices to improve their profitability and then their working conditions.

3. The basic model to test the new strategy

The DL&S consultant team developed profit maximization models to analyze competition and cooperation strategies based on considerations of price and delivery time guarantee, two critical dimensions of competition in the apparel industry. We first discuss the models in a general sense with specific details following.

The objective of the mathematical model is to maximize the expected net profit per unit time subject to the reliability for the deliverable time guarantee. This model provides an analytical framework to analyze the interrelationships between delivery time guarantee, pricing, demand, and the overall profitability of local factories under competition and cooperation. Factories compete to provide goods in a make-to-order fashion. Tools and techniques from queuing theory, mathematical programming, and economics have been applied to analyze this situation.

Queuing theory is utilized to model the responsive demand. We model the demand for a factory as a function of its own price and delivery time guarantee as well as other factories’ price and delivery time guarantees. Each factory chooses joint decisions in pricing and delivery time guarantee levels to maximize its own profitability while keeping a predetermined level of delivery reliability.

The chance constrained programming model we developed incorporates various constraints. The first constraint states that the factory’s desired delivery reliability meets a predetermined delivery time, and the second constraint identifies the factory system stability such that the arrival demand rate does not exceed the operating rate. Other constraints are specified on the price, delivery time, and demand rate.

Economic theory is applied to model factories’ dynamic price and delivery time competition and cooperation. The theory of repeated interaction suggests that in an oligopoly making a homogenous product, factories would realize their interdepen- dence, and may be able to sustain the monopoly delivery time and price with collusion. The threat of a serious punishment would be sufficient to deter the attempt to cut prices or shorten delivery time.

We now discuss the details associated with model parameters, assumptions, and formulations:

Parameters:

li: amount of orders faced by factory i per unit time; mi: operating rate (capacity) of factory i; gi: desired delivery reliability (i.e., the guaranteed cycle time) agreed by factory i management and its buyer (0ogio1); pi: unit price charged by factory i; gi: delivery time guarantee by factory i according to the contract; oi: unit operating cost for factory i.

Assumptions:

(1)

n th .ijpe

Factory i investment function: Ii¼wmi. We assume workers in the labor-intensive apparel industry have identical productiv- ity, loyalty, and mobility. Because jeans manufacturers are

rough supplier cooperation: The case of Xintang jeans town. .2011.03.010

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]4

Pl In

paid by piece rates, we modeled a factory’s investment cost as a linear function of its capacity mi.

(2)

Orders arrive at factory i according to a Poisson process with mean rate li; the handling time of an order is decided by the factory’s capacity, i.e., exponentially distributed with mean rate mi.

(3)

When there are n factories fiercely competing with each other in this factory town, it is reasonable to assume that their unit operating cost and service level should eventually converge, i.e., oi¼o and gi¼g.

The mean demand rate for factory i depends linearly on its own price and delivery time guarantee as well as other factories’ prices and delivery time guarantees, i.e.,

liðP,GÞ¼ ai�bipi�cigiþ Xn j ¼1

jai

dijðpj�piÞþ Xn j ¼1

jai

eijðgj�giÞ, ð1Þ

where ai40, bi40, ci40, dij40, eij40 for all i (i¼1, 2,yn), j (j¼1, 2,yn, jai), P (p1, p2,y,pn), and G (g1, g2,y, gn). The parameter ai represents the basic demand that is not related to price and delivery time guarantee and depends on other factors such as the factory’s reputation or quality. bi and ci measure the sensitivity of each factory’s demand to its own price and handling time, respectively. dij and eij measure the competition intensity among factories with regards to pricing and handling time, i.e., the sensitivity of a factory’s demand to any other factories’ prices and handling times. Assuming that all other parameters remain unchanged, a unit decrease in factory i’s price will attract (biþdij) more units. A higher value of dij elevates the importance of price competition. Similar connotation can be used to explain eij for the delivery time guarantee competition. With some loss of general- ity but substantial gain in expositional efficiency, we assume ai¼a, bi¼b, ci¼c, dij¼d, and eij¼e.

Because a factory always tries to maximize its profit, we can describe this behavior as:

Maxpi ¼ðpi�oÞliðpi,giÞ�wmi, ð2Þ

Pðt ogiÞ¼1�e�ðmi�liÞgi Zg, ðfactory desired delivery reliability constraintÞ mi 4li, ðfactory systemstability constraintÞ pi4o40, gi, li40, ðnon-negativity constraintsÞ

where t is the steady state actual handling time for random orders. So and Song (1998) studied a closely related problem to our objective function (2). Their work showed that for very high service levels (e.g., g40.9), which is true in our case, the tail distribution of t can be accurately approximated by an exponential function, i.e., Pðt 4giÞ¼e

�ðmi�liÞgi . Moreover, So and Song (1998) and Palaka et al. (1998) proved that the constraint of a desired delivery reliability must be binding at optimality, i.e., 1�e�ðmi�liÞgi ¼g. Therefore, the optimal m�

i can then be expressed as

m�i ðpi,giÞ¼ �lnð1�gÞ

gi þliðpi,giÞ: ð3Þ

In China, the most populous country in the world, there is an abundance of labor force in the countryside. For labor-intensive industries, manufacturers can easily optimize their capacities by using these mobile workers. Mobile workers are highly flexible and can be hired and laid off at short notice. As a result, a factory’s optimal capacity is exogenously fixed in this project. Substituting Eq. (3) into Eq. (2), the profit maximization model for factory i can be rewritten as

Maxpi ¼ðpi�o�wÞliðpi,giÞþw lnð1�gÞ=gi: ð4Þ

For the competition strategy, each jeans manufacturer simul- taneously and independently decides individual price and delivery

ease cite this article as: Jiang, B., et al., Improving supplier’s situatio ternational Journal of Production Economics (2011), doi:10.1016/j

time guarantee. The basic model in Eq. (4) can be analyzed as a non-cooperative n-person game:

Maxpiðpi,gi,P�i,G�iÞ¼ a�bpi�cgiþ Xn j¼1

jai

dðpj�piÞþ Xn j¼1

jai

eðgj�giÞ

2 6664

3 7775

�ðpi�o�AÞþ w lnð1�gÞ

gi , ð5Þ

where P�i ¼ðp1 , p2 ,:::, pi�1, piþ1,:::, pnÞ, G�i ¼ðg1, g2,:::,gi�1 , giþ1,:::, gnÞ, and i¼1, 2,y,n.

For the cooperation strategy, all factories decide on prices and delivery time guarantees jointly, considering that a central policy maker (e.g., the ABDX) decides on relevant variables so as to achieve total profit maximization. According to the game theory, such a cooperative model is a monopolistic model (due to the collusion). The total profit maximization model is given as:

Max Y ¼ Xn i ¼ 1

piðpi,gi,P�i,G�iÞ: ð6Þ

From Eqs. (5) and (6), we obtain two different strategies’ p� i and

g� i . The following numerical example shows the comparison of

p� i and g�

i under different strategies.

4. Analysis

The DL&S consultant team applied a numerical example to demonstrate the effectiveness of the proposed models, compare optimal decisions under competition and cooperation strategies with different demand characteristics, and analyze the elasticity of demand and profit to price and delivery time guarantee.

In this example, the number of jeans factories is n¼10, the desired delivery reliability g¼0.9, the unit operating cost c¼3, the investment coefficient w¼0.6, and the basic demand a¼200. According to the ABDX’s requirement, three different scenarios of clients’ demand were considered:

�

n t .ijp

Scenario 1: the demand is more dependent on price than delivery time guarantee, i.e., b4c, d4e. In the numerical example, b¼2.0, c¼0.4, d¼0.1, and e¼0.05.

�

Scenario 2: the demand is dependent on price as well as on

delivery time guarantee, i.e., b¼c, d¼e. In the numerical example, b¼0.4, c¼0.4, d¼0.05, and e¼0.05.

�

Scenario 3: the demand is more dependent on delivery time

guarantee than price, i.e., boc, doe. In the numerical exam- ple, b¼0.4, c¼2.0, d¼0.05, and e¼0.1.

Given the above settings, the consultant team applied Math- ematica 5.0 version to obtain the optimal prices, delivery time guarantees and each factory’s profit as shown in Table 1.

According to Table 1, the cooperation strategy leads to higher optimal price and profit than those under the competition strategy. For the delivery time guarantee, the cooperation strategy is in par with the competition strategy, i.e., when customers are not sensitive to delivery time (Scenario 1), it is not necessary to improve the delivery time guarantee (0.245 vs. 0.268); when customers are sensitive to price as well as delivery time or more sensitive to delivery time (Scenarios 2 and 3), the results under the cooperation strategy are comparable to those under the competition strategy (0.112 vs. 0.118 and 0.053 vs. 0.053).

Since the cooperation strategy may increase price but reduce demand, could it mean that Western clients would significantly withdraw their businesses from Xintang? The DL&S consultant team believed that such a result is unlikely to occur. There are

hrough supplier cooperation: The case of Xintang jeans town. e.2011.03.010

Table 1 Optimal results under competition and cooperation strategies.

Competition Cooperation Change (%)

Scenario 1 Price 49.481 51.773 4.6 Demand 100.939 96.346 �4.6

Demand is more dependent on price than delivery time Delivery time 0.245 0.268 9.4

Profit 4625.590 4636.167 0.2

Scenario 2 Price 224.172 251.741 12.3 Demand 110.286 99.256 �10.0

Demand is dependent on price as well as delivery time Delivery time 0.112 0.114 1.8

Profit 24,313.800 24,617.867 1.3

Scenario 3 Price 224.104 251.668 12.3 Demand 110.252 99.227 �10.0

Demand is more dependent on delivery time than price Delivery time 0.053 0.053 0.0

Profit 24,285.037 24,588.933 1.3

Table 2 Elasticity analysis under competition and cooperation strategies.

Elasticity

Demand Profit

Competition Cooperation Competition Cooperation

Scenario 1 Price 20% �0.869 �0.211 �0.252 0.099 10% �0.517 �0.077 0.053 0.017

Delivery time 20% �0.008 �0.006 0.000 0.000 10% �0.003 �0.001 0.000 0.000

Scenario 2 Price 20% �0.921 �0.208 �0.276 �0.103 10% �0.557 �0.102 �0.015 0.006

Delivery time 20% �0.631 �0.398 �0.425 �0.188 10% �0.406 �0.110 �0.376 �0.033

Scenario 3 Price 20% �0.176 �0.118 �0.047 �0.025 10% �0.062 �0.021 0.084 0.061

Delivery time 20% �0.832 �0.771 �0.203 �0.150 10% �0.322 �0.275 �0.044 �0.016

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]] 5

two reasons: first, under the competition strategy, if one factory increases its price, its buyers may switch to other suppliers who can provide lower price. Under the cooperation strategy, however, buyers have to accept the uniformly increased price in this manufacturing base; second, Xintang’s price level was already extremely low because of the previous cannibalism competition among factories. Even on increasing the price by 20%, the new price would still be competitive in the world market. To prove that the above arguments are robust, the DL&S consultant team carried out an elasticity analysis. By using optimal prices and delivery time guarantees in Table 1 as base values, we increased them by 10% and 20%, and computed individual factory’s new demands and profits by utilizing Eqs. (1) and (2) under the aforementioned three scenarios, and then obtained the elasticity of demand (percentage change of demand/percentage change of price or delivery time guarantee) and the elasticity of profit (percentage change of profit/percentage change of price or deliv- ery time guarantee), respectively.

The results, summarized in Table 2, show that the elasticity under competition strategy is always more responsive than that under cooperation strategy. For example, in the first scenario, the elasticity of demand to price for the two strategies is �0.517 vs. �0.077 and �0.869 vs. �0.211 when the price increases 10% and 20%, respectively. This means that when price increases by 10% and 20%, under the competition strategy the demand will decrease 5.2% and 17.4%, but under the cooperation strategy the demand will only decrease by 0.7% and 4.2%, respectively. This implies that because all factories under the cooperation strategy can be treated as a signal negotiator in the market, they have the

Please cite this article as: Jiang, B., et al., Improving supplier’s situatio International Journal of Production Economics (2011), doi:10.1016/j

power of monopoly to take higher price and longer delivery time (Barney, 1986; King and Lenox, 2000).

5. Implementation, benefits, and societal impact

Based on above analyses, the ABDX decided to establish unified standards for the lowest price and the shortest lead time in this factory town. In 2006, the cooperation agreement among Xintang jeans manufacturers was signed on February 1 and entered into force on March 15. The Anti-malicious Competition Committee, led by the Chairman of ABDX and made up by representatives from the top 30 factories in Xintang, provided for regular meetings to exchange information on this factory town’s current enforcement activities and priorities, to solve unnecessary conflicts or inconsistencies between those enforce- ment activities and individual factories’ policies, to discuss policy changes, which they were considering, and to discuss other issues of mutual interest relating to the realization of cooperation in competition matters. The committee’s mission was not to elim- inate competition among factories, but to monitor factories to compete with each other on quality, design, and innovativeness rather than on price and delivery guarantee time.

On March 31, 2006, all jeans factories in Xintang began to carry out the unified standard of pricing and delivery. While different jeans products had different pricing ranges and cycle times, on average the new standard raised the lowest price by about 15% and extended the shortest delivery time guarantee by four more days. If a factory was found to have engaged in

n through supplier cooperation: The case of Xintang jeans town. .ijpe.2011.03.010

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]]6

predatory pricing or violated the legal overtime, the ABDX would impose a heavy fine and in some extreme cases even shutdown operations.

In 2006 Xintang’s total export was 212 million pieces, an increase of 10.23% from the previous production season. The average price per piece increased 15% from $4.27 to $4.93 and the workers’ average monthly pay increased nearly 18%. This was the first occurrence of simultaneously increasing export and increasing price in this jeans town’s history since 1992. In addition, workers’ average overtime reduced from 26 h per week to 16 h per week; average turnover rate reduced from 140% to 35%. These achievements laid the foundation for the ABDX’s next step of shedding the sweatshop image for this jeans town.

Xintang’s cooperation strategy presents new hopes and oppor- tunities for the improvement of labor conditions in China. It already has had a ripple effect by setting the tone for what happens at other factory towns. During the implementation of Xintang’s new strategy, one administrative official at a factory town told Mr. Chen, the Chairman of ABDX, ‘‘I have paid great attention to your new strategy since the beginning. I want to know how relative parties will deal with labor condition pro- blems so we can use your experience as a reference in the future.’’ The factory town of ties, Shengzhou, which holds more than 40% global market shares, followed Xintang’s footsteps to raise its lowest price by 10% in 2008, and the increased income was utilized to raise worker wages. In 2008, the China Ceramic Industry Association required all members to collectively raise export product prices by 5% in order to fund the improvement of labor conditions and environmental protection.

The local suppliers’ cooperation strategy, by which Xintang’s jeans manufacturers are pushing back against the low wages and harsh working conditions, should also have meaningful effects on labor conditions around the world. Today 25% of the global workforce is Chinese. From basic assembly work to the upper tiers of industry and services, China is setting the global norm for working standards. Workers in rich and poor countries alike, feel the effect of China. Global corporations move to China to lower labor costs and they use those lower labor costs as a lever to drive down those in the rest of the world in a ‘‘race to the bottom.’’ Thus, failure to raise standards in China will have a devastating effect on workers around the world.

In addition, because emerging countries do not add significant capital to the global economy, more workers are competing to be employed by essentially the same amount of capital. This unbalanced equation has increased the bargaining power of capital, decreased that of labor, and substantially contributed to wage stagnation or decline in emerging countries (Costello et al., 2006). Xintang’s case provides a practical way for local suppliers to improve their collective bargaining power over Western capital.

The results of these strategies from a societal impact can also be seen through better employee wages and working conditions leading to improved welfare, health, and general living condi- tions. As a result of these improvements, firms would stand to gain from a long-term standpoint with respect to improved product quality, productivity, and performance.

6. Concluding remarks

Often there is a huge gap between the labor codes imposed by governments or Western companies on Chinese factories and these factories’ actual working practices. Chinese suppliers are becoming increasingly adept at circumventing the audit system. This in turn not only renders the results of audits inaccurate, but

Please cite this article as: Jiang, B., et al., Improving supplier’s situatio International Journal of Production Economics (2011), doi:10.1016/j

also eliminates the possibility for any meaningful improvements in labor conditions.

China’s new labor regulation, which took effect January 1, 2008, is designed to better protect workers’ rights, including signed, written contracts for all employees. The motivation for this new labor law was almost entirely internal, because Chinese government saw very obvious signs of discontent and problems where migrant workers were clearly being abused. All of this represented a source of social instability.

Focusing on Xintang’s practice, this paper assesses the pro- blems with the instable labor force and argues that to some extent poor labor conditions are driven by fierce competition and unfair buying practices, which tend to shorten lead times and squeeze prices. Since suppliers in the buyer-driven value chains are teetering on cannibalistic competition, it is exceedingly difficult for them to simultaneously achieve both the competitive cost advantage and the humane working conditions. This case explicates how competition and cooperation strategies impact on the behavior of rational and self-interested suppliers within Xintang. The game theory models, numerical analyses, and real improvements in this jeans town indicate that powerless suppli- ers in a buyer dominated supply chain should collectively work to stabilize their overall competitive relationship and secure joint competitive advantages, because the cannibalistic competition reduces the glamour of the business, and propels suppliers in a race to the bottom in wages and working conditions. While the focus in this research is on the apparel industry, the cooperation efforts here may point the way out for struggling suppliers in other highly competitive labor-intensive industries to achieve the tricky balance between low prices, short lead times, and stringent working conditions.

Appendix

Solution of Eq. (5)

Maxpiðpi,gi,P�i,G�iÞ¼ a�bpi�cgiþ Xn j¼1

jai

dðpj�piÞþ Xn j ¼1

jai

eðgj�giÞ

2 6664

3 7775

�ðpi�o�wÞþ w lnð1�gÞ

gi , ð5Þ

where P�i ¼ðp1 , p2,:::,pi�1, piþ1,:::, pnÞ, G�i ¼ðg1, g2,:::, gi�1 , giþ1,:::, gnÞ, i¼1, 2,y,n. For factory i, given the other factories’ prices and delivery time guarantee, we differentiate Eq. (5) with respect to pi and gi:

@piðpi,gi,P�i,G�iÞ @pi

¼ a�2 bþðn�1Þd � �

pi�cgiþ Xn j¼1

jai

dpjþ Xn j¼1

jai

eðgj�giÞ

þ½bþðn�1Þd�ðoþwÞ, ðA1Þ

@piðpi,gi,P�i,G�iÞ @gi

¼� cþðn�1Þe½ �ðpi�o�AÞ� w lnð1�gÞ

g2 i

: ðA2Þ

The Hessian matrix is

H ¼

@2pi @p2

i

@2pi @pi@gi

@2pi @pi@gi

@2pi @g2

i

������� �������¼ �a½bþðn�1Þd� �½cþðn�1Þe�

�½cþðn�1Þe� 2w lnð1�gÞ g3

i

������ ������:

n through supplier cooperation: The case of Xintang jeans town. .ijpe.2011.03.010

B. Jiang et al. / Int. J. Production Economics ] (]]]]) ]]]–]]] 7

The second order conditions for profit maximization by each factory can be satisfied if

�4w½bþðn�1Þd�lnð1�gÞ g3

i

�½cþðn�1Þe�2 Z0,

i:e:, gi r �4w½bþðn�1Þd�lnð1�gÞ

½cþðn�1Þe�2

� �1=3 :

To maximize piðpi,gi,P�i,G�iÞ, the first order conditions are given by Eqs. (A1) and (A2), that is,

a�2½bþðn�1Þd�pi�cgiþ Xn j ¼1

jai

dpj þ Xn j¼1

jai

eðgj�giÞ

þ½bþðn�1Þd�ðoþwÞ¼0 ðA3Þ

� cþðn�1Þe½ �ðp�o�wÞ� w lnð1�gÞ

g2 i

¼0: ðA4Þ

The optimal prices and delivery time guarantee can be found by solving Eqs. (A3) and (A4) simultaneously. Since (A3) is a nonlinear equation, it is possible that there are multiple feasible solutions to above equations. If

g�i A 0, �4w½bþðn�1Þd�lnð1�gÞ

½cþðn�1Þe�2

� �1=3" # ,

then ðp� i ,g�

i Þis the optimal solution which maximizes

piðpi,gi,P�i,G�iÞ.

Solution of Eq. (6)

Max Y ¼ Xn i ¼ 1

piðpi,gi,P�i,G�iÞ: ð6Þ

For factory i, given the other factories’ prices and delivery time guarantee, we differentiate Eq. (6) with respect to pi:

@ Q @pi ¼ a�2 bþðn�1Þd

� � pi�cgiþ

Xn j¼1

jai

dpj

þ Xn j ¼1

jai

eðgj�giÞþ½bþðn�1Þd�ðoþAÞþ Xn j ¼1

jai

ðpj�o�wÞd:

Since

@2 Pn

i ¼ 1

Q @p2

i

¼�2 bþðn�1Þd � �

o0,

it can be obtained from the first order condition that

p�i ðgi,P�i,G�iÞ¼ wþo

2 þ

a�cgiþ Pn

j ¼1

jai

dpjþ Pn

j¼1

jai

eðgj�giÞþ Pn

j¼ 1

jai

ðpj�o�wÞd

2½bþðn�1Þd� :

ðB1Þ

Substituting Eq. (B1) into Eq. (6), it can be obtained as:

Xn i ¼ 1

piðgi,P�i,G�iÞ¼ Xn i ¼ 1

1

2

( a� bþðn�1Þd � �

ðoþwÞ�cgi

þ Xn j ¼1

jai

dpjþ Xn j¼1

jai

eðgj�giÞ� Xn j ¼1

jai

ðpj�o�wÞd

9>= >;

Please cite this article as: Jiang, B., et al., Improving supplier’s situatio International Journal of Production Economics (2011), doi:10.1016/j

�

a�cgiþ Pn

j¼ 1

jai

dpjþ Pn

j¼1

jai

egjþ Pn

j¼1

jai

ðpj�o�wÞd

2½bþðn�1Þd� �

oþw

2

0 BBBBBBB@

1 CCCCCCCA þ

w lnð1�gÞ gi

:

ðB2Þ

Taking the derivative of Eq. (B2) with respect to gi, we can obtain that

@ Pn

i ¼ 1 piðgi,P�i,G�iÞ @gi

¼ cðwþoÞ

2 �

ca

a½bþðn�1Þd� þ

c2gi 2½bþðn�1Þd�

� w lnð1�gÞ

g2 i

�

c Pn

j¼ 1

jai

dpjþ Pn

j ¼1

jai

eðgj�giÞ

2 6664

3 7775

2½bþðn�1Þd�

þ Xn j ¼1

jai

w�o

2 þ

a�cgj 2½bþðn�1Þd�

þ

Pn j¼ 1

jai

pjþ Pn

j ¼1

jai

eðgj�giÞþ Pn

j ¼1

jai

ðpj�o�wÞd

2½bþðn�1Þd�

0 BBBBBBB@

1 CCCCCCCA

8>>>>>>>< >>>>>>>:

� e

2 �

we

2 þ

1

4 a�½bþðn�1Þd�ðwþoÞ�cgjþ

Xn j¼1

jai

dpjþ Xn j¼1

jai

0 BBB@

�eðgj�giÞ� Xn j ¼1

jai

ðpj�o�wdÞ

1 CCA� e2½bþðn�1Þd��

dc

½bþðn�1Þd�2

� �9>>= >>;:

ðB3Þ

In addition, by taking the second order derivative of Eq. (B3) with respect to gi, we obtain

@2 P

piðp�i ,gi,P�i,G�iÞ @g2

i

¼ c2

2½bþðn�1Þd� þ

2w lnð1�gÞ g3

i

þ 1

2½bþðn�1Þd� � Xn j¼1

jai

e� dc

2½bþðn�1Þd�

� �2 �

dc

2½bþðn�1Þd�

� �2" # :

ðB4Þ

It can be shown by Eq. (B4) that Pn

i ¼ 1

piðp�i ,gi,P�i,G�iÞis concave for

gi A 0, �4wblnð1�gÞ

c2þ Pn

j¼1

jai

ðe�ðdc=2½bþðn�1Þd�ÞÞ2�ðdc=2½bþðn�1Þd�Þ2 h i

8>>>>>>>< >>>>>>>:

9>>>>>>>= >>>>>>>;

1=32 66666664

3 77777775 :

Therefore, we can obtain 2n equations with respect to p1 , p2 ,:::, pn, g1, g2,:::, gn by considering the first order condi- tions given in Eqs. (B3) and (B1). Then we can find the profit- maximizing solution p�1, p

� 2 ,:::, p

� n , g

� 1 , g

� 2 ,:::, g

� n by solving these 2n

equations.

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