Secondary Benefits Programs: Strengthening Supply Chains in Emerging Markets through High-Impact Incentives
By Cristina Falcione, I-DEV Correspondent
The Issue: Challenges in Securing A Sustainable Global Supply Chain
In today’s globalized trade environment, supply chains are more complex than ever. Take an alpaca sweater, for example. The alpaca fiber was probably sourced from a herding family living at more than 4,000 meters above sea level in Peru’s highlands, and then transformed into yarn and dyed by a local monopoly. Pieces of the sweater might have been woven by specialized artisan workshops in Peru, and other parts by a garment manufacturer in China, where the final sweater was then assembled, ironed and packaged before being sold in a retail store in the U.S.
In the global apparel industry alone, 80% of all inputs are sourced from emerging markets, where the majority of workers involved in the production process live at the “bottom of the pyramid” (BoP) on less than $2 a day. This is the reality in the supply chain for most agricultural commodity products– from coffee and chocolate to cotton– where production depends primarily on sourcing raw matierals from resource-constrained smallholders. This makes it a daunting task to ensure transparency, stability, and quality along the way, all the while ensuring the volumes needed to meet mass consumer demand.
Such limited income makes it a daily struggle for BoP suppliers to consistently provide for their households and ensure that day-to-day needs are met. The lack of access to basic services like quality healthcare and education in impoverished communities can directly result in a higher number of sick days and lower productivity, contributing to a self-perpetuating poverty cycle. BoP suppliers also lack the required human and economic capital to improve production, leaving them highly vulnerable to widespread challenges like poor infrastructure, sudden climate catastrophes, and high seasonality of demand. Stressed for cash, suppliers are often tempted to sell their production at any given moment to the buyer that can offer the most immediate or higher price, rather than prioritizing a consistent relationship with one buyer.
This array of challenges directly threatens the production cycle of businesses that rely primarily on these suppliers. At I-DEV, we’ve seen that improving supplier loyalty and well-being in emerging markets is becoming a critical priority for corporations in all sectors to maintain the competitiveness of their business, ensure higher quality and volumes, better respond to consumer demand, and improve the overall bottom line.
“We believe that fashion can be a force for good. Playing a role in developing programs like SBP allows us to indirectly impact a vastly larger population of apparel workers in the communities in which we produce. This type of work amplifies our impact, which is a positive step towards catalyzing systemic change.”
- Scott Leonard, CEO, Indigenous Designs
Secondary Benefits: A Win-Win Model for Big Business and BoP Suppliers
In partnership with leading global sustainable apparel brands Indigenous Designs and Eileen Fisher, I-DEV explored how companies in developing countries can increase supplier quality of life in a way that also returns value to the business and strengthens the supply chain as a whole. In the report “Strengthening Supplier Resilience Through Secondary Benefits Programs,” we propose a framework for offering high-value incentives — or “secondary benefits” — to BoP suppliers to help address the unique challenges they face.
For example, in talking to the suppliers for Eileen Fisher and Indigenous Designs in Peru, we found that cotton farmers lacked sufficient incentive to make the transition from conventional to organic cotton, due to the substantial drop in yields and income that they experience during the 3-year certification period. This in turn pushes high quality suppliers out of the organic cotton market and increases the volume scarcity of raw material inputs for sustainable apparel brands.
Similarly, when we looked at the supply chain for Alpaca woven textiles, we observed that an increasing number of skilled Peruvian artisans were leaving the industry due to excessive seasonality of demand, causing a precarious gap in the supply chain for Alpaca knit work. Businesses that relied on these highly qualified workers for their Fall knitted lines were repeatedly recruiting and training new suppliers each year to meet their orders, resulting in higher procurement costs and constrained team capacity.
“The framework creates an important feedback loop in which high performing suppliers receive benefits, and these benefits further enhance their ability to perform. SBPs, therefore, provide a way to simultaneously strengthen our supply chain from a competitive standpoint, while also improving the quality of life of workers who produce critical inputs, including environmentally sustainable organic cotton.”
- Luna Lee, Human Rights Leader, Eileen Fisher
I-DEV worked with Eileen Fisher, Indigenous Designs, and their suppliers to determine key benefits that could support workers through the peaks and valleys of production. These benefits included things like technical assistance, bulk discounts on machinery, small loans and education and scholarships for the children of top-performing producers– all of which could in turn increase the sustainability of livelihoods, incentivize suppliers to continue activity, and guarnatee a stable supply of raw materials for companies throughout each season.
Similar to loyalty programs, employee benefits packages, or performance-based rewards, Secondary Benefits Programs (SBPs) are a customizable tool that allow businesses to competitively differentiate themselves in emerging markets and build long-term continuity with the suppliers who are most fundamental, but also most vulnerable, in the production process. Through technical skills training, access to finance and savings, and services that can improve quality of life, secondary benefits provide low-income populations in the supply chain with the stability and opportunities they need to grow, while incentivizing higher performance and loyalty to their buyers. Suppliers can gain access to additional benefits over time as they demonstrate consistent results, providing companies with leverage to continuously engage them and drive commitment over the long-term.
The Bigger Picture Opportunity
Beyond textiles, SBPs are applicable to virtually any businesses that work with low-income communities, and have the potential to impact many industries to mitigate supply chain risks on a global scale. In agriculture, SBPs can enable smallholder farmers to improve production capabilities and increase yields to meet growing global food demand. In mining and extractive industries, SBPs might focus on improving access to higher-standard healthcare to increase community participation in local operations and reduce absenteeism in the workplace.
While SBPs can be adapted to each unique context, they also require significant commitment from companies to take a deep-dive and understand the specific bottlenecks, production cycles, and needs in their supply chain, in order to determine an appropriate benefits and redemption structure.
“Companies are always looking for the next competitive advantage when it comes to CSR programs. More importantly, they want to figure out how they can use their balance sheet to invest. Brands can use programs like SBPs to invest in their supply chain and put their dollars to work for impact.”
— Benjamin Schmerler, Senior Director of Root Capital
This is where SPBs move beyond traditional CSR and can place impact at the heart of a company’s key business operations. At I-DEV, we have seen oftentimes how corporate foundations struggle to strategically merge their efforts with those of other business departments. CSR projects are often expensive, limited in reach, and lack a solid business case to get stronger management buy-in. They are perceived as costs, over value creators. As a result, initiatives tied to creating social impact are often placed on the back burner when they are not designed as a core building block of the business model.
Moving beyond the more traditional CSR programs, SBPs are designed to create tangible business value over time and cost less than one-off CSR grants or initiatives that require a lot of time and effort to screen, select and develop. SBPs are designed to be an ongoing long-term program that is modified only gradually and over time. And, because they contribute to operational gains and strengthen transparency and ties with suppliers, they can foster deeper synergies between a company’s foundation and its boardroom, ensuring that funds are invested in impactful initiatives that drive bottom-line value.
Join Us to Launch SBPs Globally
I-DEV has informally tested SBP models across Latin America and Asia; however, we recognize the need to formalize the process and demonstrate the business case to a broader audience in order to create a greater movement toward what we believe is the future of responsible sourcing and CSR 3.0. Beyond this initial investigation in Peru, we see broad immediate applications in India’s sustainable cotton industry and in almost every sector- mining, agriculture, apparel, and manufacturing- where SBPs can strengthen buyer-supplier relations, dramatically reduce risks and supply chain hiccups for big buyers, and create long-term value from pools of capital typically siloed to CSR, foundation or charitable divisions of the corporations.
We invite others to share with us how they think SBPs could be applicable in their supply chain or their industry. Have you seen or applied similar models, or are you interested to? If so, please email us at email@example.com and comment on/share this post!
Download the report here: Strengthening Supplier Resilience Through Secondary Benefit Programs