Bangladesh Article

Sourcing from Bangladesh: how to get it right

30 November,2018 | Tim Nicolle

Bangladesh exports around US$28bn of garments per year (2016). Whilst it is the second largest garment exporter in the world, it is a long way behind China (approximately US$180bn per year, 2016).

This is our guide to sourcing from Bangladesh. From our office in Dhaka, we are financing Bangladeshi supply chains for many buyers – both new arrivals and existing players. We are helping many buyers to take advantage of relatively low costs and a good compliance environment, but also with the benefit of open account and deferred payment terms.

This guide covers:

  • The supply chain trade-off

  • Why should you source from Bangladesh?

  • Regulation

  • Business culture

  • Pre-shipment finance – what happens?

  • Foreign exchange regulations and why they matter to you

  • What can you source from Bangladesh?

1. The trade off - it's changed in Bangladesh

There can be a trade-off in supply chains between:

  • cost on the one hand, and

  • compliance, convenience and reliability on the other.

A lower cost location typically sacrifices compliance, convenience and reliability to achieve a price point that attracts the international buyer.

There can be no free lunch.

But Bangladesh has improved its position in these respects significantly in recent years and now offers compelling value to international buyers, especially if compliance is important.

Bangladesh has the most regulated low-cost garment industry in the world following significant investment. In 2012, it is estimated that there were between 4,000 and 6,000 factories operating in Bangladesh. BGMEA now forecasts that this number has reduced to around 1,500 factories as many poor quality operations have failed audits and / or cannot afford the cost of international compliance. Minimum wage legislation has now been implemented and is being enforced – and many plants now have worker representation.

Of course, all of this has increased unit costs. You can probably find lower cost locations now (Ethopia, Uzbekistan are two regularly mentioned to us), but Bangladesh offers a good compromise between a reasonable price and effective compliance.

Important points:

  • Bangladesh has a regulated garment industry.

  • Bangladesh offers reasonable prices and is still a low-cost producer.

2. Why should you source from Bangladesh?

Quite a few retailers that we talk to regard Bangladesh as a “future project”. Whilst the availability of reasonable pricing makes Bangladesh attractive, many retailers are putting off the day when they have to go there. This is principally because of the widespread perception that the country is difficult, quality is variable, deadlines are often missed and labour conditions are unacceptable. The trade-off mentioned above is not felt to be compelling.

But the reality is better than you might expect.

  • Some of the best factories in the world are now in Bangladesh.

  • Nearly all business is conducted in Dhaka making it easy to manage relationships.

  • There is real value available, provided you are ready for the effort involved.

  • The range of products available is increasing, capitalising on 30 years of local production experience and a skilled local labour force.

3. What regulations, and how are they policed?

Contrary to what you might think, conditions for line workers in Bangladesh are some the best in the world amongst major low-cost sourcing locations. You still have to be careful. But it is easy now to find factories that meet international standards because of both international and domestic regulation.

There are two international groups who survey, audit and report on factories in Bangladesh: Accord (a US NGO funded by US retailers) and Alliance (a similar European initiative). There are several local groups as well, including the BSCI (a government-funded group).

There are no perfect factories, although some are amongst the best in the world. But what is important is that you can ask for the audit reports and understand quickly what the issues may be. Moreover, ask for and read the audit report before you visit a factory. This provides you with a good basis to discuss compliance issues with the factory management.

If the factory does not have an audit report, it does not automatically mean that it is bad. In our local office, we have hired individuals directly from garment factories – so we know our way around the issues, the standards and many of the questions that should be answered.

In Bangladesh, you can usually find out much more about your supply chain than in other low-cost locations.

Important points:

  • Talk about compliance upfront, Bangladesh is used to this.

  • Ask for audit reports.

  • Don’t assume it’s bad if the audit report is not available – but ask for local advice.

4. Bangladesh business culture

Bangladesh is a secular Muslim country, and Islam is adopted by the state as the national religion. Society is generally tolerant and other religions (and even their religious holidays) are often marked in the calendar.

Dhaka

Bangladesh is crowded. Dhaka is crowded. The good news is that, unlike other countries, you can (broadly) conduct all your Bangladeshi business just in Dhaka. People will come to you. Unlike other countries where there are multiple business centres, Bangladesh is Dhaka-centric, and this makes it a reasonably efficient place to visit.

Dhaka is also reasonably safe provided you follow local advice about where to go, and how to travel. A car and a driver are essential. In our office, we have four cars and drivers supporting our local team, and we do regularly help foreign buyers find their feet with our resources. International hotels are good but expensive – and there are good alternatives that we can also recommend. Pay careful attention to where you stay in Dhaka. Uttara and the airport area, Banani or Gulshan are locations to choose. Do not be ambitious about what you can achieve in the days when you are in town (traffic is horrendous) – a single factory visit in a day can be the limit. Again, locals can advise.

Although you should check before travel, Dhaka is generally considered to be malaria-free but you do need your shots to be up to date for hepatitis, typhus and tetanus at least.

5. Doing business

As a British company operating in Bangladesh, we are very conscious that things are different. The working week is Sunday to Thursday.

Restaurants are generally “dry”, but the food can be excellent. You will find that most offices will have time outs for prayers, and you will get used to the mu’adhin calling for prayer regularly during the day (and in the night if your hotel room faces the mosque).

But a secular society is a good place for business. Whilst you may feel that South Asia can be a difficult place, we have found many reliable and honest factory owners and buying houses. It does not mean that you can relax. But the tricks and practices we observe in supply chains are no more prevalent and no different to those we see in other locations. You do need to have expertise in garment sourcing to get good results. You should ensure that you have someone to take care of the details on the ground, and a pre-shipment inspection of the goods by someone you trust is essential - but that is the same the world over.

Some generalisations (and there are a lot of exceptions), but you will find that:

  • There is a great willingness to say yes and to be helpful. Bangladeshis are optimistic. But there is often a lack of planning in execution which means that deadlines are easily missed. Allow for this.

  • Be tolerant on the timing of meetings. Traffic conditions, amongst other reasons, mean that people are often late.

  • Small gifts are often given and received. It is a generous culture, and people are warm and friendly.

PrimaDollar is a finance business – so we don’t provide inspection services or quality checks. But we can provide you with advice on how to set up your sourcing, matching the key steps in your process with the financial support that the factory will need to meet your requirements. We can also help you to understand what is going on if there are delays arising.

Important points:

  • There are no shortcuts, and Bangladesh is no different to anywhere else.

  • Pay attention to the details, ensure that you have the checks and balances in the process so that the result is what you expect.

  • Make allowances for timing and deadlines.

  • You can get things done by just visiting Dhaka. People will generally come to you.

  • Find trusted local support, as this can deal with the monitoring of factories outside Dhaka which can be hard to reach.

6. Pre-shipment finance

It is common for factories to need finance before shipment. Factories in Bangladesh (outside the very largest) are typically not financially strong. Moreover, Bangladesh does not grow its own cotton – so the raw materials for production have to be imported.

PrimaDollar, as a trade finance company, provides support for these pre-shipment needs, so the buyer does not have to. This includes arranging pre-shipment LCs and guarantees and then also paying for the goods at shipment, so the buyer can work on open account with deferred payment.

Bangladesh operates a system of “back-to-back” letters of credit (“LC”). In other words, the factory will commonly ask for an LC from the buyer (or from PrimaDollar if the buyer prefers not to provide it). Local banks who receive the LC then provide a second LC to the materials supplier (usually in China) allowing the materials to be brought in. This back to back LC typically has to be settled within 30 to 40 days after shipment, which also puts pressure on the factory to negotiate short payment terms with the buyer.

Appreciating how the system works allows buyers to understand why, in many senses, Bangladeshi factories often appear to be inflexible on payment terms. Local factory owners have often borrowed heavily to invest in their facilities – and so need financial help from buyers to operate.

This is also where PrimaDollar can help. We can provide the LC that the factory needs for the materials purchase so that the buyer does not have to. Moreover, we can also pay at shipment (even sometimes TT in advance) allowing the buyer to pay later. This ensures that the back-to-back LC is paid off on a timely basis and the factory remains in good order with its local bank.

Important points:

  • Don’t be surprised if a factory asks for an LC and short payment terms.

  • This is a result of the system that Bangladesh operates and not necessarily a sign that the factory is in poor financial condition.

  • PrimaDollar can deal with these things for you, so you can work on open account with deferred payment.

7. Foreign exchange: a headache you need to know about

Bangladesh has some of the toughest foreign exchange controls in the world.

Whilst it is tempting to assume that this is a local matter, it inevitably affects buyers. Many buyers are looking to purchase garments on credit – and expect suppliers to trust them to pay for the goods after delivery or even later. But this causes significant local issues:

  • Foreign exchange regulations require 95% of the export value of the goods to be received in Bangladesh within 120 days of shipment. The issue is not the 120 days (most buyers are ready to pay within this time frame) but the risk of non-payment.

  • A failure to pay is an offence under the regulations, penalizing both the exporter and the local bank involved.

Do not be surprised if a Bangladeshi supplier asks for a significant down-payment, TT in advance or a letter of credit. This requirement derives from both the exporter’s and the local bank’s obligations.  Both will be reluctant to take the risk of non-payment later.

Moreover, factoring and supply chain finance programs typically do not work. The cash is not certain enough (since it is not agreed before shipment) and the money comes too late.

This is where PrimaDollar can help – as we can provide a payment guarantee that local banks can rely upon, and often we can pay the factory 95% or more of the invoice by TT-in-advance. This means that the foreign exchange regulations are then easily dealt with. Our involvement means that both the local bank and the factory can offer open account and deferred payment to buyers without risking a breach of the foreign exchange regulations.

Important points:

  • Bangladeshi factories and local banks find it difficult to provide credit to buyers. This is because of tough foreign exchange controls, not a lack of trust.

  • PrimaDollar can help. Factories working with us can accept open account and deferred payments, solving this issue for the buyer.

8. What can you source from Bangladesh?

Bangladesh has a large and skilled workforce in garment manufacturing. But Bangladesh does not grow cotton and does not manufacture man-made materials in any quantity.

Historically, the focus has been on “staples”, both woven and knit. Bangladesh is the place to go for larger orders of denim, t-shirts, hoodies, polo shirts and jumpers. Outerwear, formal wear and man-made garments have largely not featured. This is now starting to change as capabilities are emerging in these more complex areas, based upon many years of experience in production. But sourcing more complex garments means hunting down the right manufacturer.

Important points:

  • Historically Bangladesh has been known for producing large volumes of simple items (“staples”) at the lowest cost.

  • Increasingly the industry is changing reflecting the higher wages now being paid, and the costs of compliance. Bangladesh is investing in upskilling and upgrading facilities, so more complex products are now available.

  • Do not expect to negotiate the lowest price - but prices are reasonable and can be lower than other locations that have comparable production standards.

9. Summary

Bangladesh can be an intimidating place, but with the right local supports, it is a welcoming country that can add real value to your supply chain.

If you are worried about compliance, then Bangladesh is now the place from which to source. The industry is one of the most regulated low-cost producers in the world, and you can get third party reports (including from foreign NGOs) to provide you with insights and verification of the working conditions in the factories.

Work with good local partners, and do not be surprised if local factories need financial help from a trade finance company like PrimaDollar. Our services are designed to allow buyers to work on open account with deferred payment, whilst ensuring that factories have the support that they need to obtain pre-shipment finance and comply with foreign exchange regulations. What they usually need is an LC before shipment and then payment at sight of at least 95% of the invoice amount.

The industry is changing. Bangladesh’s competitive advantage is changing. It used to win business solely on price, but the costs of compliance, better conditions for workers and higher salaries mean that the industry is now investing in new products.

The trade-off between price on the one hand, and compliance, convenience and reliability has improved markedly.

Give Bangladesh a try!

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