Int. J. Production Economics ] (]]]]) ]]]–]]]Contents lists .docx

Int. J. Production Economics ] (]]]]) ]]]–]]]
Contents lists available at ScienceDirect
Int. J. Production Economics
0925-52
doi:10.1
n Corr
E-m
[email protected]
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
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dx.doi.org/10.1016/j.ijpe.2011.03.010
mailto:[email protected]
dx.doi.org/10.1016/j.ijpe.2011.03.010
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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
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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
situatio
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
dx.doi.org/10.1016/j.ijpe.2011.03.010
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
dx.doi.org/10.1016/j.ijpe.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
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
situatio
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
.ijpe.2011.03.010
dx.doi.org/10.1016/j.ijpe.2011.03.010

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
situatio
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
@[email protected]
@2pi
@[email protected]
@2pi

@g2
i
��
��¼
�a½bþðn�1Þd� �½cþðn�1Þe�
�½cþðn�1Þe� 2w lnð1�gÞ
g3
i
��
��:
.ijpe.2011.03.010
dx.doi.org/10.1016/j.ijpe.2011.03.010
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
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,

½cþðn�1Þe�2
� �1=3" #
,
then ðp�
i
,g�
i
Þis the optimal solution which maximizes
piðpi,gi,P�i,G�iÞ.

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