The Ethical Supply Chain Practitioner – Part Two: Labor and Ethical Business Practices

The Supply Chain Practitioner’s Vital Role in Corporate Social Responsibility

Part One of this series discussed the changing tide of public opinion and corporate strategies that is driving increasing corporate social responsibility, as well as the desire by employees to do meaningful work and make a difference in the world. A study by SCM Review and Loyola University found that “83% of supply chain professionals say that ethics are extremely (53%) or very important (30%) to their organizations.”

Supply chain practitioners are in a unique position within a company to affect behavior outside of the company, influencing the policies and actions of suppliers and service-providing partners. Generally speaking, a company has stronger leverage over the behavior of their suppliers than over the behavior of their customers. And though it is challenging to monitor beyond tier one, a major player can reach down and influence several tiers.

There are many ways that supply chain practitioners can influence the behavior of the supply chain and make the world a better place.We group them into two broad areas: 1) Labor Conditions, Human Rights, and Ethics, and 2) Environmental Sustainability. Here we discuss the first of those two groups.

Labor Conditions and Human Rights

Major brand companies have discovered the hard way, in the court of public opinion, that they are responsible for the working conditions in their supply chain, even several tiers back. Having a strong supplier code of conduct, that is diligently monitored and enforced, is central to making progress on the many dimensions of labor and human rights, such as:

• Forced Labor, Child Labor – ccording to the ILO,¹ about 25 million people worldwide work under forced labor (including slavery, indentured labor, bonded labor, and prison labor).² The Child Labor Coalition estimates there are about 150 million victims of child labor, about half of those under 12 years old.³ These are persistent problems. Solving them more broadly requires many things beyond the purview of supply chain managers.⁴ However, the supply chain manager can take steps to ensure, to the extent possible, that their supply chain is not complicit — that the suppliers throughout their N-tier supply chain are not using slave/forced labor or child labor.
• Living Wage — Wages may exceed the legal minimum and poverty line, but still fall well short of a living wage to afford a basic lifestyle considered acceptable by a society at its current level of development. Companies can strive to ensure their own workers and those in the supply chain are paid a living wage, which is defined as the minimum income necessary to meet their basic needs such as food, housing, and clothing. The amount constituting a living wage will vary by location.⁵
• Safety — Workers should work in a hygienic and safe environment, with measures to prevent accidents, ensure adequate fire safety, prevent exposure to hazardous and toxic substances, and working in structures that are built and maintained to adequate safety codes.
• Forced Overtime — The Fair Labor Association (FLA) standard is that the work week shall not exceed 48 hours and all overtime work must be consensual.
• Freedom of Association and Collective Bargaining — The ability to bargain collectively can be a powerful force in ensuring workers are treated and paid properly.
• Diversity — Ensuring that suppliers do not have discriminatory hiring practices and that their workforce reflects appropriate diversity by race, gender, and other dimensions (e.g. age, religion, sexual orientation, etc.).

Source: Oxfam Issues Briefing Steps Towards a Living Wage in Global Supply Chains

Central Role of the Supplier Code of Conduct, Aligned to the Company’s Mission

In Part One of this series, we talked about a company’s purpose and identity. That purpose should be encapsulated in a well-written mission statement, which in turn is supported by high level goals and metrics. The supplier code of conduct will be based on the social responsibility goals of your company. Thus, the metrics included in the supplier code of conduct are part of the overall ‘Chain of Goals and KPIs.’ This is where lower-level more-granular metrics align with higher-level broader metrics, which in turn support the firm’s strategic goals and ultimately its overall mission. Figure 2 below shows an example using GSK’s actual mission statement and their published strategic objectives and high-level goals/KPIs, combined with some hypothetical mid-level and lower level goals (on the left) that we made up to illustrate the concept.

These goals and metrics for your own company and your suppliers should be specific and time bounded. For example, a corporate objective may be to “treat employees and workers throughout the supply chain fairly.” This might manifest as a specific goal such as “90% of tier one suppliers and 75% of tier two suppliers will be paying a living wage by 2024.” These metrics can then be incorporated into supplier code of conduct, which also provides a set of time bound goals to reach living wage, plus an explicit definition of what is a living wage for each location (typically based on some respected third-party standard).

Industry initiatives and standards — such as the Responsible Business Association’s RBA Code of Conduct,theFair Labor Association’s (FLA) Workplace Code of Conduct, and the Ethical Trading Initiative’s ETI Base Code — can be leveraged to help develop or reassess your own supplier code of conduct. In addition, there are international standards that can be used as guidelines in both labor standards (ISO/SAI SA8000, ILO International Labour Standards, UN Universal Declaration of Human Rights) and environmental standards (ISO 14000), and some that cover both(UN Global Compact). There are also regulatory standards that can be referenced, such as the EU’s RoHS, REACH, and WEEE directives, and the US’s Conflict Minerals Law.⁶

It can also be helpful to ask suppliers what codes of conduct they are already being asked to comply with by their other customers. There’s no sense in reinventing the wheel, if the suppliers’ other customers are asking for the same things that you want. In that way, an industry may coalesce around some reasonably common set of standards. It makes it easier for the supplier to understand and comply with a consistent set of terminology and requirements.

A well-designed supplier code of conduct is core to communicating to suppliers exactly what is expected of them. The code of conduct should be used throughout the stages of the supplier relationship, starting as a key element of the initial RFI/RFQ packet, then used in discussions during contract negotiations, and then repeatedly discussed in ongoing reviews with suppliers. The metrics should be incorporated explicitly into the supplier contracts (typically by reference) and supplier scorecards. Quarterly reviews with strategic suppliers and annual reviews with non-strategic suppliers should include discussion of progress towards the goals and specific action plans for meeting those goals. If the supplier repeatedly hears the message, they will better understand its importance to your company. For that reason, it is important that all employees, especially those who are dealing with suppliers, receive regular training and communications to ensure they understand the importance of CSR goals. Companies that are serious about CSR link their employees’ and executives’ pay/bonuses, to how well CSR goals are being met.

Ensuring That Your Code of Conduct ‘Has Some Teeth’

Contract with suppliers, in addition to spelling out (or referring to) the code-of-conduct explicitly, should spell out what information the supplier must supply, and agreement by the supplier to cooperate with verification procedures, which may include unannounced onsite visits to the supplier’s facilities (factories and warehouses) that produce, transform, and store the products. There also must be some ‘carrots and sticks,’ i.e. substantive rewards for compliance and penalties for non-compliance. These may include fines for non-compliance and bonuses for compliance, as well as increases or reductions in the amount of business given to the supplier, including potential termination of the relationship.

Monitoring and Enforcement

Consistent monitoring and enforcement are critical. As with any framework of rules — whether a parent’s boundaries for their child or a government’s laws for its citizens — a lack of consistent enforcement undermines effectiveness. Without adequate monitoring and enforcement, a code of conduct is just words on a page, gathering digital dust on some hard drive, with little impact on actual behavior. Based on their diligence or lack of enforcement, a company gains a reputation in the supplier community of either “don’t mess with them, they really mean what they say” or “don’t worry about their code-of-conduct, they don’t really take these things seriously.”

Surveys/Self-Reporting Questionnaires
Are the Foundation for Monitoring

Monitoring compliance is typically a multi-faceted and multi-stakeholder ongoing activity, involving things like supplier surveys and self-assessments, factory/site audits (which may be conducted by third parties), and up-to-date third-party certifications. Monitoring starts with self-reporting by suppliers. There will be different survey questions depending on the type of supplier.

Monitoring Compliance Can Be Challenging

Monitoring compliance can be extremely challenging for a number of reasons. First is the sheer volume and variety of suppliers and regulations — large corporations can have tens and even hundreds of thousands of suppliers, across scores of different countries. Each country has its own laws, regulations, customs, cost of living, etc. The supply base varies greatly too, with many different types of manufacturers and service providers. Compliance requirements for a chemical manufacturer/supplier will be very different than for an apparel manufacturer/supplier.

Furthermore, different kinds of suppliers require different survey questionnaires to be created and maintained (yes, requirements will change over time). Then these surveys need to be sent out to all suppliers, with easy-to-understand instructions. Checking to ensure responses are received and the information in them is adequate, is needed. Follow-up emails need to be sent to those who have not responded. The surveys must be continually evaluated to spot problem areas that require follow-up. Remediation plans need to be put in place to fix problems. Each remediation effort becomes its own little (or not so little) project that needs to be managed and tracked.Multiply this times thousands of suppliers and the task becomes nearly impossible to do manually, at a reasonable cost.

Thankfully, there are compliance and monitoring solutions out there that automate the collection, analysis, and monitoring of responses. These not only lower the effort required but provide uniformity and consistency across a company’s CSR monitoring efforts. Ecovadis is a good example of this kind of solution, which consolidates supplier responses to avoid duplicative efforts. They have a useful guide to assessing CSR monitoring solutions: 5 Key Factors in Choosing a Supplier CSR Monitoring Solution.

Supplier Audits

Of course, it would be naïve to trust that all suppliers will tell the truth all the time. In fact, the suppliers who are breaking the rules have the highest incentive to provide deceptive, incomplete, or false responses to surveys. For this reason, audits are necessary. These often need to be onsite audits, preferably unannounced. However, onsite audits are expensive and time-consuming. Thereby a risk-based approach is needed. This entails assessing the risks posed by each supplier, such as their impact to your business and likelihood of non-compliance based on things like location, past history, and so forth. A risk-based approach allows a company to prioritize suppliers based on the risk they present, enabling limited compliance monitoring and auditing resources to focus on managing the riskiest suppliers.

Audits are not only expensive for the buyer firm. Suppliers may have hundreds of customers asking for audits, which can become overwhelming for them. To solve both sides of the equation, there are industry-wide initiatives and third-party auditors. An example of an industry-wide initiative to share audit resources and practices between companies is the Joint Audit Cooperation for ICT (Information and Communications Technology) suppliers.

There are industry-focused third-parties that provide sustainability audits, such as Valmet in pulp, paper, and energy industries. There are also cross-industry third-party audit and related services providers, such as DQS CFS and Sedex which also providesplatform for sharing multi-tier, responsible sourcing data. The big three testing firms (SGS, Bureau Veritas, Intertek) also do audits, such as SGS’s ISO 26000 assessment, and offer CSR services beyond audit as well.

Supplier Certifications

Third-party certifications offer a lower-cost way of gaining confidence that a supplier is behaving to a specific standard. There are hundreds of third-party certifications. ISEAL is an association of sustainability standards that has defined credible practices for sustainability standards (Codes of Good Practice) and assesses compliance to those good practices (a sort of standards for standards, if you will). Industry groups, peers, and even competitors’ websites can also be good resources for determining which supplier certifications make sense for your company.

Ethical Business Practices

A company may want to ensure its suppliers have ethical business practices beyond labor conditions and environmental practices. Core international CSR standards OECD Guidelines for Multinational Enterprises and ISO 26000, Guidance on Social Responsibility provide broad guidance on human rights, labor practices, the environment, economic viability, fair operating practices, consumer interest, community involvement and other areas of sustainable development. ISO 26000 covers seven ‘core subjects’ which are 1) Organizational Governance, 2) Human Rights, 3) Labor Practices, 4) Environment, 5) Fair Operating Practices, 6) Consumer Issues, and 7) Community Involvement and Development.

Some of the areas that companies may choose to monitor supplier’s policies and behavior include anti-bribery, anti-corruption, accountability and transparency, respect for the rule of law, fair competition, fair and accurate marketing (no false advertising), consumer education, protection of consumer health and safety, reasonable complaint and dispute resolution, data privacy protection, active community involvement and investment, employment/skills creation, and education investments. Some of these involve hard ‘lines in the sand’ (such as respect for the rule of law), while others may be softer goals to be encouraged (such as investments in the local community). There are a lot of areas that could be included, so companies will decide which to prioritize, based on their own business’s identity, situation, and the risks involved.

Partnering with Suppliers

The most effective CSR programs do not simply command suppliers what to do. Some of the things suppliers are asked to do represent profound changes to their practices, systems, and corporate culture. A CSR program will be more effective if you provide suppliers with tools and resources, listen to and understand their objections, and solicit potential alternate ways to solve problems — in particular, spending that kind of time and effort with suppliers that are the most important and strategic for you. This type of partnering is related to the concept ofOutcome Sourcing, where instead of being highly prescriptive in what you want from a supplier, you specify the outcome you are looking for and ask the supplier how they can achieve that outcome. In this way, you tap into the immense creativity and situation-specific knowledge of your supply base.⁷

Building a Reliable and Respected Supplier Network

Most sourcing and supply chain professionals strive to build a network of suppliers that reliably deliver quality materials, components, subsystems, and services on time and at a reasonable cost. Now the desirable attributes for suppliers are being extended to include social responsibility. Companies that care deeply about their own identity and purpose are extending that sense of purpose to their suppliers. As a supply chain practitioner or executive, ask yourself what kind of suppliers do you want? Suppliers that play fast and loose, taking shortcuts and disregarding human wellbeing to achieve their financial goals usually do not make good partners. They represent major risks for their customers both in terms of reputation and reliability (e.g. risks of getting shut down by authorities). Ensuring good labor practices and ethical business practices across your supplier network becomes a critical part of building your own corporate identity and sense of purpose. That can be a powerful force for business performance, as well as employee and customer respect.

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¹ The ILO (International Labour Organization) is a UN agency tasked with protecting workers, primarily by setting international labor standards. — Return to article text above
² See the ILO’s 2017 report, Global Estimates of Modern Slavery. The 25 million include both state-imposed and private forced labor. About half are in debt bondage. The report included the following equally alarming statistic, “In the past five years, 89 million people experienced some form of modern slavery for periods of time ranging from a few days to the whole of five years.” — Return to article text above
³ See 10 Basic Facts about Child Labor Globally. — Return to article text above
⁴ Eradicating forced and slave labor requires society-wide efforts in areas such as building social protection/safety net systems, enacting and enforcing laws protecting rights, programs for debt bondage relief, and building stable, non-corrupt governments. — Return to article text above
⁵ MIT developed a Living Wage Calculator for the US, which shows the minimum wage, poverty wage, and living wage for every county in the US, based on number of children and working adults in the household. — Return to article text above
⁶ RoHS = Restriction of Hazardous Substances) Directive, REACH = Registration, Evaluation, Authorisation and Restriction of Chemicals, and WEEE= Waste Electrical and Electronic Equipment. The US’s Conflict Minerals Law is in Section 1502 of Dodd-Frank. — Return to article text above
⁷ Outcome Sourcing can be labor-intensive and relationship-intensive. Thereby it is often used primarily with strategic suppliers. — Return to article text above

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