Ethical Supply Chains … which are sustainable

Operating ethically and operating profitably are no longer mutually exclusive concepts. Leading companies are “walking the walk,” balancing the goal of achieving profitability with gaining social and environmental advantages. Companies stuck in a mindset of “what’s the minimum I need to do” are missing out on opportunities to use ethical business practices as an integral part of what makes them unique.

Achieving responsible and profitable supply chains is about gaining a triple advantage: creating a clear business case for corporations, as well as benefits for the environment and society. Those focused on this “triple advantage” in supply chain operations can increase competitiveness through increased revenue and brand reputation while decreasing cost and risk.

In this fast paced business world, fiscal priorities often prevail over values—even the values of social responsibility and ethical behavior—as corporations strive to reduce costs and uncertainty in the corporate supply chain. The global market place need supply chains to be nimble and agile. Efficient supply chains are responsive to changing priorities by keeping costs in line, schedules on time and, more importantly, giving companies the room to scale for growth.

In the 1990s, several U.S. and European companies set aside much of their supply chains for outsourcing. Globalization, technology and the desire for profit assisted in manufacture of parts in a nation with cheapest costs, assemble parts together in another and sell them in a third nation at the best prices. This outsourcing process in itself was expedient and profitable despite its various controversies.

However the corporate citizenship  / Corporate Social Responsibility did not diminish. The supply chain cannot be divorced from corporate social responsibility (CSR) concerns about the environment, health and safety.

Envisioning a seamless world of corporate citizenship that extends beyond parent company’s country borders is far easier than achieving it. Outsourcing has brought a host of new challenges, not the least of which was entirely different sets of standards with regard to health and safety and environmental regulation.

Walking the walk - Courtesy accenture.com

CSR advocates have always argued that U.S. companies have an ethical responsibility that isn’t constrained by geographic and political borders, or even cultural traditions. It has been a sobering enterprise to put that notion into effect in countries that do not share the United States’ affinity for regulation and compliance, although it must be argued that many U.S. companies shifted operations overseas to avoid the heavy hand of U.S. regulation and the costs that came with it.

The Melamine scandal in China

Companies doing business in China have had difficulty maintaining quality throughout the supply chain, as illustrated by food and product safety scandals in 2009 especially when melamine-tainted milk discovered. Inherent problems in manufacturing processes and supply chains led to a breakdown of quality assurance. The scandal severely damaged China’s dairy industry; it took more than six months from the time the scandal broke for dairy-product sales to recover 70-75 percent of their pre-scandal value, according to one Beijing dairy analyst. To salvage consumer confidence, companies must place new importance on quality assurance. And to achieve good quality control, managers must build more accountable, transparent, and ethically managed supply chains.

Lessons from the Melamine scandal : 
The Melamine scandal provides lessons on how companies can better control their supply chains. Melamine, a chemical used to produce plastics and fertilizer, can appear to heighten the protein levels of milk so that the milk is erroneously identified as a higher grade and yields a higher price.  PRC authorities found that melamine was added to roughly 70 milk products from 20 companies in China last year; the chemical sickened nearly 300,000 infants and caused the death of at least six children, according to press reports. Leading dairy company Sanlu Group, a partially state-owned enterprise that is now defunct, sat at the heart of the scandal. Investigations determined that some Sanlu staff were aware that third parties had added melamine to milk used for its baby formula, but that Sanlu continued to produce and distribute the formula for months after the discovery. The scandal forced New Zealand dairy company Fonterra Cooperative Group Ltd., which at the time owned a 43 percent stake in Sanlu, into the international spotlight. Meanwhile, Beijing Sanyuan Foods Co. Ltd., another state-owned Chinese dairy company, man- aged to keep fairly free of the scandal, and its business is booming—2008 net profits rose 87 percent over 2007.

Other Examples of Nike and Apple

Nike

The experience of Nike in the 1990s illustrates this issue Nike outsourced its manufacturing. Nike was driven by a desire to assemble products at a fraction of the cost of producing them in the United States—indeed Nike was one of the great innovators in overseas manufacturing. But, Nike insisted that labor conditions in its contractors’ factories were not its responsibility. Nike’s company line on the issue was clear and stubborn: without an in-house manufacturing facility, the company simply could not be held responsible for the actions of independent contractors

Nike was still sensitive to the potential public relations nightmare an unrestrained local manufacturer could wreck on its good name, and it drafted a code of conduct for its contractors. There was no effort, of course, to determine if contractors complied with the code, and, eventually, Nike’s factories came under attack for their workplace practices, including the use of child laborers. Watching its reputation sullied by stories of abuse, facing a backlash on college campuses from irate students, Nike began to see its profits dip. In fiscal year 1998, beset by the Asian currency crisis, oversupply and weak demand, Nike saw its earnings fall 69 percent and was forced to lay off workers. Nike product became synonymous with slave wages, forced overtime

Nike revised its policies on contractors and encouraged monitoring of local factories and has gone beyond monitoring to embrace a more collaborative approach to reforms, sharing workplace and human resource best practices.

As Richard M. Locke, Fei Qin and Alberto Brause noted in “Does Monitoring Improve Labor Standards? Lessons from Nike” in 2007 in the Industrial & Labor Relations Review, monitoring alone is not able to accomplish the tasks necessary to ensure a safe and healthy workplace. They wrote that, “global brands and labor rights NGOs would do well to complement their current emphasis on monitoring by providing suppliers technical and organizational assistance to tackle some of the root causes of their poor working conditions. Perhaps not all suppliers would be willing to collaborate with global brands and NGOs on these efforts, but refusals to collaborate could provide global brands with a justification to shift orders and consolidate production in more efficient, cooperative, and perhaps even ‘ethical’ suppliers.”

The lessons learned from the Nike experience have a particular appeal in a world that has shrunk considerably in the last decade where in CSR and corporate citizenship has taken hold, not only in the imaginations of academics but also in the real world inhabited by consumers.

Apple

Today another corporate - Apple—finds itself facing criticism for the practices of yet another overseas supplier with a less than savory reputation for workplace safety and fair wages. Apple has been buffeted by attacks in the United States for much of the last year for the workplace conditions and wage rates of its Chinese manufacturer, Foxconn, which makes the incredibly popular iPhone.

In February Apple became a participating company in the Fair Labor Association (FLA) and, in doing so, it agreed to abide by the FLA’s Workplace Code of Conduct throughout its supply chain. The FLA quickly launched a series of independent investigations of Foxconn’s factories in Shenzhen and Chengdu, China. A report detailing the FLA’s findings at Foxconn facilities and recommendations for a broader strategy to address workplace rights issues is due in March.

Launched in 1999 by a coalition of industry, labor and nonprofit advocacy groups, including Nike, the FLA assesses working conditions and monitors attempts to remedy violations in factories, farms and facilities used by its affiliated companies. Independent assessors schedule random visits, although critics complain that they do give warnings of their imminent arrival, to facilities supplying participating companies.

“We believe every worker has the right to a fair and safe work environment free of discrimination, where they earn competitive wages and can voice their concerns freely,” Apple CEO Tim Cook said in February. “Apple’s suppliers must live up to this to do business with Apple.”

Apple is an exceptionally able company to walk the minefield of workplace standards at this moment in time. Arguably one of the most agile and intellectually authoritative corporations operating today, Apple has the creativity, reputation and scope to find solutions to workplace standards and compliance

for contractors that have eluded many other companies.

Key findings

·    Companies that talk about sustainability instead of actually shaping responsible supply chains will begin losing their ability to grow and compete.

·         Social media puts businesses under the lens for their practices, and they may feel a reaction from a global customer base that will “vote with their wallets.”

·         Reputable analyst firms are increasingly factoring ethical behavior into their valuations, and sustainability can create significant impact on stock prices.

·         Ignoring business sustainability may make it difficult to attract and retain new talent. Millennials consider sustainable practices to be essential, and 46 percent of CEOs reported that employees would be among the most influential groups in guiding their action on sustainability over the next five years – second only to consumers.

·   Companies that don’t embrace responsible supply chain practices risk falling behind and losing a competitive edge they may never regain.


Tips for ethical supply chain management  (with reference to the lessons from the Melamine scandal )

To reduce risks stemming from miscommunication, cultural differences, and logistical challenges while improving accountability and quality assurance in the supply chain, companies investing in overseas supplychain operations, should consider taking one or more of the following steps.

• Focus on ethical supply chain management early : When considering a joint venture (JV), the potential foreign and domestic partners should emphasize the importance of establishing an ethical supply chain management process early in the contractual negotiation stage—when trust is being built between the two companies. Once the partners agree on a set of values, the values become the foundation on which the partnership builds its supply chain and quality assurance management systems. Foreign investors should also use their negotiating power to set high ethical standards for a subcontractor’s supply chain management in their business agreements and contracts—including by making subcontractors’ adherence to a contractual clause related to quality assurance and supply chain management mandatory. Companies may want to establish financial consequences for breaches of these contractual commitments.
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• Integrate ethical considerations into technical solution :Companies may wish to discuss supply chain management best practices with consulting companies that focus on ethics and corporate social responsibility (CSR). Such consultancies can help foreign companies locate partners with strong corporate values and find districts and zones that maintain legal policies and training programs that uphold high standards in employee relations, supply chain management, and environmental sustainability. Consultation on ethical criteria facilitates the building of trust between JV partners and emphasizes the importance of ethical considerations in business decisions.
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• Grow sustainably : With more than 45 years in the milk industry, Sanyuan was cautious about enlarging distribution beyond its base in northern China. This strategy allowed Sanyuan to focus less on market growth and more on the effective management of its infrastructure, with a huge payout in the long term. In contrast, Sanlu’s relatively quick expansion after its founding in 1995 led to a shortage of milk sources, the collection of milk without close supervision of quality, and ultimately the company’s demise. Sanyuan’s March 2009 takeover of Sanlu’s dairy farms and distribution infrastructure poses a challenge to its sustainable growth and has opened an online debate among consumers about the future of Sanyuan and the quality of the company’s products as operations expand.
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• Invest in greater integration and ownership of supply chain channels : Sanyuan’s integrated, company-owned supply chain focuses on quality assurance. A November 2008 Xinhua News Agency article explained that Sanyuan “escaped the scandal because of its nearly self-sufficient production chain. Its raw milk came largely, or 80 percent, from dairy farms that the company owned or had a stake in.” The company built secure milk sources by using dairy farms run with strict quality-control systems for animal feed procurement, veterinary care, milking, and delivery of raw milk to processing plants. With strong ownership in the supply chain, Sanyuan directly participated in the establishment of these quality-management systems.
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• Go beyond compliance training to develop a stronger ethical culture : Companies should consider training programs and quality assurance processes that link product safety, consumer safety, and profit in employees’ minds and thereby encourage employees to identify quality as a company hallmark. For example, Sanyuan’s workers test-drank every batch of milk before it left the factory, according to Xinhua’s interview with Sanyuan. Companies can also consider conducting training seminars in leadership and business ethics. The dairy company Inner Mongolia Yili Industrial Group Co., Ltd. delivered leadership and business ethics training seminars to help develop a deeper ethical sense among its employees. These efforts created a stronger ethical culture at Yili, which survived the product safety scandal, though it too had to recall melamine-tainted products.
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• Focus talent recruitment efforts on candidates who value business ethics : For entry-level positions, companies can attract talented individuals devoted to ethical supply chain management by participating in student organization and nonprofit initiatives. For example, companies can attend conferences on CSR or innovation that are run by business school students. Companies can also reach out to university students interested in business ethics through research competitions.
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• Share best practices with other companies : Companies can learn more about supply chain best practices by joining CSR-related groups. For example, the Beijing Ethics Network, a group of about 15 CSR practitioners from the business and nonprofit sectors, holds a monthly round-table to discuss CSR best practices. In a meeting that focused on labor rights and ethical supply chain management, human resources and compliance officers shared ethical supply chain management problems and best practices with colleagues from various industries. One discussion centered on how contracting companies in the technological and financial services sectors handle subcontractors that stand out as high ethical performers. Participants described their companies’ preferential policies in which subcontractors that excel receive more business from the contracting companies. Some managers explained that their companies took initial steps toward this type of reward policy, while others require that ethical performance clauses be added to every contract signed with a subcontractor.

To conclude

• By exhibiting a genuine commitment to social responsibility and ethical business practices, corporations like Nike and Apple have the power to not only transform their organizations but also their supply chains. A robust corporate citizenship isn’t limited by the vision of its shareholders and customers, and its reach certainly doesn’t end with its company headquarters.
  
  
  Companies must move go beyond the concept of sustainable business practices as a noble purpose and instead embrace them as a strategic weapon wielded to gain a competitive advantage.
  To do so calls for getting the numbers straight and building a clear business case for investments. Businesses must also pass by “trial and error” approaches and go straight to proven methods. Decision support tools can help a company to compare its current portfolio of initiatives and identify ways of prioritizing supply chain investments.
  
  
  It also is key to collaborate on sustainability issues across an extended value chain of internal stakeholders, suppliers, sub-contractors and the end consumer. By working together, companies can find new ways of achieving social, environmental and economic gain, and ultimately create a competitive advantage.
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• Info resources: accenture, china business review