The campaign group the European Coalition for Corporate Justice wants the European Union to force firms to do human rights due diligence on their supply chains.
And not a moment too soon. Amnesty International for example, recently asked 29 companies about their use of the mineral cobalt in their products. Almost half of them failed to show even minimal compliance with international standards.
No responsible business leader wants to risk being found supporting child labour. Even fewer want to risk being accused of supporting child slavery. Yet for many their supply chain is a car crash waiting to happen—most recently and publicly over the use of cobalt mined by children and adults, in horrendous conditions in the Democratic Republic of Congo (DRC).
Cobalt powers batteries for mobile phones and the upcoming tsunami of driverless and electric cars. The price of the commodity is soaring—see chart. So this is no mere footnote to ethics in company supply chains.
Companies showing little concern with their cobalt supply chain sources include such iconic names as Sony, Samsung Electronics, General Motors , Volkswagen, Fiat-Chrysler, Microsoft, Lenovo, Renault, Vodafone and many others.
Yet the leaders of all these firms know that human rights risks and abuses cannot be separated when it comes to cobalt mining in the DRC.
Purchasing and supply management professionals face growing pressure to to show the supply chains they manage take ethical and social responsibility issues into consideration. Even back in 2012 Phil Knight then CEO of Nike, ruefully admitted:
“The product has become synonymous with slave wages.”
This led to a complete re think at Nike, with sweeping reforms to its supply chain approach. Other companies too have realised they must take a fresh look at their entire supply chain.
For instance, the London Metal Exchange recently sent a low key directive to its members asking them to show how they guarantee “responsible sourcing “ of commodities traded on the exchange. This was part of a broad push to address responsible sourcing and unrelated to any product or brand.
New research from The Risk Advisory Group suggests third party risk is at the top of the agenda for compliance professionals in 2018. Hardly surprising since businesses tends to increasingly rely on networks of third parties to take their services and products to market.
Yet these third parties pose a significant risk. These challenge compliance teams to find ways to manage these relationships effectively and efficiently. Technology is one solution. Automated processes such as online questionnaires, evaluation, and approval systems can help. But they can also generate more complexity, reducing efficiency gains if they not managed in the right way.
The complexity and length of some supply chains also make it a challenge to meet moral and legal obligations. Forces pushing to ensure supply chains are more ethical include:
- media or consumer pressure
- codes of conduct or legal imperatives
- inclusion of such issues in annual financial or social accounts
- results of social audits
- demands from ethical investors
- perceived high risk from supply chains based in a particular country or on a particular product
No hiding place
Business used to deny any responsibility for the behaviour of their oversees suppliers’. Such disinterest in the supply chain no longer stands up to scrutiny. Those firms associated with the 2012 Dhaka fire in Bangladesh found this out the hard way.
That fire killed 117 people, and injured over 200 others. The overseas firms using the factory as part of their supply chain tried to distance themselves from any responsibility for what went on locally. That included Walmart, the world’s largest retailer. No prizes for guessing how this sales giant initially responded to the disaster—it denied any suggestion of accountability.
Yet by 2016 Walmart was boasting of new credentials of caring. Particularly, “training in promoting factory safety in Bangladesh.” Having seen the writing on the wall its leaders adapted accordingly.
In a global economy supply chains can be lengthy and dispersed. That is, they may have many sub contractors, spread across a wide geographic area. As more suppliers keep entering the chain the chances that ethical problems will arise keep multiplying. The price for failing to monitor and regulate such supply chains to make sure they are ethical can prove commercially devastating–see panel on right.
Few academics, industry experts and company executives can agree on what an “ethical” supply chain even looks like.
Once it meant “sweat shop” conditions and environmental issues, such as pollution or energy conservation. Now though, it encompasses a much broader range of issues:
- Freedom of employment and association
- Eradication of child labour
- Safe and hygienic working conditions
- Appropriate pay and working hours
- Humane and non-discriminatory treatment
- Anti-bribery and corruption
- Environmental awareness
What’s the pay off?
The UK’s Independent Anti Slavery Commissioner has boldly claimed:
“The business case for ethical supply chains is incredibly strong.”
Nor is the business case confined to narrow and obvious areas such as slavery. While the precise benefits from an ethical supply chain can be hard to quantify precisely, they include lower transport costs, less waste, increased efficiency, lower material costs and even access to government incentive programs.
Attractive though these gains may be, many managers remain dubious about whether they can be achieved. Instead, they find it easier to alter branding and marketing than to reconfigure or rebuild an entire global supply chain.
Getting the supply chain right though, can lead to big business wins, as PepsiCo discovered in 2010. It made over $60m in energy saving opportunities from its carbon management and energy assessment programme. This stemmed directly from working with its suppliers.
“Supply chain” used to mean the source and movement of parts and labour for making a finished product. Now, it includes everything from metals in the earth to seeds in the ground. From those making an intermediate product such as the foot pedals for a bicycle, or an ingredient added to corn syrup that goes into a breakfast cereal.
Some would argue that it’s actually impossible to ensure there’s an ethical supply chain when it’s so fragmented. A business may not know enough about all its actual suppliers, with increasing complexity of products and suppliers.
For example, a study of Apple’s supply chain found that most (90%) of the components came from companies outside the US. They included chips made in German and Taiwan, memory board and display panels made in South Korea and Japan, and data chips produced in Europe.
There has to be a better way
Demands for transparency provides a new norm making leaders acutely aware of the vulnerability of their supply chains. Social media for example, has killed off any ability to rigidly control a firm’s image. Also Wall Street and socially conscious investors now pay far more attention to ethics and especially the hard to analyse supply chains.
Given the difficulty of finding and correcting supply chain ethical problems, many companies have tried to collaborate more closely with suppliers, governments and NGOs.
There is now a new tool calls the Higgs index which helps companies understand the social and environmental impact of their supply chains. It rates their policies and practice, including how materials sourcing and various operations affect sustainability.
Based on the idea that “we can’t do this on our own” some companies are both acknowledging that they don’t know everything about their supply chains, and asking outsiders to take a look. Unilever for example has even opened its factories in Vietnam to researchers from Oxfam and others, with no strings attached. Rather than reacting defensively the company’s CEO embraced the findings:
“It’s fair to say that this report highlights areas where we still have a lot to do.”
CEO Paul Polman, Unilever
The continued evolution of supply chains also means business leaders may not see the scandal heading their way. In the UK, safety standards of certain building panels hardly rated highly until the terrible disaster of the Grenfell Tower fire. Now it’s a priority across the entire building industry. Or in simple terms, selling panels that can catch fire easily is now deemed highly unethical.
While there are no absolute rules for how to keep a supply chain clean and ethical, there are certain principles. These emerge from numerous studies; here are 12 well tried ways to keep your supply chain ethical.
- Harbert, Can businesses police the behavior of global suppliers? SAGE Business Researcher, April 2016
- Seal, Sustainable supply chains: why placing ethics over profits pays off, Guardian 21st November 2017
- H.Sanderson, London Metal Exchange probes child labour concerns over cobalt, FT 23rd November 2017
- Sanderson, Amnesty warns on use of child labour in cobalt mining, FT, 15th November 2017
- Industry giants fail to tackle child labour allegations in cobalt battery supply chains, Amnesty International, 5 November 2017
- Beyond Supply Chains, empowering responsible value chains, World Economic Forum, Jan 2015
- P. Novak, Principles and Standards of Ethical Supply Management Conduct with Guidelines, Institute for Supply Management, Inc.™ 2013
- Ten tips and principles for ethical sourcing in supplier management, Chartered Institute of Purchasing and Supply
- Chapman, Lessons from the Front-Line: How to Unlock the Promise of Online Third-Party Compliance Management Systems, Compliance and Ethics Blog, SCCE, Jan 201