“Buyer Beware” – A Commentary & Suggestions from Robert Kuhn on Supply Chain Management
Posted on June 26, 2013 by Hank Boerner – Chair & Chief Strategist#Uncategorized
First and foremost, these are human tragedies of significant magnitude. But they are also perfect examples of the challenges retail brands face in managing large, complex supply chains and trying to hold far-flung suppliers accountable for their human rights and labor practices.
This isn’t a case of brands intending to do harm; rather it’s a case of nasty unintended consequences of outsourcing to low-cost geographies.
Brands have responded to the deaths of over 1,000 garment workers in an 8-story factory outside of Dhaka, Bangladesh, by signing on to one of several “solutions:”
- A group of mainly European retail brands, along with a few US retailers, have signed on to a legally binding pact under which building safety training and inspections will be centrally- managed and beefed up.
- A separate group of US brands, together with some industry associations, announced the formation of a working group under the auspices of the US-headquartered Bipartisan Policy Center.
- Other retail brands, like Japan’s Fast Retailing Co. (the Uniqlo brand), H+M and others, have decided to each go their own way and deepen their engagement with suppliers on this issue. Some of these companies were frightened off from signing the European-led pact because they felt its legally-binding nature could expose them to lawsuits.
- Some brands may still opt to de-select suppliers who violate codes of conduct.
It’s not just garment worker deaths that should concern us. Exposure to hazardous chemicals, poor living conditions, unsafe machinery, lack of fire safety and even “virtual” slavery (where workers’ essential identity documents are held by factory management, making them unable to travel at will) are part of the daily routine in some supply chains.
While the most common places to find these conditions are Bangladesh, Cambodia, Indonesia and Vietnam, they can also occur in more mature markets such as China and India (and what will conditions be like for workers in newly-liberatedMyanmar?).
The important point is that human and labor rights abuses occur frequently in extended supply chains that are characterized by significant opaqueness, cultural differences, corrupt governments and stretched suppliers.
The Current Approach Is Broken
Most “leading” retail brands use a multi-pronged approach to managing human and labor rights in their supply base:
- Basic due diligence during the sourcing process, including brief site visits and review of publicly-available information.
- Documentation, consisting of contract language and supplier “codes of conduct,” setting forth in writing the expectation that the supplier will abide by all applicable laws and regulations.
- Supplier questionnaires and self-assessments, providing the retailer with quantitative and qualitative information on investigations, violations, accidents, etc..
- Annual or more-frequent factory audits, often by “certified” third-party auditors, which look for legal violations and violations of codes of conduct.
For some time, retail brands worldwide have believed that this approach would alert them to any possible problem in time for them to either work with the supplier to rectify the problem or, in rare cases, de-select the supplier.
Even regulators have bought into this approach — the best example being the California Transparency in Supply Chains Act of 2010, which requires any company doing business in California and with over US$100 million in annual worldwide sales (including B2B companies) to disclose on its website its approach to identifying and mitigating human trafficking and slavery in its entire supply chain. The required disclosure tracks this paradigm perfectly. But now the evidence shows that this approach is not working. Deaths, illnesses, injury, slavery, human trafficking and other abuses continue and millions of dollars are being spent chasing an intractable problem. There are many reasons why things aren’t working, but chief among them are these:
Companies do not have transparency very far into their supply chains and do not have legal relationships with any supply chain partners other than their direct suppliers. You can’t fix what you can’t see and you can’t fire who you don’t hire.
- Suppliers are fatigued by surveys and audits coming at them from every direction. Rather than encouraging improvement, their fatigue makes them cut corners, such as giving work to unauthorized suppliers just to keep business.
- Governments in many of these countries are notoriouslycorrupt, siphoning off resources intended to address the problem. Bribery is commonplace.
- Wages in many industries are set by law, so paying a supplier more likely results in richer company owners, not fairer wages or better working conditions.
- Low-cost supply models, driven in part by consumer preferences, don’t leave any room for investment in anything more than the basics, if that.
It’s taken a while to get to this rather dark place and it might take a while to get back out. But there are better ways to manage supply chain human and labor rights.
Fixing This Requires More Than Money
I’ll admit, this is a tough one for any retail brand. There is no band-aid approach and it’s totally unclear that companies have any way to eradicate the cultural problems and deep-seated corruption that contribute to these problems. But it is clear that there is a better way to do things:
- Create and share visions of healthy supply chains. Perhaps this means zero violations – or perhaps it means supply chains that empower workers and improve communities. In any case, it’s essential to start with a vision of success.
- Take a collaborative, rather than a one-off, approach. Industry consortia (such as the Sustainable Apparel Coalition, and the Electronics Industry Citizenship Coalition) bring together multiple stakeholders and thereby:
- facilitate seeing the problem through multiple “lenses,” based on each stakeholder’s individual experience.
- create mass that is significant enough to influence suppliers.
- remove duplicity in surveying and auditing (activities that should, in fact, continue), alleviating suppliers of any real or imagined overburdening.
- pool resources, especially those that must be directed to administrative tasks such as data collection.
- Take a more serious approach to corruption and bribery in the supply chain. While these activities don’t account for all of the problems, investing in policy-influencing activities (where legal) that result in stricter laws and harsher penalties for illegal behavior can help in the medium- nd long-term.
- View suppliers as partners, not cogs in a wheel. That means investing in training and capacity building and rewarding suppliers that create a history of violation-free activity or work quickly to expose and remediate problems.
- Partner with innovative solutions providers, such as the start-up “Labor Voices,” which is using cell phone technology to give retailers employee-derived information about factory working conditions.
- When possible, and especially in locations where a company expects to work long-term, invest in “root cause” solutions. For example, in response to learning of child labor contributing to the manufacture of one of its product lines, a European-based global retail brand leveraged its corporate foundation to invest in educational, home care and after-school initiatives
All of this will take time — and, of course, money. And it must be done while maintaining profitability, meeting customer expectations and addressing environmental issues.
But anyone who thought that today’s version of supply chain accountability was easy is probably confusing it with the days when you could drive down the street to your supplier, knock on the door, share a cup of coffee with the owner or manager and look them squarely in the eye.
Most process-change initiatives don’t get the green light until someone can articulate a sound business case for making the initial investment and maintaining whatever program is needed.
Sometimes there are exceptions for crisis situations, and the Bangladesh factory collapse borders on one of these. It is clear, in any case, that investing in improved supply chain human and labor rights conditions in the manner outlined above can have a real payoff:
- Mitigation of reputational risk – as customers because increasingly knowledgeable and savvy about how companies are managed, investing in activities that target reputational “hot spots” (such as far-flung supply chains) can protect revenue.
- Sharing of best practices – by participating in a focused community of practice, such as an industry-led consortium, companies can save costs on acquiring the knowledge and skills necessary to identify the best suppliers, work with marginal companies and root out the worst of the bunch.
- Enhancement of brand equity – the concept of the “socially conscious” consumer is taking hold worldwide; for the brand that gets ahead of the pack on addressing human and labor rights issues, there is the opportunity to capture market share from laggards and create new revenue streams based upon sustainable business practices. The opportunities in any one company will, of course, be unique to that company’s circumstances. In cases where customers don’t have much information about supply chain failures, the upside may be less discernible. But where customers have almost real-time knowledge about supply chain practices, especially in global retail brands, the payoff is likely to be huge.
Robert W. Kuhn is President of Kuhn Associates Sustainability Advisors, LLC, consultants to companies throughout the product supply chain. With over a decade of senior corporate management experience and deep subject matter expertise, Robert combines extensive strategy development and process re-engineering experience with superior sustainability insights as he helps clients design and implement sustainability initiatives in environmental and social responsibility.
Kuhn Associates Sustainability Advisors is based in New York City and focuses exclusively on the intersection between sustainability and business and supply chain operations.
Governance &Accountability Institute and Kuhn Sustainability Advisors collaborate on client programs.
Robert Kuhn is a member of numerous trade associations and serves on the Greenhouse Gas Protocol Advisory Group and the Institute for Supply Management’s (ISM) sustainability and social responsibility committee. He’s a frequent speaker and published writer about sustainable business practices.
Robert Kuhn’s web site: www.kuhnassociatesllc.com