Building sustainable supply chains

The impact of the media coverage of Foxconn on Apple should act as a stark reminder to companies to carefully analyse both their supply chains and how they engage them. Incidents, challenges and tragedies can have a long-lasting impact on both corporate reputations and the resilience of the supply chain itself.

Unfortunately, the last few years have seen a decline in creative approaches and investment in strong supply chain engagement programmes. At the same time, the problems of unpaid wages, working hours, safe working conditions, freedom of association, environmental stewardship and workforce engagement have not improved as quickly as many stakeholders would like.

Building robust supply chains with appropriate working conditions is an ongoing and complex challenge. However, I have identified four barriers which perpetuate a continuing negative stasis in supply chain management processes. Unless buyers and suppliers recognise the fallacy in continuing to operate against these standards, they will continue to undercut the ability of many supply chain programmes to evolve.

From audit fatigue to proven transparency

Audit fatigue is the belief that too many factories are audited too many times. There is some truth in this idea: too many poor quality audits at too many factories produce too little value. However, instead of reducing audits to accommodate the fatigue of the audited supplier, audits protocols themselves should be changed.

Deeper audits should be mixed with light audits. Announced visits with unannounced visits. Technical reviews of systems mixed with worker roundtable dialogues and civil society engagement with factories and workers.

The frequency of factory audits should be based on the reputation of the supplier and the ability of the buyer to see and trust information. Factories with untrustworthy information or poor transparency should be audited more, not less.

On the other hand, factories where the supplier has effective, transparent practices and where freely elected union officials speak about supplier working conditions should be audited less, or perhaps not at all. In short, the supply chain dialogue needs to evolve from the perception of audit fatigue to the concept of proven transparency.

From "comply or die" to shared values

A phrase often heard in the auditing industry is "comply or die" and refers to brands that overreact to isolated issues on audit reports by terminating the business relationship with the supplier. This misconception holds a grain of truth: there is no such thing as a perfect employer, and knee jerk reactions to failures by factories to meet brand standards help no one – the brand, the supplier or the workers.

Unfortunately, this terminology has encouraged companies to over-emphasise the compliance journey, often making the penalties for non-compliance redundant, and so undercutting the primary focus on the values upon which any compliance programme is based.

If a company believes in basic social and environmental standards, such as paying workers a minimum wage, then there should be repercussions when these standards are not met.

Ideally businesses should promote a shared values approach that emphasises the content of the buyer/supplier dialogue, the relationship between the two, and the quality of procedures to deal with identified problems.

From "continuous improvement" to robust, standards-based systems

The way continuous improvement has evolved is unfortunate: companies accept shortfalls in supplier standards as long as the overall big picture is one of "continuous improvement". However, the gaps they accept in doing this means they are knowingly complicit in violations of basic legal requirements such as illegal wages, excessive and unsafe working hours, dangerous health and safety standards, or unhealthy living and social conditions.

And if these gaps are not quickly closed (for example if wages rise from 57% of minimum wage to 63% of minimum wage under the "continuous improvement" system) the moral hazard for the buying company only increases. To engage in "continuous improvement" without non-negotiable, basic standards is essentially a recipe for no standards.

Consequently, we need to move the supply chain dialogue on from "continuous improvement" to create the foundation for a "robust standards-based systems". A system in which buyers and suppliers have agreed basic standards prior to any business relationship, based on milestones and improvements. This allows for working conditions to improve beyond compliance over time and ensures the shared values of the buyer and supplier are implemented with transparency.

Integrated buyer transparency

Building better supply chain processes rests with buyers. All too often, audits or compliance information is not shared beyond the walls of the buying organisation. It's not only possible to open auditing results, but doing so can result in improved working conditions, as evidenced by the International Labour Organization's Better Factories program. This means that messages of transparency, values, and robust standards are integrated with purchasing terms, pricing, and the business relationship.

And it means open auditing information, clarity on buyer standards, and demonstrated causality between compliance programs and purchasing decisions. Last but not least, it can also lead to improved industrial relations.

Time to refresh, realign and reinvest

Companies that have taken their eye off the ball of good supply chain management but want to get back in need only focus on the fundamentals: transparency, values, and the integration of purchasing practices with their company's social and environmental principles.

Rethinking supply chain management shouldn't be hard, but it does take a reinvestment in creative solutions. What it means for any responsible business is looking at its values and ensuring they are practiced throughout the company and its suppliers. It also means not putting up with easy excuses for easing up on social and environmental standards that are core to the standards promised to stakeholders.

Jeremy Prepscius is vice president, Asia-Pacific region, at BSR

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