Vertical Industries Most at Risk

Most corporations, whether service or production orientated, domestic or global, vertically integrated or fragmented , will have some concerns with supplier behavior based on these types of characteristics and supplier relationships. But early pressure for supply chain monitoring has often fallen on several vertical industries, and it is companies in these areas that are being forced to pioneer some of the most innovative practices with regard to an ethical supply chain. Consider some of the industries where dependence upon suppliers tends to make companies vulnerable to potential disasters.

Light Goods Manufacturing

Soft and plastic toys, footballs, housewares ” all constitute a massive loosely related light goods manufacturing industry that today is almost entirely dependent on labor from developing economies. India s homewares export market, for example, employs approximately six million people, and U.S. purchases alone ( textiles , leather, handicrafts, carpets, cookware, etc.) account for some $3.4 billion. Most of these goods ” an estimated 65 “ 70 percent ” are created by subcontractors . ^{[10 ]} This vast industry area, possibly more than any other, contains all of the potential criteria for social and environmental exploitation ” large subcontractor networks, low skills, low wages , child labor, exposure to chemicals, and home-based workers.

Challenges in the Extended Supply Chain

Table 3-1 is a recent attempt by the Ethical Trading Initiative in the United Kingdom to create a detailed study of the challenges that UK companies faced in their extended supply chain. It provides a summary of how corporate members purchased supplies in 2000 compared with the percentage of suppliers they were able to evaluate.

 

Table 3-1: The Supply Chained Analyed

Company	Own production capacity	Sub- contract using own overseas office	Supply via agent	Contract direct to overseas supplier	Supplier sub- contracts inputs	Supplier takes product from family smallholders	Supply from UK-based firm, which may in turn subcontract to overseas	Produce purchased at auction	Percentage of supply- base evaluated
A	V			V			V
B		V	V	V	V		V
C			V	V			V
D				V			V
E			V	V	V	V		V
F		V	V		V
G			V	V			V
H			V	V	V		V
I	V	V	V	V	V
J			V	V			V
K			V	V	V		V
L		V	V	V
M	V	V	V
N	V	V	V	V					V
O		V	V	V	V	V
P		V	V	V
Q		V	V			V

NB Company A was also supplied by overseas joint ventures ; company G purchased supplier-branded products; company I had suppliers with home workers; company N had a licensing agreement covering marketing and manufacture and company Q purchased from an overseas producer board.

Source : The Ethical Trading Initiative s 2000 “2001 Annual Report, at www.eti.org.uk/pub/ publications /annrep/2000_en/page04.shtml .

Textile , Garment , and Footwear Industries

Probably no other sector has become more closely associated with the sins of their suppliers than the clothing and footwear industry. There are many inherent problems with this area, which is still labor intensive , with little plant or heavy equipment needed. In a global marketplace , the poorest ” those that will accept the lowest pay and yet are able to produce a quality product ” will be sought out, and that usually means low pay, poor working conditions, and few environmental protections . Sewing garments or assembling a football can be done at home, and a great portion of this work falls into that multitiered network of unmonitored, often individual subcontractors, too often including children and involving long and unregulated hours of work with little safety supervision. Of course, garment factories themselves are notorious for their difficult working conditions, poor safety records, low wages, exploitative hours, and sloppy employment practices. Toxic dyes and other chemicals are often used in the manufacturing process, and equally, fiber development and disposal, the use of pesticides in cotton cultivation, and uncontrolled water pollution that comes about during the washing and dyeing processes all create potential environmental and health problems.

The severe criticism that large retailers such as Nike, Gap Inc., or Reebok have received from activists for supporting, or at least permitting, sweatshop conditions in this area has had two effects. In the first place, as the single most vilified industry, the clothing industry ” the rag trade ” has essentially provided the momentum for the development of the Social and Ethical Accounting and Reporting movement that has become the foundation of CSR (which we will explore in the next two chapters).

Second, many of these companies are at the forefront of innovative new programs for improving working conditions in these factories, and for generally improving supplier management performance. Well-known brand names that for the past few years have been harangued by activists ” Levi Strauss, Nike, Gap Inc. ” have in fact been fairly instrumental in developing codes of conduct for better supplier behavior. Gap Inc., for example, now has more than 80 employees dedicated to its ethical sourcing and supplier monitoring program. Nike has more than 60. In fact, more than a quarter of the companies currently involved in the Ethical Trading Initiative (see Chapter Ten) are garment or footwear companies. ^{[11 ]}

Moreover, under pressure from these key corporate buyers , there is evidence of a greater appreciation for the need to improve these types of factory conditions by developing-world governments themselves. Cambodia, for instance, under the pressure from increased ILO factory inspections and the withdrawal of several large retailers (including Nike for two years) from the country because of its poor labor standards, has now reached an agreement with Washington D.C., in which Cambodia will receive an annual 18 percent textile quota as long as the garment industry improves its labor conditions. Accordingly, many Cambodian factories have made substantial improvements to their employment and environmental policies. ^[12]

Automotive Manufacturing

In the midst of global relocation and poised on the edge of a significant new demand for cars and trucks in competitive developing economies ( estimates are that the number of automobiles and trucks globally will jump from 700 million today to over a billion by 2050), the automotive industry is already confronted with many of these same employment, environmental, and health and safety issues. Moreover, with its enormous network of suppliers and business partners , the automotive industry is particularly susceptible to criticism.

The automobile industry is strongly motivated to manage EHS impacts in its supply chain, says Ram Narasimhan, Professor of Marketing and Supply Chain Management at Michigan State University Eli Broad College of Business. The industry attracts attention from many stakeholders including regulators concerned with gas mileage, emissions, and recovery of material from retired vehicles. Its processes involve many safety and environmental risks, and it relies on multiple first tier suppliers for a steady flow of components and for quick time to market. ^[13]

In fact, the automobile industry, because of its multiple levels of risk exposure, leads in many aspects of environmental supply chain management. Toyota, GM, and Ford, for example, require thousands of their first- and second-tier suppliers to gain ISO 14001 environmental standards certification. Many observers believe that further improvements in the social and environmental standards of suppliers will come as the automotive industry, with its enormous influence and relentless drive for efficiencies, becomes more and more entrenched in developing economies.

^{[10 ]} Sourcing From India s Informal Sector Homeware Industry, Levi Strauss & Company, Homeware Meeting summary, March 1, 2002.

^{[11 ]} Sarah Roberts, op. cit.

^[12] Amy Kazmin, U.S. Sportswear Giant May Be Ready for a Cambodia Comeback, The Financial Times , June 18, 2002.

^[13] Ram Narasimhan and Joseph Carter, Environmental Supply Chain Management, Center for Advanced Purchasing Studies, 1998, p. 12.