Risky Business

So how does a company begin to assess its level of relative risk in terms of supplier performance? There are several ways to categorize exposure.

One group that often find themselves at high risk are companies that have a fragmented supply chain, with each phase of the supply chain operating almost entirely independent of the others. Organizations such as grocery chains that deal in fast-moving consumer goods and produce are a good example. They may purchase products through a network of suppliers who themselves buy from many thousands of small producers or farmers. Similarly, a building supply chain will usually deal through middle market consolidators that deal with hundreds of small suppliers worldwide.

The difference between forest and paper products presents a good example. With most furniture, shelving, or lumber purchased at a retail store such as Home Depot or Lowe s, the goods originate from a single source, or at least can be traced through an obvious chain from sawmill through to retail supply. For that reason, retail outlets have found it a fairly straightforward process to request a Forest Stewardship Council s (FSC) certification from their suppliers (for more on FSC certification, see Chapter Ten). Paper products such as those sold by Office Depot or Staples, on the other hand, are often purchased from hundreds of sources, making that type of certification program much more difficult.

In the early stages of the evolution toward outsourcing and supply chain fragmentation, having multiple levels of subcontractors seemed to insulate the buying company from charges of poor supplier behavior, but lately even organizations with a more fragmented supply chain are being held responsible for their relationship with various upstream, and occasionally downstream, suppliers. Sainsbury s, one of Britain s largest grocery chains, provides a good example of this new level of exposure and responsibility.

Sainsbury s supply chain is typical of many large UK supermarkets, says Liz Fullelove, Manager for Socially Responsible Sourcing at Sainsbury s Supermarket . We have about 2,000 suppliers providing our ˜ ownbrand goods and we accept responsibility for monitoring labor standards in those. Many of these suppliers also source from within their own supply chains, be these factories or farms. So, even among the suppliers providing own-brand goods, we are probably taking the produce of a million farms across the globe.

As a representative from another UK retailer admits, keeping track of this ever-changing supply chain can be difficult. I can know my supply chain at 9 A.M. then by 10 A.M. it s all different. We deal with about 1,300 suppliers, involving maybe 5,000 factories, but if buyers can t get goods from the usual source, they ll find another. The supply base is growing all the time. ^{[1 ]}

Companies that deal in low value goods, whether as part of an assembly process or through direct sales to consumers, also remain at considerable risk from charges of exploitation, simply because an everincreasing majority of these types of manufactured goods are produced and assembled in low-wage labor conditions. Toys and garments, kitchen utensils, plastic goods, and low-cost tools are all likely to involve some level of low-skill labor, often overseas. Moreover, unlike expensive or complex products, low-value goods offer an easy option for consumer resentment and rejection , in that outrage (i.e., switching to another, similar low-cost product) involves little personal economic sacrifice.

Similarly, any time a company becomes the direct interface with the retail public, the relative risk to their reputation ” in the case of product safety issues, or poor supplier performance ” increases . Again, large grocery store chains, home supply stores, automobile manufacturers, large retail stores ” virtually any company that ultimately has responsibility for selling products directly to the public ” are more vulnerable than the vast number of second- and third- tier suppliers that remain largely unknown to the public, to the media, to analysts, or to activists. With a well-recognized brand name and a potentially transparent supply chain, these companies are (often disproportionately) in the frontline of consumer, activist, and investor pressures for ensuring that ethical management policies extend throughout their supply chain.

In this same vein, companies that are dominant market leaders or have well-known brand names are much more likely to be targeted by activists and held to high supplier standards. As we have already seen in Chapter Two, one of the most effective NGO and activist pressure techniques is to target well-known brand name companies ” Nike, Home Depot, Coca-Cola, Reebok, K-Mart ” knowing that consumer and investor leverage is highest among these market leaders. Many other less wellknown companies may also purchase similar goods from the same overseas factories, but will receive much less activist attention.

Where resource- extractive firms like timber giant Georgia-Pacific may be isolated from consumers and thus insulated from negative press, explains Gary Gereffi, professor of sociology and director of the Markets and Management Studies Program at Duke University, companies such as Staples Inc. (a current Rainforest Action Network target) are much more vulnerable. By using tactics such as boycotts, banner hangings, leafleting, and other direct action, NGOs force retailers to take proactive labor and environmental stances. ^{[2 ]}

Some companies make mistakes, says Narayanan Sreenivas, general-manager of Environmental Compliance Consultants (ECC) International. But these small mistakes can cause public relations disasters. News reports don t emphasize the name of the small supplier that is not socially responsible but dwell on the big company that purchases from it. ^{[3 ]}

Yet even organizations that have less public exposure and operate under-the radar of most NGOs and activists (known as stealth companies by AccountAbility s John Elkington) may soon be targeted by activists. Indices such as AccountAbility s Gradient Index begin to offer analysts, consumers, and the media direct access to comparative information on corporate performance. ^{[4 ]}

Equally, and this is something that companies such as Nike (see Nike Versus Kasky in Chapter Five) have learned the hard way, a company can find itself under increased scrutiny if it has previously boasted of its corporate social responsibility without authentication, and these claims are later questioned by activists.

All of this means that companies today are placed in an awkward position-where, while still retaining ultimate responsibility (at least in the eyes of activists and many investors) for producing a safe product in a safe and employee-friendly way, direct control over those factors is actually shifting more and more toward third-party business partners over which, unless a formal program is undertaken, the buying company has little control. The combination of collaborative manufacturing and outsourcing has meant that companies are now ” more than ever ” vulnerable to poor supplier or subcontractor performance, both in terms of bottom line costs and in terms of protecting their reputation.

^{[1 ]} Mick Blowfield, Fundamentals of Ethical Trading/Sourcing in Poorer Countries, The World Bank Group at http://wbln0018.worldbank.org/ESSD/essdext.nsf/26ByDocName/FundamentalsofEthicalTradingSourcinginPoorerCountries .

^{[2 ]} Gary Gereffi, Ronie Garcia-Johnson, and Erika Sasser, The NGO-Industrial Complex, Foreign Policy, no. 125, July/August, 2001 at www.foreignpolicy.com. Copyright 2001, Carnegie Endowment for International Peace.

^{[3 ]} Marites Villamor, Filipino Exporters Urged to Comply with Global Standards, BusinessWorld (Philippines), June 12, 2002; see also www.vpac-usa.org/humanrights/vietnam/ mcdonald .htm.

^{[4 ]} Moving Up the Learning Curve ” Corporate Management of Supply Chain Labour Standards, Sustainability at www.sustainability.com/news/articles/ core -team-and-network/John-Sabapathy-gradient-index-mar-02.asp.