The Global Supply Chain

In a global supply chain, the sourcing path is usually much less straightforward than in the past (see Figure 3-1):

Figure 3-1: The Extended Supply Chain

Consider the various levels of company “ supplier relationship that now routinely exist:

Tier -One Suppliers

These are the company s most important suppliers, critical to production or to supply. Sometimes domestic, more often foreign based, these suppliers are usually selected and managed directly by the company s procurement professionals. This strategic sourcing process ” whereby procurement officers choose and monitor supplier performance ” has been one of the areas of greatest emphasis for companies in the past decade . Yet, as we will see later, the very fact that supplier credentials and performance are formally reviewed by corporate officers in a strategic sourcing exercise makes it easy for activists to point the finger of blame back to the company when these suppliers are found to be violating employment or environmental standards. There are many good examples.

• A factory owned by Mandarin International that was operating in El Salvador fired 350 workers when they formed a union to protest against harsh working conditions. Mandarin International was one of Gap Inc. s major suppliers, and the action was in violation of Gap s freedom of association clause in its code of conduct. Under pressure from NGOs, Gap agreed to have the factory monitored independently, and to force Mandarin International to improve working conditions and permit unionization. ^{[5 ]}

• For nearly two years , Benetton has been trying to refute charges that one of their major Turkish suppliers was manufacturing Benetton brand label clothing using child labor. The accusations revolve around work taking place at the Bermuda textile factor in Istanbul, where a series of investigations by Italy s largest trade union, CGIL, contended that the Bermuda factory was employing minors but never registering them on the official payroll.

  All of this highlights the difficulties of a company in the modern, extended supply chain, and as Neil Kearney, the general secretary of the Brussels-based International Textile, Garment and Leather Workers Federation, points out, if the accusations prove true, given new realities, Benetton will need to take some sort of action.

  They can t wash their hands [of this], saying that it s not their responsibility, he says. Today the power of control lies with the retailer. Nobody has goods made today through sub-contractors without checking out the premises. They send in quality-control people to ensure that the goods carrying their label are up to scratch. ^{[6 ]}

• In September, 2000 CNN reported that McDonald s had been accused by labor rights activists of having their Snoopy, Winniethe-Pooh, and Hello Kitty toys made by a factory in China that employed underage workers that were paid less than $3.00 a day for a 16- to 20- hour workday . McDonald s issued a statement saying it takes these issues very seriously. Our Code of Conduct for suppliers makes clear that we will not tolerate any substandard practices. Despite the promise by McDonald s of a full-scale inquiry, there have been calls for a boycott of the restaurants . ^{[7 ]}

Tier-Two Suppliers and Below

Depending on the size of the buying company and the scale of its strategic sourcing exercise, tier-two and below suppliers may still be considered within a major company s supply chain span of responsibility. A lot depends on the nature of the relationship. Long- term suppliers, even if they service other major buyers as well, for example, may still be seen as falling within the parameters of a company s responsibility for review and monitoring. There seems to be a direct and fairly logical correlation based upon the extent to which a supplier contributes ” or is indispensable ” to the success of a company s production and the level of responsibility that activists apply. As we will see in Chapter Thirteen, ranking and prioritizing these suppliers according to their importance, relationship, and relative risk is one of the first steps in developing an ethical supply chain program.

There seems to be no formal method for drawing the line of responsibility, but generally speaking, if suppliers only provide spot-market goods, or if they are selected through tier-one suppliers, local plant staff, or another third-party, there seems to be general agreement that the original buying company is seen as less culpable when local issues arise. But franchising operations often fall into these categories, as do distribution networks.

Coca-Cola, for example, had to withdraw its products from four northern -European countries in 1999, after a health scare caused by a batch of substandard carbon dioxide used by one of its bottlers/ distributors resulted in a total of 115 Belgian and 80 French Coca-Cola drinkers ” mostly children and students ” suffering from nausea, headaches , and stomach cramps after drinking Coke. After initially dismissing the incident, explaining that after thorough investigation, no health or safety issues were found, Coca-Cola was forced to recall 2.5 million bottles from Belgium, Holland, Germany, Spain, and Saudi Arabia when those countries governments banned the sale of Coca-Cola “owned brands, such as Coca-Cola, Fanta, or Sprite, until the company could provide a satisfactory and conclusive explanation. There were many lessons to be learned from the incident about risk and reputation management, but the important point is that the press did not focus its fury on the bottler which produced the defective carbon dioxide; they focused exclusively on chastising Coca-Cola. ^{[8 ]}

Supplier s Suppliers

Part of the problem is that many tier-one and tier-two suppliers themselves serve as an assembly or transportation clearinghouse, maintaining relationships with hundreds of smaller suppliers from around the world. U.S. or European companies may simply send raw materials or partially assembled materials to these factories for assembly and completion. Even then, overseas suppliers may subcontract out that work. At what point does the original buying company s responsibility for these suppliers end?

Many companies take their manufacturing, ship it overseas and it s subcontracted out three, four, or five times, says Anita Green, director of social research and corporate activity at Pax World Funds, the SRI fund managers. So by the time you get the bottom level, to the people that are actually making the goods, you don t have any idea what the conditions are. ^{[9 ]}

This vast network of multiple, often single-person or family subcontractors , is frequently where many of the most egregious environmental, health, and safety violations occur. After all, developing-world suppliers have the same outsourcing pressures as any other company. Accordingly, an ever-increasing portion of the work that is done in overseas labor markets is completed not in factory settings, but in homes and small shops ” essentially outside the formal economy. Completed for the most part by women (estimates are around 90 percent), these at-home workers constitute an invisible workforce, screened from any of the protections of company, national, or international labor or environmental protections .

These at-home workers are responsible for making an incredible variety of the everyday goods used by Americans: sewing clothing, soldering electronics, stitching together footballs, assembling automobile parts , or simply packaging goods. These workers, in countries such as India, China, Vietnam, Cambodia, Thailand, and Mexico, are seldom protected by minimum wage or hour legislation, and remain well beyond pledges to eliminate this type of sweatshop per piece work made by the major multinationals that ultimately pay for their services. As individuals, they have little leverage to demand higher wages or a less demanding schedule, always fearing unemployment if they fail to produce items on time. It is a recipe for low-cost consumer goods, which provides much-needed employment for developing-economy workers, but only at a price. Environmental and social violations are rampant.

Downstream Subcontractors Including Product Disposal and Recycling Partnerships

Even with these various categories, it is important to remember that it is not only product assembly services that present a potential danger to a company s reputation. Downstream contracted services for waste or usedproduct disposal, for example, constitutes one of the greatest subcontractor risk areas. Similarly, construction and maintenance work, even in domestic operations, are often carried out by small contractors employed on a short-term, often spot, contract. With little oversight, vague contracts, and little monitoring or record keeping, even these small service contractors can create company liabilities.

^{[5 ]} Gary Gereffi, et al., op. cit.

^{[6 ]} Benetton Fails to Halt Child-Labour Row, Global March Against Child Labour, at www.globalmarch.org/cl-around-the-world/italy-benetton-fails.php3.

^{[7 ]} Mike Chinoy, Activists Claim McDonald s Toys Made With Child Labor, CNN.com, September 6, 2000, at www.cnn.com/2000/ASIANOW/east/09/05/mcdonalds.child.labor/.

^{[8 ]} Coca-Cola ˜Regrets Contamination, BBC News Online , June 17, 1999, at http: news.bbc.co.uk/2/hi/europe/371300.stm.

^{[9 ]} Sarah Murray, GLOBAL INVESTING: Seeking the golden rules for SRI investors, The Financial Times, October 2, 2002.