Chapter Nine: Creating a Case for Action | Supply Chain Imperative, The: How to Ensure Ethical Behavior in Your Global Suppliers

One of the most important functions of the ethics committee, led by the Chief Ethics and Risk Officer, should be to develop a credible ethical supply chain business case for the company. It is a critical exercise, not only in producing the supporting financial data to justify an ethical supply chain initiative, but also because the process of building a business case itself will provide improved insight into the strengths and weaknesses of the current company processes and potential supplier- related vulnerabilities. The business case should be as comprehensive and strategic as possible, taking into account many of the quantitative and qualitative arguments for and against various elements of a full ethical supply chain program that we have made already in this book.

A company s motivation to ensure that its suppliers are adhering to sound employment and environmental policies might be altruism, or equally it might stem from a legitimate need to avoid being seen as socially irresponsible by investors and consumers. Or a company s motivation may simply be enlightened self-interest ” realizing that a better managed supplier is likely to provide higher quality goods, dependable delivery, and lower prices in the end. Whatever the motivation, however, in order to better understand the relative costs and benefits of adopting various aspects of an external supply chain framework (and for explaining these to interested and sometimes skeptical stakeholders, including senior management), it is important to build a strong business case for action.

Savings and Benefits

First, it should be said that when calculating the savings and intangible benefits for an ethical supply chain framework, it is worthwhile keeping in mind ” and giving proper weight to ” the liability costs of inaction, particularly given the catastrophic possible outcomes of becoming a target of an NGO campaign or a government investigation. After all, the fact that a serious social or environmental incident can create lasting damage to a company s reputation means that the exercise needs to be something more than simply weighing up the relative cost versus benefit dollar figures.

With this in mind, and although difficult to calculate objectively with any accuracy, it is important to take into account the contingency costs of damage to the company s reputation ” a run on the share price, consumer boycotts, legal fees, fines , and environmental clean-up costs ” that a crisis in the supply chain may provoke. In many ways, these areas tend to dwarf the typical day-to-day hard costs that are used to calculate normal costs and savings in studies such as these. When potential liabilities or reputation damage are involved, day-to-day costs can become suddenly very insignificant in comparison.

For example, says GEMI, Intel recently decided to join many other companies in agreeing to buy only wood products certified to come from well-managed second-growth forests. Intel buys few wood products, so the cost consequences were small. To protect reputation, a decision was quickly made without a detailed calculation of pencil prices. ^{[1 ]} Too often, companies still resist change simply because there is a visible, if relatively small investment cost involved, overlooking the potentially devastating costs of being blind-sided by a reputation- damaging disaster.

Putting aside the critical issue of reputation damage, at the most practical-level, there is growing evidence that basic improvements in the health, safety, and environmental policies of developing world suppliers can mean significant return on investment. There is, after all, also a positive side to managing suppliers proactively and helping them improve their performance.

First, as we have seen, though less easily quantifiable, given the multiple-pressures of globalization, strategic sourcing, and the continuous quality-improvement movement, closer integration, at least with selected suppliers, is necessary for more efficient supply chain collaboration. Closer monitoring and audits lead to collaborative planning, rethinking inefficient or dangerous processes, to closer levels of communication and cooperation, and to generally higher expectations for performance all around.

More important, of course, are the straightforward productivity increases that come from better management and more efficient working methods at the supplier level. After all, supplier workplace injuries, low pay, and poor equipment maintenance, even in developing markets, are hardly a good foundation for efficient production. Purchasing illegal or toxic ingredients can shut down an entire production process, or lead to later recalls. Low wages and bad working conditions tend to produce low performance ” waste, late deliveries, rework ” and poor quality products. Reducing toxins in supplier facilities reduces their health and safety costs (protective equipment, employee turnover and retraining , employee compensation), wherever the plant is located, and recycling not only reduces waste but can often significantly reduce disposal costs.

Too often, U.S. companies tend to focus only on the negative ” that is, bureaucratic ” side of the equation, emphasizing only the costs associated with these types of programs, say experts. Again, reflecting the different perceptions discussed in Chapter Five, this seems to be less the case in European companies. I believe that companies in Europe see those kinds of activities as a way of increasing their competitiveness , says Tomasz Kobus, from PricewaterhouseCoopers Assurance/Business Advisory Services in New York. Aside from just being responsible, it means selling more and being more competitive in the market. ^{[2 ]}

Many would argue that if exceeding minimum standards of employee treatment ” training, pay, conditions, working hours ” was effective for industry in U.S. or European production sites, it follows that similar improvements will increase productivity, reduce workplace injuries, and reduce training costs from turnover in developing labor markets. There is an ever-growing body of evidence to support these real business benefits. John Brookes, CEO of Manaxis and an experienced social and environmental auditor , contends that high expectations of supplier performance and good overall supply chain management go hand in hand. Leading edge companies tend to manage everything well, he suggests. For example, it would be unusual for a company to manage quality well, but not their environmental issues. Companies that have the right culture, driven from the top, tend to be doing the right thing . . . I think the same companies that have lead in other areas are leading in corporate social responsibility areas. ^{[3 ]}

Equally important, in terms of productivity increases, is helping developing world suppliers understand the value of modern organizational and employee management techniques. For example, explains Michael Allen, Director of External Affairs with the Global Alliance for Workers and Communities, supervisory skills training helps line managers fully understand that abusive management practices are not only morally unacceptable code violations, but that they are also bad management . . . a skills-based approach draws out the business case for worker-friendly management practices: that well-treated workers are more productive, loyal and creative.

In recent training sessions with supplier managers and supervisors that Global Alliance had in Indonesia, for example, participant comments reflected that important link between improved management training and greater productivity:

Quality problems are now responded to much more quickly.
Managers give more opportunity for ˜ subordinates to express ideas.
Problem-solving meetings are now held . . . Improved communication about work processes is resulting in positive impact on work quality.
Greater delegation by department heads and supervisors has prompted higher performance and discipline standards from operators. ^{[4 ]}

Those same factory managers report improvements in quality and customer satisfaction, and employees interviewed spoke of the improved working conditions, better treatment by supervisors, and a greater sense of participation.

This is a mutual gains agenda that invests in training and employee welfare that in turn enhances worker performance, concludes Mike Allen. A sustainable approach to ˜supply change is only feasible through equipping managers and workers with the tools, skills and incentives to take ownership of the issues at workplace level. The associated business benefits of enhanced employee motivation, retention and performance at least hold out the promise of building on the essential compliance agenda and moving from minimum standards to high performance. ^{[5 ]}

Stratos, the Canadian-based sustainability consultancy, asked Canadian companies in a 2002 survey what they believed were the benefits of sustainability reporting. Their responses:

Improves reputation (74 percent).
Aids stakeholder communications (56 percent).
Improves performance (54 percent).
Improves management of risk (54 percent).
Strengthens management systems (54 percent).
Motivates employees (50 percent).
Attracts investment (43 percent).
Identifies opportunities for savings (30 percent).
Increases access to markets (30 percent). ^{[6 ]}

More objective savings can be calculated ” even if only indirectly through improved social and environmental policies by company suppliers ” from reduced health care or insurance pay-outs to injured workers, lower recruitment and retraining costs for replacing employees, less downtime lost to union efforts, reducing the cost of protective garments when using unsafe materials, decreasing hazardous disposal costs, or myriad other practices that are now considered necessary to productive working environment.

These jobs are relatively highly skilled, contends John Brookes, highlighting a widely held misperception. Although they are minimum wage jobs, needlecraft is not an unskilled job, believe me.

Even though they might only get paid four dollars a day, he explains, they have to invest in training people, and it is not as straightforward [as it seems]. Yes, they will bring people in from the provinces , and yes, there are people knocking on the door waiting to take these positions , but there are training costs involved, so reducing turnover is one of the major issues for supplying companies . . . and one of the things that actually can drive the tangible benefits from an SA 8000-type system.

The quality demands of western purchasing organizations are extremely high, maintains Brookes. You remember when you were a kid, anything made in Japan was ridiculed ” then it was Taiwan, then Korea. Today that kind of thing doesn t exist anywhere anymore. Reebok, Chiquita, Nike, whoever, he suggests, all western buyers have the same quality demands from Chinese factories as they would from everywhere else. And there are skill levels associated with that quality. It is manual labor, to be sure, but it is semi-skilled and there is a major investment in training for suppliers. ^{[7 ]}

There are many good examples of how applying higher standards has improved supplier productivity:

A recent study conducted by the World Bank s private sector lendingarm (the International Finance Corporation) and the consultancy SustainAbility, found that of the 176 companies surveyed in 60 different countries , sustainable practices can be linked with lower costs, higher revenues , reduced risk, better reputation and staff morale , and greater access to capital. ^{[8 ]}
The Thai Garment Manufacturing Association implemented a series of social responsibility policies pressed upon it by various international corporations. Applying SA 8000 (see Chapter Ten), the company limited its overtime to a maximum of 12 hours a week (well below the 36 hours allowed under Thai law). Yet even as overtime was cut by nearly one half, a combination of better working practices and an employee incentive plan meant that productivity rose 21 percent and employee pay rose 10 percent. ^{[9 ]}
Rewriting their code of conduct and based on the SA 8000 standard, Chiquita began working toward certification in 2000. In 2001 they began a collaborative program with banana growers to provide greatly improved working conditions for the pickers, including rebuilding facilities and initiating modern health and safety programs, helping to provide a school and daycare center for workers children, and building affordable housing around the processing sites for the workers and their families. In their 2001 Social Responsibility report, Chiquita lists the soft benefits that come from their efforts as greatly improved employee morale and trust. But there are hard benefits, as well. Recycling policies have saved the company millions of dollars, with savings on agrochemicals alone amounting to 14 percent, or $4.8 million a year. Similarly, pallet recycling (before, they were simply thrown away) saved $3 million, and health and safety costs were reduced by $513,000 per year in one division. Able to better retain trained employees, and essentially ensure an efficient, loyal workforce, the policies help them avoid underage employment, and better worker conditions have meant that they have avoided the perennial and crippling strikes that typically plague the industry. ^{[10 ]}
Ron Nielsen, Manager of Environment and Sustainability at Alcan, a company that was listed by the Dow Jones Sustainability Index in 2000 as among the top 10 percent of companies in its sector in terms of economic, environmental, and social policies, recently listed 10 reasons why these types of sustainability are beneficial:

Finding new approaches to operations that raise productivity and conserve resources
Developing new profitable products and alliances because of improved stakeholder, customer, and supplier relations and intelligence
Fostering increased loyalty and improved relationships with suppliers, contractors, and customers due to the focus on these relationships
Longer tenure and increased attraction of high quality workers due to company reputation, values, and focus
Increased worker productivity and innovation due to a focus on workplace and employee issues
Improved relations with communities and governments because of proactive, responsible, and ethical approaches
Increased demand for a product or service because of consumer support for sustainability 8. Improved management and increased mitigation of risks and liabilities through a business decision-making model that reinforces sustainability principles
Increased access to capital as markets begin to value sustainability performance
Better use of resources ” R&D, investment, business planning ” on those parts of the business that demonstrate long term , sustainable opportunity ^[11]

Companies that manage and report on sustainability issues, says Geoff Lane of PricewaterhouseCoopers, typically cite improved financial performance, reduced operating costs, improved operational efficiency, enhanced brand image and reputation, increased sales and customer loyalty, increased ability to attract and retain employees, reduced regulatory oversight and improved access to capital.

A growing body of academic evidence, he concludes, suggests the benefits are tangible. ^{[12 ]}

There are also potentially considerable savings to be achieved, if the company is requiring its suppliers to become certified in quality processes such as ISO 9000. The current trend is to combine important aspects of the ISO 9000 quality standard certification process (now almost ubiquitous even in developing world manufacturing sites), with the ISO 14001 environmental standard certification process. Both have been designed by the International Standards Organization (OSI), and the two process approaches have many aspects in common (similar audit processes, document control requirements, management review, etc.), and the audit and certification process can often be combined for cost savings and efficiencies. These types of productivity results are not that unusual, and the relative costs of implementing a standard such as SA 8000 to the buying company are not as onerous as often thought.

In terms of SA 8000, explains John Brookes, a certified auditor and CEO of Manaxis, there should be relatively little cost in terms of maintaining the system. SA 8000 was designed (as was ISO 14000) to be able to be implemented by companies in all industry sectors, all countries, all shapes and sizes ” even not-for-profit organizations. The requirements were written with the idea that they should not become too onerous or too expensive for the smaller company to implement.

The cost of SA 8000 for most businesses, he contends, would be minimal. They are required to create some records, to be able to demonstrate to the outside world that management principles are being adhered to, and there will be some monitoring costs ” but relatively little, and those costs can really be offset very quickly against the company s needs and risk management, since they need to be doing this anyway. ^{[13 ]}

Finally, it is important not to overlook the soft benefits that come from these types of programs. These types of savings come not from the bottom line (increased productivity, less spent on overtime, legal fees, penalties, etc.), but rather from top line benefits (increased sales because of high NGO or Socially Responsible Investment Indices ratings, good press, or a top 100 CSR rating, etc.).

In short, as many companies such as Chiquita, Apparel Avenue, and Gap have found, the same principles of quality and good management that are valid in domestic operations also apply to developing labor markets, and improving conditions and pay can contribute both directly and indirectly to the bottom line through productivity increases and reduced costs (see Figure 9-1).

Figure 9-1: Benefits from SEAAR

Source: Globe Scan August 2002.

^{[1 ]} Global Environmental Management Initiative, p. 22.

^{[2 ]} Interview, November 6, 2003.

^{[3 ]} Interview, August 15, 2003.

^{[4 ]} Allen Michael, Analysis: Increasing Standards in the Supply Chain, Ethical Corporation , October 2002, pp. 34 “36.

^{[5 ]} Allen, pp. 34 “ 36.

^{[6 ]} Corporate Sustainability Reporting: Adding Business Value, Stratos, Inc., August 2002, p. 4 at www.stratos-sts.com.

^{[7 ]} Interview, August 15, 2003.

^{[8 ]} Alison Maitland, Developing Nations Win by Getting Greener, The Financial Times, June 27, 2002.

^{[9 ]} Somporn Thapanachai, Accountability Essential, The Bangkok Post, November 16, 2002.

^{[10 ]} Conference Presentation by Jeff Zalla, Corporate Responsibility Officer and Vice President, Corporate Communications, at How to Manage Corporate Responsibility seminar, October 3, 2002; and 2000 Corporate Responsibility Report, Chiquita Brands International, Inc.

^[11] Toby Kent, Alcan and Sustainable Development, Conference Report for the How to Manage Corporate Responsibility Conference, Ethical Corporation Magazine, October 2 “ 4, 2002 and at www.ethicalcorp.com/confreport_usa2002.asp.

^{[12 ]} Geoff Lane and Melissa Carrington, Measuring the Triple Bottom Line, PricewaterhouseCoopers Web site at www.pwc.com/extweb/manissue.nsf/2e7e9636c6b92859852565 e00073d2fd/dee94804c6db148685256cdf0036db78/$FILE/TripleBtmLine.pdf.

^{[13 ]} Interview, August 15, 2003.