Costs of outsourcing

CSR “ The strike itself was not all that different from others where workers were expressing their dissatisfaction. But the fact that this strike was not the ﬁrst one to hit an Apple supplier should have propelled management to immediate action, not just as a feel good measure of corporate responsibility, but because there was a real risk to damaging the brand and global sales. ” Coming to terms By Richard Brubaker with the true costs I n the run-up to Apple’s recent launch of the iPad, the focus of the media, analysts and consumers was on whether the new product would become a of outsourcing replacement for Amazon’s kindle; whether consumers would accept the addition of a new device, and what content would be made readily available. Eight thousand miles away the story was very different, as 2,000 workers at Apple’s Suzhou-based supplier, Wintek, were on strike and the production lines were idle. A mix of rumours on the reasons behind the strike action circulated, including that staff had been exposed to toxic substances and that Wintek had failed to pay overtime salaries. The problems at the supplier should not have come as a big surprise to Apple – the company’s own 2009 supplier Firms need a new approach to responsibility report revealed that more than half (43 of 81) of their China-based developing outsourcing models suppliers were not in compliance with which takes into account the company directives. risks to brand and reputation that hide beneath lower cost Economic and moral balance production in regions like Asia For many, corporate social responsibility (CSR) has had the look and feel of a ﬂuffy add-on; something to be done when extra 18 Supply Chain Asia May/June 2010

CSR money was in the bank or when a little Why is this the case? Because a firm steps to remove the risk of economic, extra brand value needed to be created. that has a core of responsible decisions and environmental, and social failures. It has not been seen as an investment practices has a much better understanding Once ownership of the risks has been in products, processes and people that of real costs and – unlike firms that accepted by the brand, the next step is to create sustainable businesses, or as a act irresponsibly through graft, labour/ work out where those risks lie, and where strategic counter-balance to the negative environmental abuse, and so on – is not the exposure points exist. Firms needs to externalities that many expose themselves relying on anyone to subsidise negative ask whether the main threats are found in to when outsourcing production to another externalities. At some point, firms that environmental, labour, product quality, or country. While consumers on the whole ignore CSR will be forced to move into other areas, and what the relationships are may not understand the complexity of a compliance and pay the real price for between these issues and stakeholders? supply chain, or have a direct personal what they do. The question at that point They need to ask will it be a government connection to the labourer who assembled is whether or not they can continue to official upholding a regulation; a blogger their product, they do have a line, and they compete on the new cost basis. exposing an environmental failure; a line will increasingly walk away from firms that In the article ‘Why Apple can’t control worker who falls ill, or a consumer who dies break the unwritten and written codes. This its Chinese factories’ it was recently that will expose the problem? is a fact that some firms have lost sight reported by Malcom Moore in Britain’s of over the past 18 months as the global Daily Telegraph that the company was Low cost does not always mean full recession took hold. powerless to make a change in suppliers cost For Apple, the strike itself was not all when an employee committed suicide at Outsourcing a component, or a process, that different from others where workers Foxconn’s Suzhou facility because, “it is to a firm may bring immediate economic were expressing their dissatisfaction. But the triumvirate of big suppliers who are in benefits through economies of scale, by the fact that this strike was not the first charge of running the system day-by-day. If allowing organisations to focus on core one to hit a supplier of the global computer Apple tried to take its business elsewhere, activities, or by savings from lower labour brand should have propelled management it would risk losing its entire supply chain”. costs. But firms should never assume to immediate action, not just as a feel good If there is indeed something here, it signals that these reduced costs, as quoted by measure of corporate responsibility but the labour woes are symptomatic of a much an external firm, somehow represent because there was a real risk to damaging wider supply chain management issue, the full costs of the move from in-house the Apple brand and global sales. and highlights once again why firms need operations to outsourced operations, and Yet the conditions did not garner the to reassess how their supply chain models ‘red alert’ one might have expected, and are constructed, this time with CSR and within six months of the release of the sustainability in mind. supplier responsibility report, news of a Foxconn employee committing suicide threatened to become a commercial issue for Apple as it highlighted the problems the The brand carries the risk It should be abundantly clear that regardless of whether a supplier has produced to “ Regardless of whether a supplier has produced to spec or failed to produce company was facing with its suppliers. spec or failed to produce to spec, it is For those who would suggest that ultimately the brand that carries the risk. to spec, it is ultimately the companies should work to find a balance Nike, Mattel, Toyota and many others brand that carries the risk. between economic and moral imperatives, have all learned this lesson the hard way. Nike, Mattel, Toyota and what we are finding is that it is the firms It is an expensive lesson to learn, and one others have all learned this ” who act morally that perform the best that others should take note of. Brands, economically over the long-term, and those not suppliers, ultimately carry the risk lesson the hard way. with the least moral imperative are more of CSR failure in supply chains, and it is often the first to exit the market. their responsibility to take the necessary May/June 2010 Supply Chain Asia 19

CSR should understand that at some point these invest in mitigation of negative externalities “ excluded costs will be incurred. related to their outsourced supply chains Perhaps it will come in the form of and do not account for the risks of when We abide by all local the complete loss of control over one’s intangible negative externalities turn into standards” is something supply chain, or through the erasure of very real economic costs. that one can commonly brand equity that a firm has worked years hear when firms are to develop through a labour scandal or Building a sustainable supply chain a weakened quality control process that model defending themselves, results in product failures. Either way, it is While the process of developing a but how often can you imperative that firms begin to understand sustainable supply chain model may for remember when a firm that low cost does not equal full cost and some begin with a CSR or sustainability said: “We have a global that costs need to be incurred to protect programme, or may simply require a firm the integrity of the supply chain. to add those lenses, at the end of the day standard in place, a the issue for firms is ensuring economic standard that did not meet Risk and responsibility are not mutually exclusive “We abide by all local standards” is and market sustainability. Like any other sustainable competitive advantage, it is a process that engages the entire organisation the local conditions”? ” something that one can commonly hear through a change in core values and drives when firms are defending themselves. decisions that will return favourably Knowing the risks of outsourcing and off How often can you remember when a firm internally and externally to the firm. shoring, do the benefits still outweigh said: “We have a global standard in place, Unlike a traditional model, where the costs? Are there ways to reduce those a standard that did not meet the local immediate gains are logged without a full risks upfront so as to ensure the long- conditions”? understanding or recognition of how those term economic viability of the model and For many firms, outsourcing the savings may require a top-up investment process? production of a product or process – all of unknown proportions, a sustainable or part – is in some ways liberation. Not model is one that anticipates early and Mature approach only are cost savings gained through the plans around the unexpected. It is a Moving beyond the standard moral process, but someone else also owns risk process that removes long-term risk to the reasons for developing a new approach of a failure – supply chain failures become system, develops strength in supply chain to outsourcing that is compliant with the the product of China’s poor quality control and distribution channels, and maintains wider needs of the economy, environment, systems. brand equity. It is a process that ultimately and society, there is a very strong business The shift in responsibility here is returns higher profit margins and satisfies motive for doing so. Firms are no longer of course an illusion, as the aftermath consumers and investors. simply outsourcing their products, they of cases such as the Mattel recall have Building a sustainable outsourcing are trusting partners to safeguard their conclusively proven. The risk of supply model requires development of a supply brand and the availability and safety of chain failure rests squarely with the brand chain that incorporates the value and the product. and firms that disregard the arbitrage risks of negative externalities that may While developing the case for an between the standards at home and those return in the future. For some that will offshore or outsourced production model, in another location will run into issues mean understanding the costs and risks firms traditionally only looked at bottom going forward. associated with working with a country line cost savings and will have to take a or company that does not have the same much more mature approach to making Mitigating negative externalities will cost level of environmental or labour controls these decisions going forward so as to the brand much less in the long-term in place, which has created temporary ensure their place and success in the Mattel’s original recall of product was arbitrages that will be removed over time. market. initially estimated to cost $20m in product The next step is to understand how and logistics costs, a figure that inflated quickly and in what manner those arbitrages Richard Brubaker is the Shanghai-based into the hundreds of millions of dollars will be removed. Will it come through a new CEO of Collective Responsibility and Visiting as fines were levied, class action suits regulation and/or increased enforcement Professor of Sustainability at the China Europe settled, and market competitiveness lost. of current regulations that will force the International Business School Why Mattel didn’t make the decision to supplier to invest in new equipment? invest $20m into supply chain integrity Will it come in the form of a news report is a simple function of not properly highlighting the abuse of workers in the Additional resources: International Labor Organization (http://www.ilo.org) – Works understanding and planning for the risks same factory you have outsourced to, and between NGOs, corporations, and government agencies to of the outsourced supply chain, and an the potential for consumer actions that promote best practices in labour standards unwillingness to invest in a system upfront have been proven to cost firms billions in Ethical Corporation (www.ethicalcorp.com) – Monthly magazine promoting responsible business decision to mitigate those risks. In hindsight, it lost revenue and brand value? making was a bad calculation. Many firms fail to After that the assessment begins. Business for Social Responsibility – (www.bsr.org) 20 Supply Chain Asia May/June 2010

Costs of outsourcing

by Collective Responsibility

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