Companies are facing increasing scrutiny over ethical issues in their supply chains, such as human rights violations and environmental sustainability. Having transparency into supply chain practices is important to customers. While tracking violations can be difficult, companies are working with providers, third parties, and governments to gain more visibility into their supply chains and identify problems. Taking meaningful action involves committing to key areas of improvement and integrating supply chain goals into daily decisions.

1. ISM May 201624
Companies need to get a firm handle on the ethical
issues in their supply chains, then take meaningful
action to mitigate risks to safety and reputation.
TRANSPARENCY
MATTERS

2. 25
S
upply chains are the lifeblood
of a healthy company, with sup-
pliers having a direct impact on
quality, profitability and innovation.
Unfortunately, the supply chain can also poison
a company.
It’s hard to miss these recent headlines:
Chipotle’s supply chain shortcomings for food
safety, and Nestle and Jacobs Douwe Egberts,
two of the world’s largest coffee companies,
currently facing allegations of slave labor
in their supply chains after an investigation
by research firm Danwatch. Today, having a
transparent and ethical supply chain is worth
its weight in (conflict-free, ethically-sourced)
gold. And that’s why supply management pro-
fessionals are paying closer attention to sup-
pliers — and their suppliers, further down the
supply chain — than ever before.
There are a number of ethical supply chain
issues facing companies, but two of the more
pressing concerns involve human labor viola-
tions and environmental sustainability. Thanks
to the internet, customers have more tools
than ever to research products and determine
which ones to buy, and that means compa-
nies must stand up to unprecedented levels
of scrutiny. “Visibility into supply chains is
something that resonates with customers,
particularly the younger generations,” says
Robert Handfield, Ph.D., Bank of America
Distinguished University Professor of Supply
Chain Management and executive director of
the Supply Chain Resource Cooperative at
North Carolina State University. “They really
want to know where their food comes from,
where their clothing is manufactured, and
the demand for transparency is only going to
increase. The corporate world is facing a much
more informed group of people that say we
need to make more effort to be ethical in our
actions.”
Although the onus to mitigate supply
chain problems ultimately lies with individual
companies, governments are taking steps to
eradicate products with dubious origins from
entering their countries. In mid-February,
By Lisa Arnseth
ISM May 2016

3. ISM May 201626
President Barack Obama took action
to make sure fish imported to the
United States has not been caught
by providers using forced or slave
labor in Asia’s Southeast region.
The Port State Measures Agreement
gives officials the right to keep for-
eign ships from docking in U.S. ports
if they are suspected of illegal, unre-
ported or unregulated (IUU) fishing
activities. In addition, the President
signed a new rule that requires more
reporting on the origin of fish on a list
that includes threatened and at-risk
species including cod, mahi-mahi
and snapper. The measures will help
track illegally-caught fish and are also
intended to fight human labor rights
abuses — abuses that came to the
public’s attention in July 2015, when
The New York Times published a story
about the use of child and slave labor
aboard Taiwanese fishing vessels.
In the United Kingdom, the
Modern Slavery Act 2015 (MSA)
requires companies with global rev-
enues of $51.1 million (£36 million)
or more to release statements each
year to outline their actions to ensure
slavery and human trafficking has not
taken place anywhere in their supply
chains. Interestingly, many compa-
nies may not be prepared to comply
with the MSA, according to a January
survey of U.K.-based supply chain
managers by the Chartered Institute
of Procurement and Supply (CIPS).
One in five was not aware of their
obligations under the MSA, and one
in four of those surveyed told CIPS
they would “not know what to do” if
they found out a supplier was guilty
of using slave labor.
The Challenge of Taking
Meaningful Action
As it turns out, “not knowing
what to do” is a common challenge.
“It’s very difficult, from an analytics
perspective, to track all supply chain
activity for human rights abuses. You
might have a contract with a certified
strategic supplier you have audited,
and you’re confident it treats its own
workers right, only to find out later
that the supplier subcontracted out
some of its work to a factory that’s
not compliant with your company’s
standards,” explains Handfield, who
says this is a tremendous concern in
the apparel industry. “Then, when
a tragedy happens like the factory
collapse in Bangladesh, that’s when
retailers find out the hard way they
actually had product with their name
on it in one of these unsafe, subpar
manufacturing facilities.”
In some cases, providers are
developing innovative tools to gain
visibility through different segments
and commodities within supply
chains. Chris Haydon, who leads cor-
porate strategy and business develop-
ment for SAP Ariba, says his company
is working to help customers link
supply chain management technology
with databases that track human rights
violations. However, the first step to
finding these violations is recognizing
you might have a problem. “It’s not
as if companies don’t strive to have
supply chain security and continuity,
and they are not trying to be poor
corporate citizens. Rather, they just
don’t know how to deal with getting
their arms around some very complex
and difficult problems,” says Haydon.
“Systems and processes need to be in
place that enable users to examine and
track as many suppliers as possible,
not just the top 50, if you’re serious
about rooting out unethical behavior
in your supply chain.”
Working with providers, third-
party groups and government
resources can be ideal options to get
started in tracking down abuses in the
supply chain. Every year, more orga-
nizations are working to track uneth-
ical labor practices in supply chains,
depending on the type of goods and
countries of origin. For example, the
U.S. Department of Labor’s Bureau of
International Labor Affairs has a list
of goods produced by child or forced
labor. Supply management practi-
tioners can look up a country to find
out which products and commodities
are likely to have been sourced using
either child labor or forced labor.
Sugarcane in the Dominican Republic
may be farmed and processed by
forced labor, and furniture factories
in Turkey may have child labor, for
instance. India has the most product
categories likely to be produced by
unethical labor with 22 product cat-
egories, ranging from soccer balls to
silk thread, on the list.
The California Transparency in
Supply Chains Act of 2010 (SB 657)
also helps shine a light into workforce
issues including slave and child labor,
and a number of companies have been
complying with this act to the best of
their abilities. In a few cases, manufac-
turers not only comply with the regula-
tions set forth by government — they
go even further and create their own
strict codes of conduct. One of the
most well-known examples of this is
outdoor clothing company Patagonia,
which is not only a member of the
Fair Labor Association, but one of
the association’s founders. And well
before SB 657, the company devel-
oped and implemented its Workplace
Code of Conduct and factory auditing
program in the mid-1990s. A detailed
disclosure statement is available to
the public on its website, and the
company has a reputation as being
one of the most transparent clothing
companies in the world on a range of
issues. Even the down feathers used
in its parkas must be ethically sourced
from audited geese farmers.
Making Business ‘A Force For
Good’
Another company dedicated
to ethical sourcing with a stringent
code of conduct in place is Method
Products, the San Francisco-based
cleaning and home product man-
ufacturer. “Ethical supply chains
TRANSPARENCY
MATTERS

4. ISM May 2016 27
should be transparent,” says Garry
Embleton, vice president of supply
chain for Method. According to
Embleton, Method defines an eth-
ical supply chain through three key
components:
1) Ethical sourcing. It’s about
understanding where all ingredi-
ents and packaging comes from
— at the earliest downstream point
in the supply chain — to ensure
they have been developed and pro-
duced to Method’s high standards.
“We expect suppliers to follow and
exceed all labor and code of conduct
guidelines. Whenever possible, we
also look for suppliers aligned with
our environmental and community
goals,” he says. “And where an
industry is less progressive, we do
whatever is possible to influence
them, including supplier incentive
programs.”
2) Transparency. From ingre-
dient disclosure, origin information
about ingredients and materials,
and details about water, waste and
carbon footprint involved in man-
ufacturing, the requirements for
transparency are “powerful tools
in building ethical and sustainable
soil-to-shelf supply chains,” says
Embleton. “Very few, if any, compa-
nies have the complete data set to
have absolute transparency, but one
of the benefits of doing this is that it
creates an urgency and incentive to
get better every day.”
3) Setting an example. “We
strive to set the bar higher in places
where we operate manufacturing or
distribution centers,” says Embleton.
Method’s factory in Chicago’s South
Side is creating jobs and opportuni-
ties for the community there — and
boasts the world’s largest rooftop
greenhouse. More than 500 tons of
fresh produce is harvested from this
greenhouse each year for the South
Side community, an area Embleton
says is considered a food desert.
“By setting examples such as this,
we are able to do our part to push
the boundaries to prove how busi-
ness can be a force for good, and not
focused on profit alone.”
Adhering to Method’s code of
conduct means that suppliers must
provide written documentation and
confirmation of their practices, and
many must submit to tours of facili-
ties by Method supply management
personnel. “Basically, we take every
possible measure when bringing in
a new supplier. We also include our
code of conduct and labor practices
in every contract as non-negotiable
clauses,” says Embleton.
Finding Workers Closer to
Home
Consolidating the supply base
— rather than proliferating it —
is another strategy Method has
employed. Many companies are
taking this approach, says Handfield.
“There is movement toward using
fewer suppliers, but this is not done
solely to lower costs,” he says.
“Rather, companies want to work
with vetted suppliers and build
better relationships so both parties
know it’s about a way of doing eth-
ical business. I’m also an advocate
of working with supply partners that
are agreeable to being more trans-
parent in their actions. It’s all about
acknowledging that there could be
issues that come up while doing
business, but it’s fine to admit you’re
not perfect as long as you’re willing
to make adjustments and correc-
tions by addressing them with the
right mentality.”
Moving manufacturing away
from foreign countries with lax reg-
ulations is another way to combat
human labor violations in the supply
chain. To that end, reshoring is gaining
momentum, says Handfield. “For
North American-based companies,
Mexico is seen as a positive alterna-
tive to Asia, particularly in electronics
and automotive industries, because
the labor costs are lower, logistically it
is much closer and Spanish is spoken
by a growing number of Americans
and Canadians,” he says. “It’s less
challenging to track labor violations
there, but overall it’s easier to deal
with because Mexico’s population is
becoming more trained all the time,
and the companies there are much
more compliant and willing to accept
standards.”
An Opportunity and a
Journey
Going forward, the focus on
developing ethical supply chains is
a powerful and ongoing opportu-
nity for supply management practi-
tioners, says Haydon of SAP Ariba.
“Procurement was not traditionally
viewed as anything beyond a tactical
role, but now it’s a function with a
chance to make the world a better
place by choosing to work with eth-
ical suppliers and do as little harm to
the environment as possible. That’s
pretty compelling.”
It might seem daunting to dive
into the often-murky waters of
supply chain human rights and envi-
ronmental issues, but remember the
old saying about Rome not being
built in a day. The important thing is
to start somewhere. Embleton gives
this advice for supply management
practitioners seeking to make pos-
itive changes in their own supply
chains: “Commit to a few key areas
for your business first, rather than
trying to make too many changes
all at once. Then clearly define what
success in those areas looks like,”
he says. “Integrate these goals into
day-to-day decisions. Ethical supply
chain concerns shouldn’t be treated
only as add-ons or ‘nice-to-have’
propositions. Always view this as a
journey, something that you can —
and will — improve over time.” ISM
Lisa Arnseth is a publications coordinator
for Inside Supply Management®
.
© Institute for Supply Management®
. All rights reserved. Reprinted with permission from the publisher, the Institute for Supply Management®
.