The Relationship Between
Responsible Supply Chain
Practices and Performance
Barchi Gillai
Angharad H. Porteous
Sonali V. Rammohan
Hau L. Lee
RESEARCH INSIGHTS
November 2013
1
The Relationship between Responsible Supply Chain Practices and Social,
Environmental, and Operational Performance
Insights from the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR)
By Barchi Gillai, Angharad H. Porteous, Sonali V. Rammohan and Hau L. Lee
November 2013
Despite multinational firms’ continued investments in factory audits and other practices aimed at tackling
social and environmental issues in their supply chains, lapses in employee labor standards, health and safety
standards and environmental protection remain an issue in many industries. In an effort to explore these
challenges and gain a better understanding of the responsible supply chain practices1 likely to be most
effective in reducing labor and environmental violations, the Stanford Graduate School of Business
launched a research project, the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR).
The research was based on two main sources of information: the “Social and Environmental Responsibility
(SER)” section of SCM World’s 2012 Chief Supply Chain Officer Report (based on input from 334
companies), and a smaller, more comprehensive survey conducted by the Stanford Graduate School of
Business (completed by 33 companies).
Based on the leading practices multinational firms employ as part of a continuous improvement program
for monitoring suppliers, the research team found that responsible supply chain practices can be divided
into three major categories:



Management Systems: Leadership, policies and procedures that lay the foundation for responsible
practices across the supply chain.
Visibility Methods: Methods that help companies “sense” issues in the supply chain by providing
data on supplier practices and performance.
Response Practices: Actions taken, either in response to identified violations, or in an effort to
prevent potential issues from developing into major problems.
This “Sense and Response” Responsible Supply Chain Framework is presented in Exhibit 1 below.
Exhibit 1: “Sense and Response” Responsible Supply Chain Framework
Management Systems
Leadership &
Resources
Policies &
Procedures
Visibility Methods
Visibility
Into
Violations
Continuous
Monitoring
Response Practices
Reaction to
Violations
Penalties
Incentives
Supplier
Capability
Building
Proactive
Product &
Process Design
1
We define supply chain responsibility as the implementation of supply chain management practices that lead to
improved social, ethical and environmental performance. In this paper, we focus on social and environmental
responsibility.
2
The two surveys examined multiple practices related to each dimension of our “Sense and Response”
Responsible Supply Chain Framework, and their link to reduced SER violations and lower operating costs.
Highlighted below are the main findings from analyzing the two sets of survey responses. Both surveys
showed similar results in many areas. Where there were inconsistencies between the findings in the two
surveys, we present the results associated with the Chief Supply Chain Officer (CSCO) Report.
1. Practices used to manage social and environmental issues are correlated with lower labor and
environmental violations.
Close to 60% of the practices related to the “Sense and Response” Responsible Supply Chain
Framework were associated with reduced labor and environmental violations. Please refer to Appendix
1 on page 6 for a complete list of the SER practices included in this study, and their link to reduced
SER violations. Below, we highlight the most interesting findings.
When examining the prevalence of different SER practices, we found that many firms seem to be
“getting it right” by investing in practices that are associated with reduced SER violations. For example,
61% of Stanford survey participants reported having regular involvement of senior management in the
continuous improvement of social and environmental issues, and having sufficient resources to address
social and environmental issues. These factors were found to be positively correlated with reduced code
of conduct violations . Similarly, more than 90% of CSCO survey participants had monitoring systems
in place. For about half, the monitoring systems focused on internal operations, while the other half
also monitored external suppliers. These monitoring capabilities were also linked with reduced
violations, particularly those that included external suppliers. Similar results were obtained through the
Stanford survey, which looked at more specific visibility and monitoring practices related to risk
assessments, auditing, and reporting. The Stanford survey also revealed that many companies are using
proactive response practices to prevent social and environmental violations from reoccurring. The
survey looked at six proactive practices, and each of them was found to be used frequently by at least
40% of the survey participants; all of these practices showed strong correlation with reduced violations .
2
3
At the same time, some popular practices do not actually correlate with reduced number of SER
violations. When it comes to penalizing suppliers for code violations, 45% of CSCO survey participants
issued a warning followed by a reduction in the amount of business they give to the supplier. However,
this practice was found to be negatively associated with reduced violations. This may suggest that it is
challenging for low performing suppliers to improve over time, or that the threat of reduced business is
not sufficient to motivate suppliers to invest in improving performance. In fact, of the six penalties
examined, the only type found to be correlated with reduced SER violations was issuing a warning,
followed by contract termination. And yet, fewer than 30% of CSCO survey participants reported using
this practice. It is important to note that while contract termination seems to be much more effective
For both surveys, a practice was considered to be correlated with a performance measure (e.g. “reduced SER
violations” or “lower operating costs”) if its Pearson Correlation Value was greater than 0.2 and its p-value was at most
0.05.
3
A correlation was considered to be “strong” if the Pearson Correlation Value was greater than 0.55, with a p-value of
at most 0.05.
2
3
than retaining a nonconforming supplier, it may not always be feasible, as there may be no alternative
suppliers available.
Some collaborative practices and incentive programs are used infrequently, despite being associated
with reduced SER violations. For example, participation in industry working groups to collectively share
and develop responsible practices is associated with lower violations, yet only 24% of Stanford survey
participants reported doing this. In terms of building supplier capability, only 27% of Stanford survey
participants reported training factory/supplier managers on monitoring and improving socially and
environmentally responsible practices in their own upstream suppliers, a practice that was also found to
be correlated with reduced SER violations.
For more complete information on the prevalence of each SER practice among the Stanford survey
participants, please refer to the “Most Popular Answer” column of the table in Appendix 1, and to the
diagrams on page 9.
2. Many SER practices are positively associated with lower operating costs.
While reducing labor and environmental violations and building social and environmental value is a top
priority of SER policies and practices, many SER practices are also positively correlated with lower
operating costs. Some of the SER practices that showed the strongest correlation with lower operating
costs include proactive practices used to prevent social and environmental violations from reoccurring,
and to strengthen supplier capabilities. These include, for example, reengineering product and/or
process designs; investing in training and education for factory managers and supplier staff; and
consulting public information and worker opinions when assessing supplier risk. Senior management
involvement was also found to be linked to reduced operating costs. In contrast to conventional wisdom
that building in supplier incentives can be costly to buyers, some of the incentives studied were also
found to be positively correlated with reduced operating costs. Please refer to Appendix 1 for a
complete list of the SER practices studied in this research and their link to lower operating costs. These
findings clearly indicate that investment in SER practices can result in increased business value.
Companies should therefore consider SER practices not as a cost burden, but rather as an opportunity
to reduce operating costs in addition to improving SER performance and enhancing the company’s
public image.
3. Reduced SER violations are linked with lower operating costs.
Many of the SER practices examined in this research were positively associated with reduced SER
violations as well as lower operating costs. This result intuitively makes sense for a number of reasons.
First, health and safety violations or incidents such as fire or a building collapse are likely to result in
supply side disruptions, which in turn can lead to financial losses. Furthermore, buyer firms may be
held legally accountable for their suppliers’ actions. It is therefore not surprising that efforts to reduce
SER violations are also linked with lower operating costs. In addition, efforts aimed at reducing waste,
water, and energy use along the tiers of the supply chain can not only improve environmental
performance, but may also result in cost savings for the buyer company and its suppliers.
4
Summary
The study results clearly demonstrate a positive link between certain SER practices and improved social,
environmental, and operational performance. However, not all practices were found to have the same
relationship with performance; some of them showed no correlation with reduced SER violations and/or
lower operating costs, and one of them – the reduction of business engagement with repeated SER violators
– was actually found to be negatively correlated with both of these performance measures. In addition, we
found that the practices that were the most prevalent among the survey participants were not necessarily
those that were most positively correlated with improved performance. At the same time, some less
prevalent practices did show correlation with improved performance.
Overall, our research suggests that senior management involvement, supplier collaboration and capability
building, supplier incentives and more proactive practices aimed at preventing problems from occurring in
the first place seem to be the most strongly associated with SER performance improvement and lower
operating costs. That said, companies should be careful when crafting their SER strategies, and choose to
implement those practices that seem to be most likely to yield the desired results for their organizations.
We’d like to thank Professors Kala Mehta, Joshua Cohen, and Richard Locke for their valued insights.
We’d also like to thank Kevin O’Marah of SCM World for sharing data from the annual Chief Supply
Chain Officer survey, and members of the Stanford Initiative for the Study of Supply Chain Responsibility
for their valuable support – Microsoft, CREATe, Nike, PwC, Intel, PCH International, Cisco, EMC, and
Ryder Supply Chain Solutions.
5
A p p e n d i x 1 : S E R P r a c t i c e s a n d T h e i r L i n k w i t h R e d u c e d S E R Vi o l a t i o n s a n d
Lo w e r O p e r a t i n g C o s t s
The table below lists all the SER practices covered in our research, and indicates whether they
were found to be correlated with reduced SER violations and reduced operating costs. A practice
was defined as correlated with one of these performance measures if it met the following criteria:
• Pearson Correlation Value ≥ 0.2 and P-Value ≤ 0.05
Question
1
2
SER Practice
Reduces
SER
violations?
Ma n a g e m e n t S y s t e m s : L e a d e r s h i p & r e s o u r c e s
Extent of senior management involvement
✔
Ma n a g e m e n t S y s t e m s : P o l i c i e s & p r o c e d u r e s
Participate in industry working groups
✔
Share with peer companies successful practices
✔
Share audits and audit results with other companies
(suppliers only)
Adoption of standard code of conduct
Reduces
operating
costs?
Most
popular
answer
✔
Level 3
✔
✔
No
Yes
Yes
Yes
Visib ilit y M et h o d s: Co n t in u o u s m o n it o r in g
CSCO
3
4
5
Extent of monitoring systems for internal operations
and external suppliers
Risk assessment completed at set intervals
Risk assessment completed when risk is suspected
Risk assessment is completed before a contract is signed
or first place an order (suppliers only)
Use of public information for risk assessment (suppliers
only)
Use of worker opinions for risk assessment
Use of information about certifications / standards
achieved for risk assessment
Use of data from historical audits for risk assessment
Use of data from assessments conducted by buying
company for risk assessment
Use of data from risk assessment services (e.g.
Maplecroft) for risk assessment (suppliers only)
Encourage suppliers to produce annual CSR report
(suppliers only)
Encourage suppliers to produce annual CSR report
using standardized format (e.g., the Global Reporting
Initiative) (suppliers only)
Allow suppliers to privately disclose issues without
penalty (suppliers only)
Ask internal factories to self-report their SER
performance (factories only)
✔
✔
✔
Internal
only
Yes/No
No
Yes
✔
✔
Yes
✔
✔
Yes/No
✔
Yes
Yes
Yes
No
✔
✔
No
No
No
Yes
6
!
6
Question
6
CSCO
7
CSCO
10
8
9
SER Practice
Reduces
SER
violations?
Visib ilit y M et h o d s: Visib ilit y in t o vio la t io n s
Send company members to observe audits
✔
Clearly communicate audit results
✔
Follow industry standard auditing procedures
✔
Issue corrective action plans in a timely manner
✔
Publicly disclose audit results
Participate in shared audits with companies using the
same supplier (suppliers only)
Extent of visibility into internal operations and external
suppliers
Re sp o n se Pr a ct i ces: Re a ct io n t o vio la t io n s
Share with supplier best practices on implementing
✔
corrective actions
Require suppliers to involve workers in implementing
✔
improvements
Collaborate with supplier to conduct root-cause analysis
✔
Systematically follow up to ensure corrective action
✔
plans are completed
Re sp o n se Pr a ct i ces: P ena lt i es
Warning followed by monetary fines
Warning followed by termination of contract
✔
Warning followed by reduced business
Negative
No warning; monetary fines
No warning; termination of contract
No warning; reduced business
Zero tolerance approach
Clear penalties for common social and environmental
✔
violations
Immediately terminate contracts when certain issues are
uncovered (suppliers only)
Offer support to terminated suppliers to enable them to
re-engage with us (suppliers only)
Terminate contracts only after repeated corrective action
attempts (suppliers only)
Manage these issues like other performance issues (e.g.,
quality)
R e s p o n s e P r a c t i c e s : In c e n t i v e s
✔
Include SER performance in supplier scorecard
Weight given to social and environmental performance
on the scorecard
Reduces
operating
costs?
Most
popular
answer
✔
✔
Yes
Yes
Yes
Yes
No
✔
No
Internal
only
✔
Yes
✔
No
Yes
Yes
No
No
No
No
No
No
No
No
No
No
No
Yes
✔
Yes
No
scoring
system
7
Question
SER Practice
Reduces
SER
violations?
Reduces
operating
costs?
Preferred supplier status (suppliers only)
✔
Increased business engagement (suppliers only)
✔
CSCO & Invest in supplier’s training and education (suppliers
✔
✔
11
only)
Public recognition (suppliers only)
✔
Better terms & conditions (suppliers only)
✔
Price premiums (suppliers only)
Re sp o n se Pr a ct i ces: Sup p lier cap ab ilit y b u ild in g
Suppliers to include worker representation to improve
✔
✔
working, environmental conditions
Involve external stakeholders in training
✔
✔
Train factory managers in root-cause analysis,
✔
✔
12
continuous improvement
Train factory managers to report risks, violations
✔
✔
Train factory managers to monitor practices of
✔
✔
upstream suppliers
Involve factory workers in training
✔
✔
R e s p o n s e P r a c t i c e s : P r oa c t i v e p r o du c t a nd p r o c e s s r e d e s i g n t o p r e v e n t v i o l a t i o n s
re o c c u rri n g
Investigate our own company’s role in the root causes of
✔
✔
violations (e.g. product design, short lead time, and
materials used)
Collaborate with our factories/suppliers to identify how
our company can contribute to reduced violations (e.g.,
✔
✔
joint demand planning, product design, or
communication)
Work directly with factories/suppliers to identify their
root causes of violations (e.g., worker turnover,
✔
✔
13
production process, or worker-management
communication)
Provide our factories/suppliers with resources to address
✔
✔
their root causes independently
Reengineer product and/or process designs to improve
✔
✔
social and environmental performance
Focus on changing practices where the greatest impacts
occur in the supply chain (e.g., at the smelter level for
✔
✔
conflict minerals, at the fabric supplier for apparel
companies) (suppliers only)
Most
popular
answer
Yes
No
No
No
No
No
No
No
No
No
No
No
fr om
Level 5
Level 4
Level 5
Level 2
Level 5
Level 3
8
A p p en d ix 2 : St a n fo r d SER Su r ve y R e sp o n se St a t ist ics: SER P r a ct ices
*All questions are with respect to either a firm’s top 5 internal factories or suppliers – whichever
is applicable.
Q u e s t i o n 1 : How involved is your senior management (e.g. director level and above) in the
continuous improvement of social and environmental issues?
Senior management is not very involved (Level 1)
15%
24%
61%
Senior management is regularly updated on issues, but does not
take an active role (Level 2)
Senior management is regularly updated on issues and takes an
active role, providing suf!cient training and !nancial resources for
monitoring and improvement programs (Level 3)
Q u e s t i o n 2 : Does your company collaborate with other organizations on social and
environmental issues in any of the following ways?
99
!
Q u e s t i o n 3 : When do you carry out a factory/supplier risk assessment on social and
environmental issues?
We complete an assessment before we sign a contract or
!rst place an order (suppliers only)
80%
We complete an assessment at set intervals as part of our
ongoing factory/supplier monitoring (e.g., during annual
evaluations)
50%
We complete an assessment when we suspect a risk
We have no risk assessment procedure
30%
9%
Q u e s t i o n 4 : Which information sources do you consult when doing factory/supplier social and
environmental risk assessments?
Assessments conducted by our own company
87%
Historical audits
83%
Certi!cations/standards achieved
77%
Public information (e.g., Internet /newspapers/databases/
nonpro!t organization reports) (suppliers only)
65%
Worker opinions (e.g., from hotlines or crowd-sourced
data)
Risk assessment tools/services (e.g., Maplecroft)
(suppliers only)
50%
35%
Q u e s t i o n 5 a : Do you ask your internal factories to self-report their social and environmental
performance?
Yes: 75%
No: 25%
1
10 0
Q u e s t i o n 5 b : Are suppliers encouraged to self-report their social and environmental
performance?
We encourage suppliers to produce an annual corporate
social responsibility (CSR) report
48%
We allow suppliers to privately disclose issues without
penalty
48%
We do not ask suppliers to report on their own
performance
43%
We encourage suppliers to produce an annual corporate
social responsibility (CSR) report using a standardized
format (e.g., the Global Reporting Initiative framework)
24%
Q u e s t i o n 6 : How do you audit your factories/suppliers for social and environmental
compliance?
We ensure corrective action plans are issued in a timely
manner
82%
We follow industry standard auditing procedures
79%
We clearly communicate audit results to the supplier and
our management
70%
We send members of our company to observe audits to
learn from the auditor
64%
We publicly disclose results (e.g., in our corporate social
responsibility report)
We participate in shared audits with companies using
the same supplier (supplier only)
42%
29%
1
1
11
Q u e s t i o n 7 : What do you do when you find a code of conduct violation?
We collaborate with the factory/supplier to conduct a
root-cause analysis and form a corrective action plan
97%
We systematically follow up to ensure corrective action
plans are completed
91%
We share best practices with factories/suppliers on
implementing corrective actions
70%
We review our own company’s role in violations as part
of our continuous improvement program
61%
In certain cases, our company terminates contracts with
suppliers for violations (suppliers only)
48%
We require factories/suppliers to involve workers when
implementing improvements
45%
Q u e s t i o n 8 : Is social and environmental performance included on your internal factory/supplier
scorecard?
Yes = 67%
No: 33%
Q u e s t i o n 9 : If “Yes” to Q8, how much weight is social and environmental performance given
on the scorecard as a percentage of the total score?
0-5%
9%
6-10%
12%
33%
11-15%
16-20%
3%
3%
6%
6%
21-25%
26% +
Do not know, or I am not allowed to share this
12%
15%
Use another scoring system
No scoring system
1
122
Q u e s t i o n 1 0 : How do you penalize your factories/suppliers that have ongoing social and
environmental issues or code of conduct violations?
We manage these issues like other performance issues
(e.g., quality)
79%
We terminate contracts only after repeated corrective
action attempts (suppliers only)
24%
We have clear penalties for common social and
environmental violations
24%
We rarely penalize factories/suppliers based on ongoing
social and environmental violations
21%
We offer support to terminated suppliers to enable them
to re-engage with us (suppliers only)
10%
We immediately terminate contracts when certain issues
are uncovered (suppliers only)
10%
Q u e s t i o n 1 1 a : Do you offer incentives to managers for strong social and environmental
performance at their factories (such as internal awards or recognition)?
Yes: 75%
No: 25%
Q u e s t i o n 1 1 b : Which incentives do you offer to suppliers for strong social and environmental
performance?
Preferred supplier status (e.g., priority for future
business)
57%
Increased business/volume
43%
None
33%
Investment in training and education for supplier staff
24%
Public recognition (e.g., supplier of the year awards)
14%
Better contract terms and conditions
Price premiums
10%
5%
1
313
Q u e s t i o n 1 2 : What is included in your company’s social and environmental capability building
program?
We don’t have a capability building program for factories/
suppliers
45%
Factory/ Supplier factory workers are involved in trainings
45%
We encourage factories/suppliers to include worker
representation to improve working conditions and
environmental conditions
42%
Factory/ Supplier factory managers are trained to proactively
report risks and violations
39%
Factory/ Supplier factory managers are trained in root cause
analysis and continuous improvement
39%
We encourage and facilitate the involvement of external
stakeholders in training
39%
Factory/Supplier factory managers are trained on monitoring
and improving socially and environmentally responsible
practices in their own upstream suppliers
27%
114
4
Q u e s t i o n 1 3 : To what extent does your company take actions to prevent social and
environmental violations from reoccurring? Please rate each area with respect to your top 5
internal factories/suppliers.
We focus on changing practices where the greatest impacts
occur in the supply chain (e.g., at the smelter level for
con!ict minerals, at the fabric supplier for apparel
companies) (suppliers only)
14%
19%
29%
We reengineer product and/or process designs to improve
social and environmental performance
18%
We provide our factories/suppliers with resources to address
their root causes independently
18%
27%
We work directly with factories/suppliers to identify their
root causes of violations (e.g., worker turnover, production 6% 9%
process, or worker-management communication)
33%
We collaborate with our factories/suppliers to identify how
our company can contribute to reduced violations (e.g.,
joint demand planning, product design, or communication)
We investigate our own company’s role in the root causes
of violations (e.g. product design, short lead time, and
materials used)
15%
9%
21%
15%
21%
15%
15%
14%
21%
9%
9%
21%
15%
33%
27%
24%
30%
24%
36%
21%
27%
Level 1, We don't do this at all
Level 2
Level 3
Level 4
Level 5, We do this extensively
!
1
5 15