Darden Graduate School of Business Administration
University of Virginia
Working Paper Series
Paper No. 04-05
Corporate Social Responsibility and
Global Supply Chain Management:
A Normative Perspective
D. Eric Boyd
James Madison University
College of Business
Robert E. Spekman
University of Virginia,
Darden Graduate School of Business Administration
Patricia Werhane
University of Virginia,
Darden Graduate School of Business Administration
This paper can be downloaded free of charge from the
Social Science Research Network at:
http://ssrn.com/abstract=655223
Corporate Social Responsibility and Global Supply Chain Management:
A Normative Perspective
By
D. Eric Boyd
Assistant Professor of Marketing
College of Business
James Madison University
Robert E. Spekman
Tayloe Murphy Professor of Business Administration
Darden Graduate School of Business
University of Virginia
Patricia Werhane
Ruffin Professor of Business Ethics
Darden Graduate School of Business
University of Virginia
June 2004
Please direct all inquiries to:
Robert Spekman, Tayloe Murphy Professor of Business
Darden Graduate School of Business
University of Virginia
Charlottesville, VA 22906
434-924-4860 (phone) 434-243-7677 (fax)
spekmanr@virginia.edu
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Corporate Social Responsibility and Global Supply Chain Management:
A Normative Perspective
Abstract: Integrated supply chains are becoming an integral part of the competitive
landscape as firms seek to create strategic advantages. Yet, along with the economic
benefits derived from these more coordinated supply chains come certain social
obligations. Many buying firms are developing codes of conduct as a way of managing a
number of partner behaviors within the supply chain. The issues addressed here converge
on the extent to which buyers ought to be responsible for the ethical behaviors of their
suppliers. While the management of partner-corporate social responsibility is an
important issue for firms, extant research offers little guidance. This paper develops a
framework for considering the obligations of the more powerful supply chain member to
the other members of the supply chain. We examine the extent to which one supply
chain member should exert governance as it relates to social responsibility on the
members of the extended supply chain. We provide both managerial and theoretical
insight.
Key Words: Supply Chain, Business Ethics, Corporate Social Responsibility
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Corporate Social Responsibility and Global Supply Chain Management:
A Normative Perspective
Introduction
On May 12, 2004, the Gap released a report admitting to less than perfect working
conditions in as many as 3000 of its world-wide factories (Merrick 2004). Gap stated
that close to 90 percent of these contract manufacturers fail the retailer’s evaluation of
working conditions. Such a report is a major step for the Gap, the largest U.S. specialty
retailer of clothes with $15.85 billion in sales, because in the past it has been very
defensive of working conditions in its factories. The report states that between 10 to 25
percent of its factories in China, Taiwan, and Saipan subject their workers to
psychological coercion; 50 percent of the factories in sub-Saharan Africa run machines
without proper safety devices; and many factories regularly demand work weeks in
excess of 80 hours. Is this an isolated set of events? Hardly. Are such reports a longawaited wake-up call for purchasing and corporate executives? Absolutely. As firms
rely more heavily on outsourcing, contract manufacturing, and other strategies to reduce
costs in their supply chains, a new set of issues surface that are not fully appreciated by
supply chain managers who must manage suppliers that provide key materials to firms.
The decision calculus to adopt supply chain management has been developed elsewhere
(Davis and Spekman 2004); what changes the complexion of the problem is the increased
attention given to supply chains and corporate social responsibility.
Increasingly, more firms are becoming involved in business networks like
integrated supply chains. An integrated supply chain represents a vertically coordinated
network of firms that engages in various activities associated with the production and
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distribution of the firm’s products to its end-use customers. Rather than rely on vertical
integration to accomplish each of these activities, these firms have begun to outsource
non-core activities and now must coordinate and organize the flows of goods, paperwork,
and money among these different partners. In fact, one often hears of the extended
enterprise as an attempt to link technology and trust whereby supply chain members
share a common goal and vision, exchange sensitive information and data, and link
processes to achieve competitive gains that could not be achieved if each supply chain
member acted independently (Economist Intelligence Unit, 2002). Such efforts are very
often a response to a number of factors such as the globalization of competition, changing
customer demands, the advancement of information technology, and attempts by firms to
establish industry standards (Moller and Halinen 1999). Integrated supply chains
improve a firm’s competitive capabilities by lowering production and transaction costs,
accelerating product development, and providing the firm with access to needed
resources and knowledge.
Collaboration among the different supply chain members is often orchestrated by
one member who is the sphere of influence around whom the others converge. In many
cases, a single firm, most often the buyer, assumes responsibility for managing the range
of activity within the supply chain. At one extreme is Wal-Mart whose global reach and
seemingly insatiable purchasing appetite has placed it first among the most influential
business institutions in the world. Wal-Mart is not only the world’s largest retailer (and
company), it is the single-largest employer in Mexico, accounts for 10 percent of China’s
total exports to the United States, has over 20,000 suppliers world-wide, and is visited by
118 million shoppers each week (e.g., Fishman 2003; Neff 2003). At the opposite end of
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the continuum is any small manufacturing firm that either outsources component
assemblies to foreign companies or who sub-contracts professional services to another
firm that might conduct data processing, software development, or customer service to
companies in India or elsewhere. To be sure, a great deal of media attention in the
United States and elsewhere has been given to the plight of computer and software
engineers who have seen their jobs migrate to countries where labor costs are a fraction
of U.S. wages.
Yet, with the migration of costs (and jobs) comes certain obligations. More and
more organizations are expanding their responsibility to include managing the corporate
social responsibilities of their partners within the supply chain (Kolk and Tudder 2002;
Emmelhainz and Adams 1999). To some degree, this movement is defensive and can be
viewed as a reactive response to managing risk. Despite the gains that an integrated
supply chain affords, many managers fear that such relationships lead to a lack of control
and heightened vulnerability. Herein is the challenge facing senior managers: widespread
use of extended enterprise concepts increases a firm’s dependence on its supply chain
partners to achieve greater effectiveness and efficiency. At the same time, these practices
expose most companies to greater risks. These extended enterprise-related risks
compound the effects of conventional business risks that confront every company on a
daily basis (e.g., Spekman and Davis 2004).
One dimension of risk relates to the notion of corporate social responsibility
(CSR) and the extent to which supply chain members’ reputations and images can be
tainted by the actions of another member who engages in activities that result in public
sentiment and outcry or, even worse, is accused of criminal behavior where liability
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extends up and down the supply chain. Along with extended enterprise thinking come
additional consequences. Supply chain managers have begun to address issues related to
consumer confidence and trust that the goods and services have been provided without
compromising ethical or environmental standards (New, 2003). If we tout the advantages
of blurred boundaries between firms, we must also be prepared to manage the parallel
risks that reflect the consequences of our partners’ policies and actions on ethical and
environmental issues.
Focus of the Paper
Attempts to manage partner corporate social responsibilities raise several
important questions for both supply chain managers and researchers. One critical
question is whether firms should, in practice, direct the corporate social responsibility of
their partners. Another important question and the focus of this paper is what should
buyers ask of their supply chain partners if indeed organizations accept the task of
managing partner corporate social responsibility.
Our objective is to provide a normative discussion of CSR that can guide supply
chain managers as they navigate the challenges of managing partner corporate social
responsibility. Yet, to speak of corporate responsibility is too broad a concept, and we
narrow the topic to include issues germane to ethical sourcing. We emphasize the issue
of worker relations between a firm’s supplier and the supplier’s employees. The paper
concludes by discussing the study’s implications for supply chain management.
What Is Corporate Responsibility?
Corporate social responsibilities in a general sense reflect obligations to society
and stakeholders within societies impacted by the firm (Brown and Dacin 1997). Davis
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and Blomstrom (1975) assert that CSR is the obligation of the decision maker to take
actions that protect and improve the welfare of society along with their own interests.
One approach would follow the dictum “first, do no harm,” and the second would suggest
that business should proactively provide positive benefits to society. Several factors
drive firms to accept responsibility for managing partner CSR including customer and
stakeholder expectations and the potential threat of legal liability. At its core, CSR
argues that economics and social goals need not be in conflict. While governments can
mandate that certain practices be adopted by businesses such as minimum wages,
pollution, and air quality standards, regulators have also relied on tax credits and other
incentives to achieve certain social goals. A more serious challenge is how to incorporate
such behavior and attitudes as mainstream business practices.
This challenge is at times quite formidable despite the logic of following ethical
sourcing. In the case of Wal-Mart and the Kathie Lee Gifford line of women’s clothing,
news items first appeared in 1996 suggesting that garments bearing the Kathie Lee
Gifford brand were being produced in Honduran sweatshops. In addition, these clothing
items carried a “made in the USA” label. The news of sweatshop practices by Wal-Mart
suppliers damaged the Wal-Mart brand name and tarnished its reputation. The sweatshop
issue also affected Wal-Mart’s ability to raise public funds. This problem played an
important part in the removal of Wal-Mart public stock from the investment portfolios of
socially responsible mutual funds like the Domino 400 Social Index. Consider further the
more recent press accounts of undocumented workers who were employed to clean WalMart stores in the United States. As the subject of a federal probe, Wal-Mart argued that
these workers were not in the direct employ of Wal-Mart and, in fact, were employed by
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janitorial contractors who worked for Wal-Mart. Regardless of whose payroll they were
on, Wal-Mart bore the burden of these allegations (Zimmerman 2003).
Public policymakers find themselves involved through activities like the
“Trendsetters” list established by the Department of Labor in 1995 and heavily endorsed
by policymakers. The objective behind the Trendsetters list was to publicly recognize
firms taking a proactive stance managing corporate responsibility within their respective
supply chains.
It would appear that demand considerations and legal liability are the main
reasons firms accept responsibility for managing their partners’ CSR. These issues
appear to override any cost considerations involved in CSR management. This point is
evidenced best in the comments of Melinda Johnson, head of Policy, Chartered Institute
of Purchasing and Supply. Johnson states:
You have got to consider what is going on in the supply chain as a whole.
You need to think about how the manufacturers treat their staff. There is
such a drive on cost these days that often companies do not weigh the
impact of poor working conditions on quality and their reputation.
The comment by Johnson points to an important tension in managing the supply chain.
On the one hand, firms employ supply chains because of the advantages available from
outsourcing to suppliers. Yet, outsourcing results in less control over the supplier’s
performance, and this lack of control can ultimately create problems for the firm that far
outweigh any cost or strategic advantages gained from the supply chain. In the past year
alone, major global brands like Nike, Adidas, and Benetton were accused of using child
labor in Cambodia and Turkey and prison labor in China.
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Numerous firms are beginning to create a greater sense of balance between the
advantages provided by supply chains and the loss of control involved in outsourcing to
suppliers by accepting the responsibility of managing partner CSR. Firms accepting this
responsibility will often develop a code of conduct tailored to the firm’s individual
supply chain partners. In other cases, the firm may outsource this activity to third-party
agencies such as the Fair Labor Association and the Ethical Trading Initiative that have
developed more generic codes of conduct for suppliers that can be applied across
different supply chains. An important question is what should be asked of supply chain
partners relative to the partners fulfilling their corporate social responsibility. A review
of individual firm and third-party codes of conduct reveals considerable variance
(Emmelhainz and Adams 1999). The differences in supply chain partner codes of
conduct raise the possibility that some firms may be asking more than what is required of
their supply chain partners and in the process placing the supply chain at a competitive
disadvantage. Alternatively, other firms may be asking too little of their supply chain
partners and thus creating liabilities for their supply chains, similar to the liabilities
previously discussed involving Wal-Mart and the Gap. Others feel it is just good
business to engage in such practices as they are also consistent with firms’ mission and
values. In 2002, Starbuck’s signed a licensing agreement to sell only trade-certified
coffee in Canada. This effort is part of their mission statement and exemplifies
Starbuck’s commitment to people and places that grow coffee (Starbucks 2002).
At the same time, consumers have taken up the fight, and many feel that they can
affect how firms behave. Consumers are exercising their voices by supporting retailers
whose policies give better deals to producers from less developed countries. In part,
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these actions illustrate the increased activism among many consumers. Yet, the rise in
consumerism can be directly attributed to the availability of information through all
forms of media (e.g., Strong 1996). Special interest groups and concerned citizens have
access to targeted media that collects such information real-time from across the globe.
Firms must attend to stockholders and stakeholders who may not have invested money in
the company but who clearly have a de facto investment in the air they breathe, the food
they eat, and the communities they live in.
Practical Responses to CSR
The issue of CSR relative to any foreign operations arises often in managing
supply chains because many companies source on a global basis. Major manufacturers
have been producing goods in foreign countries for years and have come to rely on a
global presence to balance their total labor costs, to gain access to raw materials, and
even to hedge against currency fluctuations. Yet, the real issues are whether a business
case can be made for corporate responsibility, or whether firms should engage in ethical
practices and demand similar behavior from their suppliers simply because it is the right
thing to do (Roberts 2003). Given the Gap example mentioned at the beginning of the
paper, it becomes clear that many of the contract manufacturers receive mixed signals as
not every outsourcer is equally committed to the same level of ethical sourcing. In fact,
some contract manufacturers might debate whether conformance to Gap’s code of
conduct is in their best interest because other buyers do not make the same demands and
are willing to look the other way. To the extent that firms share a common set of values,
the debate becomes moot. If supply chain members commit to the same set of values as
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would be expected in an integrated supply chain, compliance is part of the criteria for
inclusion as a supply chain partner.
CSR issues related to worker relations encompass a range of concerns including
collective bargaining, minimum wage rates, maximum work hours, and the enforcement
of workers rights. Firms primarily follow two strategies in managing worker relations
within partner firms. One strategy is for the buying firm to craft a code of conduct
specific to the firm’s supply chain. Table 1 reflects the efforts of several individual
companies in addressing CSR associated with worker relations within their respective
supply chains. A review of Table 1 reveals the inconsistent manner by which worker
relations are managed across firms. For example, the rights of workers to freely associate
in labor unions and bargain collectively is recognized by Hewlett-Packard but not by any
of the other firms identified in Table 1. We also can see the extent to which an individual
company addresses employee support by suppliers also varies. To illustrate this point
compare the efforts of Intel versus Hewlett Packard. Intel makes no explicit mention of
any of the four employee-relations areas, whereas, Hewlett-Packard addresses all four
areas in their supplier code of conduct.
[Insert Table 1 about here]
Alternatively, the Ethical Trading Initiative, Social Accountability (SA) 8000, and
the Fair Labor Association each represent third-party initiatives that firms can join and
use in managing worker relations within the supply chain. Table 2 details the CSR
identified in several popular third-party agencies and highlights the similarities and
differences that exist between third-party-sponsored codes of conduct relative to worker
relations. Each third-party code of conduct supports workers rights to organize and form
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unions for purposes of negotiating with their employees within the supply chain. This
similarity regarding workers rights to organize differs markedly from the picture revealed
in the corporate codes of conduct described in Table 1.
The third-party codes of conduct do, however, differ in several areas. The detail
in Table 2 regarding the issue of mandatory wages, for example, reveals that the thirdparty codes of conduct differ in regard to whether suppliers within the supply chain are
required to pay a wage that provides workers with discretionary income. The Fair Labor
Association makes no mention of discretionary income whereas the other two codes of
conduct in Table 2 specifically identify the provision of discretionary income as a CSR of
suppliers. There also are monitoring differences between the third-party codes of
conduct. The three third-party codes of conduct identify varying degrees of required
monitoring and the monitoring mechanisms acceptable in meeting CSR.
[Insert Table 2 about here]
The discussion to this point has covered several CSR related to managing worker
relations within supply chains and the different perspectives on the subject. The
differences between firm-level and third-party-level codes of conduct reflect a diversity
of thought regarding what exactly a firm’s CSR is relative to supply chain management.
The data suggest third-party-designed codes of conduct assign greater levels of CSR to
firms than do the codes of conduct designed individually by firms. The incongruity
between firm- and third-party-designed codes of conduct regarding the CSR presents a
problem for supply chain managers. Should the manager adopt the lower level of CSR
identified in individually designed supply chain codes of conduct, or should firms be held
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to a higher level of CSR similar to that captured in third-party initiatives? In addition,
how do these codes of conduct relate to implementing CSR into a firm’s supply chain?
Implementing CSR into Supply Chain Management
These codes of conduct provide a framework from which supply chain partners
can begin to address ethical sourcing issues with a common set of principles. Once
shared principles have been identified, they serve as a basis of assigning rights and
responsibilities to companies within the supply chain. Keep in mind that in an integrated
supply chain, rules and norms emerge during the process of establishing trust and
committing to a common set of shared practices that govern the relationship and set the
rules of engagement for the trading partners. Without such norms trust cannot emerge,
and the supply chain lacks a common thread to hold it together. Such individualistic
behavior invites opportunistic behavior, raises transaction costs, and lessens the known
benefits that are derived from collaborative behavior. The challenge is to create systems
that expose issues and do not shelter people from the realities of the marketplace that
might adversely affect the working conditions for workers in less-developed countries.
In 2004, the Jewelers of America (JA) adopted a supplier code of conduct that
committed to a framework for social, ethical, and environmental responsibility. In
addition to concerns regarding carat weight, brand authenticity, and the like; consumers
have expectations regarding health and safety, child labor, and the effects of gem mining
on the environment. The European Commission has proposed a mandated framework
that provides a holistic approach to corporate social responsibility. The intent is to begin
a process to adopt a global standard. While corporate response might avoid risks to brand
reputation and the negative press from such exposure, the motivation for such action is
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less important. What is important is the recognition that along with the gains attributed to
outsourcing and supply chain management is the fact that there are potential costs and
risks from noncompliant partners.
Challenges
Critics suggest that the preceding discussion is inconsistent with the very real cost
considerations that are driving firms from vertical integration to the use of supply chains.
Effectively run supply chains have been shown to provide very real cost advantage plus
there are other less immediately tangible gains from supply chain management. But
focusing only on cost underestimates the true potential of supply chains for managing
current and future customer relationships. Social responsibility on the part of business is
an important means by which firms build relationships with current and future customers.
This point is substantiated in surveys of managers who recently credited socially
responsible strategies with providing a large and relatively untapped means of building
and managing customer relationships (Benezra 1996). A major reason for why socially
responsible strategies are so effectives is customers’ increasing use of social criteria in
choosing among firms. A study conducted by Marymount University in 1995, for
example, revealed that 69 percent of customers surveyed would not shop at retail
establishments that sold sweatshop-produced goods.
Recognizing the importance of socially responsible strategies toward customer
relationship management, leading companies are addressing social issues and seeing
success with customers. The American Express Charge against Hunger campaign, for
example, involved American Express donating a portion of the processing fees it receives
on each American Express card transaction toward the fight against hunger. If American
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Express had only considered the cost implications from donating, then the company may
well have not gone through with the campaign. However, the effectiveness of the
campaign resulted in a 10 percent increase in cardholder charges. Similar stories are
associated with other socially responsible strategies including Starbuck’s donation of $2
per bag of coffee sold to growers in Ethiopia, Guatemala, Kenya, and Indonesia and
Nabisco’s two-year tie with the World Wildlife Fund to support saving endangered
species. Environmental issues are central to the Body Shop’s supply chain management
policies, so the Body Shop will not buy products that have been tested on animals. The
Body Shop’s policy requires would-be Body Shop suppliers to alter their practices or face
losing business relations with the Body Shop. Hewlett-Packard addresses these productrelated issues within its supply chain as part of its self-identified “product stewardship”
and works with suppliers in several product-related areas, which include product design,
material composition, packaging, recycling, and safety.
These examples are illustrative of how companies are building social
responsibility into strategies that assist in customer relationship management. Ethical
sourcing is not cause related per se, or is it intended explicitly to decrease the churn in a
firm’s consumer base. We certainly believe that supply chain managers can begin to use
their supply chains in a more socially responsible manner to enhance their firms’
relationships with customers. Yet, the heart of our argument rests on the belief that there
is a moral obligation for supply chain managers to think about the conduct of their
second-, third-, and fourth-tier suppliers if the total supply chain is to act in an ethical
manner.
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Firms are also building social responsibility into their management strategies as a
way of developing future markets and customers. Most supply chains generate lower
costs by involving suppliers from developing countries where the labor rates are cheaper.
Rather than seeing developing countries solely as opportunities for cost savings,
companies increasingly are viewing customers in developing counties as important
markets for selling products in the future. The view that customers in developing
countries reflect future market opportunities underlies Hewlett-Packard’s strategy to
bring technology to the poor through generous donations of computers and printers.
Johnson & Johnson is following a similar strategy as it tries to find ways to familiarize
the poor with its products. Procter & Gamble has taken this strategy one step farther by
developing products addressing nutritional deficiencies, waterborne diseases, and other
issues of importance to customers in developing countries. Supply chain managers can
utilize the framework described here as a basis for both developing new markets and
nurturing future customers through the advocacy of socially responsible worker relations
within developing countries.
Levi Strauss was founded over 150 years ago on the principles of quality and
integrity, and these attributes remain the hallmark of the firm. Beyond its commitment to
the local communities in which it does business, Levi Strauss was the first U.S. company
to adopt a global-sourcing policy that ensured that workers producing their products
anywhere in the world would do so in safe and healthy working conditions and would be
treated with dignity and respect. Other companies who chose to ignore human rights
found the costs are far greater to remediate the problem than it is to avoid it from the
outset. To produce at lower costs in foreign countries does not mean exploiting the wage
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differential. Ultimately the CEO is responsible for the firm’s supply base and any
transgressions, at any level of the supply chain, are placed at his/her door. It is well
documented that ethical sourcing does matter, and firms that violate these expectations
jeopardize the consumer franchise.
The more well known the brand is means more is at stake. In 1998, Phil Knight,
founder of Nike, sadly proclaimed that the brand had become synonymous with slave
wages overtime and arbitrary abuse (Murphy and Mathew 2001). To solve this problem
Nike now has almost 100 people dedicated to corporate responsibility issues. Nike is one
of many firms in the clothing sector where such problems have loomed large. Yet, other
sectors of the economy have similar issues, so no one firm or industry can be insulated
from these considerations.
Beginning the Process
The challenges are formidable, but there are processes a firm could adapt to begin
sourcing in an ethical manner and take responsibility for its supply chain, end-to-end. At
an operational level, purchasing personnel might take on roles that are not traditional
within their job descriptions. Beyond having responsibility for buying goods in the “right
quantity, at the right price, and delivered at the right time,” procurement now is the
partially responsible for stewardship of the brand. Price is important, but firms cannot
afford to potentially denigrate their reputations through benign neglect of their supply
bases. Imagine the challenge Wal-Mart faces managing 20,000 suppliers and deciding
how deep to extend its influence into the supply chain. The results to date would suggest
that its corporate policy has been lax. Buyers and merchandise managers must attend to
social and environmental issues in addition to managing their suppliers.
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Even with corporate buy-in and an espoused commitment to the ethical treatment
of second-, third-, and fourth-tier suppliers, the implementation process is not nontrivial
and despite agreement regarding doing the right thing, there will always be nay sayers. If
one firm acts without the majority of their industry following, some will argue that the
firm is placed at a potential cost disadvantage while our competitors reap the short-term
benefits of noncompliance. While not a compelling response, it does demonstrate that
some firms act because it is the right thing to do, and others react to the potential risks
associated with noncompliance.
At the very outset, there must be corporate buy-in and commitment to the ideals
of CSR. If there is not support from the top, there will be no support at the operations
level, and commitment will never be built. In many instances, the real challenge is
changing corporate culture to recognize that there is an obligation to those foreign
contract workers who provide services to the firm. Recall that Microsoft is presently
settling cases where contract workers did not receive comparable benefits as employees,
especially their right to buy Microsoft stock at deep discounts. While the links to a
worker in China are far more tenuous, obligations still exist.
As managers begin to confront these considerations, it would make sense to
follow a process or methodology that delineates the steps required to implement a
successful CSR program. The steps in the process broadly encompass:
•
Look internally: Determine if your own organization is prepared to do what you
will ask of your external partners. The issues here are less tied to ethical sourcing
(although it is essential that it be done internally) and more focused on the
integrating factors that would permit seamless flows of information and goods
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across parts of your business. Transparency and open/honest communication
flows are essential to the process. Also, consider the present culture and values of
the firm; senior managers must support the call to action or see the burning
platform that necessitates the requisite changes, so have your own house in order.
You cannot ask others to do what you cannot. The lack of internal consistency
will only hamper enforcement of an ethical-sourcing policy as suppliers will
quickly see the hypocrisy in asking them to follow a course of action your firm is
not willing to undertake also. Hewlett-Packard has been accused of having their
contract programmers work 80 hours but was paying them only for 40 hours
(Fererra 2003). The lawsuit potentially weakens Hewlett-Packard’s ability to
manage CSR within its supply chain because one could infer there is a lack of
credibility in its commitment.
•
Define your code of conduct: A firm cannot manage its supply chain partners if
it has not articulated precisely what its expectations are, what it expects from its
suppliers and its suppliers’ suppliers. Table 1 provides examples of the supplier
codes of conduct for several companies. The important point is that the codes
represent the efforts of each company to put into writing a statement or set of
expectations regarding supplier corporate social responsibility. There can be no
ambiguity as to what the goals are, what the penalties are to those who violate the
letter and the spirit of the code, and what resources are available to help suppliers
(current or potential) become compliant. Also, make sure it is tied to your
strategy. If it appears that there is an inconsistency in goals (i.e., cut costs by
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outsourcing and provide a platform for workers’ rights) your actions will be seen
as insincere.
As a way of completing the circle, you should publish a report of
corporate social responsibility on an annual or bi-annual basis. Companies like
the Gap and McDonald’s Corporation are publishing CSR reports as a way of
illustrating both their commitment to their codes of conduct as well and
highlighting the benefits that are derived from these efforts (Radhika 2003).
•
Map the process: Show the entire flow of goods through the pipeline from the
simplest raw material to the most complex subassembly. Imagine building a
complete flow chart of how all materials move through the supply chain. Then,
replicate these maps for different product families or SKUs as each might have a
unique set of suppliers. This alone is a daunting task but is but the first step.
After the map is built, collect data on each of the firms, so that you know the
players. Then, conduct an audit to evaluate the quality of goods produced, costs,
commitment to workers’ rights, labor and wage practices, as well as local
regulations and management’s philosophy towards its workers. Companies like
the Body Shop use the mapping process as a means to identify a baseline from
which to measure future improvement, give suppliers an opportunity to provide
input, and identify specific problem areas (Sillanpaa 1998).
•
Make sure each relationship fits with your strategy: Post audit, it might be
necessary to cull your list of suitable suppliers. If there is a lack of trust or if
there is a gap in values and beliefs that you hold dear, then drop the supplier.
There is no compelling reason to work with suppliers who do not share core
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values. The price differential, quality etc. cannot be that advantageous to justify
working with a supplier who does not fit your profile.
•
Have monitoring mechanisms/technology in place: How can you enforce
codes of conduct if there is no apparent way to measure behavior? Remember
what gets measured gets done! A closely related issue is the metrics used to
evaluate compliance. Do the metrics measure what they are intended to? Are
there contradictory metrics? Do supply chain members understand precisely
what is expected of them? While it would be noble to assert that suppliers will
self-police to ensure compliance, it would be incredibly naïve to think that this
would happen in all instances. Monitoring is probably more important in the
early years of the program. Given that shared norms and trust are expected to
grow over time, self-regulation could become more likely.
•
Train your buyers and be consistent in how they are compensated: Too often
buyers are rewarded for variance to stated price although they are nominally held
to another set of standards or performance criteria. Price is important, no doubt;
but the ability to maintain an ethical code of supplier development and
management is equally as important. To ensure that such policies are followed,
buyers must have both an enterprise and supply-chain-wide perspective. They
must understand the second- and third-order effects of noncompliance, and they
must understand that, if they buy badly, their actions can literally kill a leading
brand. Clear signals must exist externally and must be communicated internally
as well.
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•
Communicate your code to your suppliers: Discussion must be done with
complete transparency in the information exchanged. If there is no trust among
supply chain members and they do not share both a common vision and a
commitment to workers’ rights, nothing will happen. There can be no exceptions
made, and the code must be enforced independent of the local customs,
governmental regulation, etc. A company’s actions and words must be consistent
over time. Set your course and do not waiver. Advise suppliers of the
consequences for noncompliance. Federated Department Stores, for example,
has articulated a three-step process of action the company will undertake when a
supplier violates its Supplier Code of Conduct. The actions include suspending
further shipments until compliance is documented, and measures enacted to
prevent future noncompliance. The issue here is communication, both of what is
expected of the supplier and the repercussions associated with noncompliance.
Questions of Governance
Although we can develop a series of steps through which a firm might progress in
implementing an ethical sourcing program, there are governance issues to address as
well. These issues are likely to arise in relation to questions:
•
Who performs the different activities that must be executed as part of the
program?
•
Who reports to whom such as the operational teams, steering committees,
champions? There is both the formal and the informal network that must be
considered. Do not rely solely on the chain of command to implement actions
since the informal relationship among supply chain members takes on added
importance in situations where values and norms are considered.
•
Where does decision-making authority lay, and who makes what decisions? Do
corporate managers advise, make decisions, or get informed of a decision related
to workers’ rights? Where does decision-making authority rest?
22
•
If there are violations and a remedial plan is a first step in correcting the
problems, which partners are responsible for what issues?
Decision-making responsibility and issues related to any action that could
adversely affect the supply chain should be delegated to each supplier because each
location must be responsible for its actions. Yet, some of these decisions might be
embroiled in conflicts and tensions at the local level due to differences in perspectives
and levels of commitment. To contain any crisis that might surface, managers should
look for early-warning signs that might signal the problems ahead.1 Given the severity of
the problems that can occur and the damage to the firm’s reputation that is likely, we
advise hypervigilance. The following set of questions is illustrative of the issues that
should be monitored:
•
Look at the people.
- Do they have sufficient knowledge/expertise to implement the program?
- Are they able to devote the time, or are they distracted by other issues?
- Do they demonstrate support/buy-in or do they just give the tenets of the
program lip service?
•
Look at the process.
- Is the process jointly managed or not?
- Will those involved in the discussions be part of implementation?
- Are partners aware of each other’s situation, concerns, and challenges?
- Have tough issues been ignored or swept under the carpet?
•
Program Design
- Do shared objectives guide the process?
- Has consensus been reached on scope, information sharing, and
termination if noncompliance continues, etc?
- Is the implementation plan doable?
- Do the partner’s structure and processes support the objectives, reward the
right behavior, and align with the program’s objectives?
- Are expectations aligned regarding resource commitment, time frame, and
outcomes?
Answers to these questions should go a long way in helping supply chain
managers uncover potential problems before they become serious. These early-warning
1
This discussion is adopted from Jordan Lewis, Trusted Partners (New York: Free Press, 1999).
23
signs can prevent costly adverse publicity and potential legal actions. Also, early
intervention can be less expensive than attempting to fix a problem after it has run its
course. There is truth to the adage “an ounce of prevention is worth a pound of cure.”
Conclusion
The common belief is that tension exists between competitive opportunity and
human rights in managing a supply chain. Firms turn to outsourcing supply as a means to
lower product costs and thus remain competitive. Yet, the cost advantages available from
a supply chain often come at the expense of the workers within supplier firms. Some
firms simply shut their eyes and try to avoid facing these issues while others try to
resolve this tension by accepting responsibility for managing their contract
manufacturers’ or foreign suppliers’ relations with workers. This paper provides one
potential solution to firms choosing to follow this strategy in its consideration of several
important issues arising in the course of managing corporate social responsibility within a
supply chain.
We present a managerial framework for addressing the challenges associated with
developing an ethical sourcing program. We have described different codes of conduct
and have offered an approach to implementing a viable ethical sourcing program.
Although we believe our approach has merit and will assist managers to better understand
the issues that contribute to such efforts, certain limitations remain, specifically the
practical uncertainty of any normative discussion about the success rate. At this juncture,
we have attempted only to map the process to help managers think more about these
complex issues. We hope we have presented a sufficiently logical discussion that
24
contributes to the debate and provides guidance for those who wish to move from the
normative to the realities of implementation.
25
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27
Table1: Recent Examples of Individual Firm Supply Chain Codes of Conduct
Collective
Activity of
Employees
Mandatory
Wages for
Employees
Mandatory
Limit on Hours
Federated Department
Stores(&)
No stated requirement.
McDonald’s
Corporation(*)
No stated requirement.
Suppliers should pay at
least the minimum
required by law or the
prevailing industry wage,
whichever is higher, and
shall provide legally
mandated benefits.
Workers hours not to
exceed 60-hours per work
week, and in cases where
local law does not
mandate maximum
hourly work weeks, the
worker shall not work on
a regular basis in excess
of a regular work week
plus 12 hours of
overtime.
Supplier self-verification
and Federated will make
unannounced inspections
of supplier operations.
Employees should be “fairly
compensated and provided
with wages and benefits that
comply with applicable
national and local laws”
“except in extraordinary
business circumstances,
employees will not be
required to work more than
either (a) the limits on
regular and overtime hours
allowed by local law, or (b)
60 hours per week inclusive
of overtime.
Hewlett-Packard
Corporation ($)
Recognizes rights of
workers to organize into
labor unions in accordance
with local laws and
established practices.
Provide wages to workers
that meet or exceed legal
requirements.
Intel Corporation(^)
Workers shall not work
more than the maximum
daily hours established by
local laws.
No stated requirement.
No stated requirement.
No stated requirement.
Supplier verification
No stated requirement.
through periodic selfassessments in regard to
meeting supplier
requirements.
(&) Source: Federated Department Stores, Inc.’s Vendor Supplier Code of Conduct, downloaded on 4/13/03 from
www.federated-fds.com/company/fds_code_of_conduct.pdf.
(*) Source: McDonald’s Code of Conduct for Suppliers, downloaded on 4/14/03 from
http://www.mcdonalds.com/corporate/social/marketplace/supplier/code/http://www.mcdonalds.com/corporate/social/m
arketplace/supplier/code/.
($) Source: HP Supplier Code of Conduct, downloaded on 4/13/03 from www.hp.com/hpinfo/community/
environment/pdf/supcode.pdf.
(^) Source: Intel Supplier Code of Conduct, downloaded on 4/13/03 from
https://supplier.intel.com/static/supplier/CoCRev0.pdf.
Monitoring of
Supplier
Operations
Supplier self-verification
required on an annual basis
and McDonald’s retains right
to verify compliance.
28
Table 2: Recent Examples of Third-Party Supply Chain Codes of Conduct
Ethical Trading Initiative(&)
Collective
Activity of
Employees
Mandatory
Wages for
Employees
Mandatory
Limit on Hours
Recognizes rights of works to
organize and collectively
bargain, and also requires
supplier to facilitate parallel
means of worker collective
bargaining where local law
prohibits worker organizing.
Suppliers should pay a living
wage which allows workers to
pay for basic needs and
provides workers with small
amount of discretionary
income.
Workers shall not on a regular
basis be required to work in
excess of 48 hours per week
and shall be provided with at
least one day off for every 7
day period on average.
Overtime shall be voluntary,
shall not exceed 12 hours per
week,
SAI 8000 International
Standard(*)
Recognizes rights of works to
organize and collectively bargain,
and also requires supplier to
facilitate parallel means of worker
collective bargaining where local
law prohibits worker organizing.
Fair Labor Association($)
Suppliers should pay a living wage
which allows workers to pay for
basic needs and provides workers
with small amount of discretionary
income.
Employers shall pay employees, as a
floor, at least the minimum wage
required by local law or the prevailing
industry wage, whichever is higher,
and shall provide legally mandated
benefits.
Workers shall not on a regular basis
be required to work in excess of 48
hours per week and shall be
provided with at least one day off
for every 7 day period on average.
Overtime shall be voluntary, shall
not exceed 12 hours per week,
Except in extraordinary business
circumstances, employees shall (i) not
be required to work more than the
lesser of (a) 48 hours per week and 12
hours overtime or (b) the limits on
regular and overtime hours allowed by
the law of the country of manufacture
or, where the laws of such country do
not limit the hours of work, the regular
work week in such country plus 12
hours overtime.
The FLA accredits monitors to conduct
independent external monitoring of
facilities used by companies
participating in the FLA.
Employers shall recognize and respect
the right of employees to freedom of
association and collective bargaining.
Member companies accept the The company shall maintain
principle that the
appropriate records of suppliers’
implementation of codes will
commitments to social
be assessed through
accountability, including
monitoring and independent
participating in the company’s
verification; and that
monitoring activities as requested.
performance with regard to
monitoring practice and
implementation of codes will
be reported annually.
(&) Source: Ethical Trading Initiative base Code, downloaded on 4/13/03 from
http://www.eti.org.uk/pub/publications/basecode/en/index.shtml.
(*) Source: Social Accountability International Standard, downloaded on 4/14/03 from
http://www.cepaa.org/Document%20Center/2001StdEnglishFinal.doc.
($) Source: Fair Labor Association Code of Conduct, downloaded on 4/13/03 from http://www.fairlabor.org/all/code/.
Monitoring of
Supplier
Operations
29