Maturity in Responsible Supply Chain
Management
A WHITE PAPER
Angharad H. Porteous, Sonali V. Rammohan, Shoshanah Cohen, and Hau L. Lee
Stanford University
Stanford Initiative for the Study of Supply Chain Responsibility
White Paper
December 4, 2012
SUMMARY Today’s multinational companies are held to myriad social, environmental, and ethical standards in their supply chains. But despite efforts at monitoring, buyers routinely face challenges when working with suppliers to meet and exceed standards. A recent survey of chief supply chain officers found that over 80% of the 750 firms polled have social and environmental monitoring systems for their internal operations, but that less than a third have such systems in their immediate and extended supplier network.1 In 2012, the Stanford Global Supply Chain Management Forum launched the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR), a consortium of organizations dedicated to examining the relationship between maturity in responsible supply chain (RSC) practices and supply chain performance. The term maturity in this context relates to the degree of formality and comprehensiveness of business practices. Developing a better understanding of this relationship will strengthen the case for integrating RSC practices with traditional supply chain management practices and can help identify RSC practices that build social, environmental, and economic value. RESEARCH QUESTIONS 1) What supply chain practices do buyers (i.e., purchasers of materials and services) employ that they believe have a positive impact on social, environmental, and ethical performance? 2) Can we develop a framework to assess the relationship between maturity in RSC practices and supply chain performance? METHODOLOGY Most aspects of RSC management (e.g., non-­‐discrimination policies, worker health and safety management, emissions reduction, anti-­‐corruption measures) can be associated with one of three broad categories: social responsibility, environmental sustainability, and ethical integrity. See Appendix B for more information on the topics we identified under these three broad categories. For this phase of research, we investigated three timely issues important to SISSCR members: • Excessive working hours (related to social responsibility) • Hazardous materials and related pollution (related to environmental responsibility) • Counterfeit components in electronics products (related to ethical integrity) We conducted our research over a six-­‐month period, interviewing leading multinational buyers and select suppliers in the electronics industry. We also reviewed academic literature and researched best practices used in a broad set of industries. Intellectual property: While the topic of counterfeit components is not traditionally associated with supplier responsibility codes of conduct, it was selected because the protection of intellectual property (IP) in the supply chain is an emerging area of research and business concern. Examples of IP issues in the supply chain include counterfeitting, software license non-­‐compliance, and trade secret theft. Intellectual property issues are not typically included in sustainability rankings or guidelines (e.g., the Dow Jones Sustainability Index or Organisation for Economic Co-­‐operation and Development (OECD) Guidelines for Multinational Enterprises). However, we contend that there are similarities between IP and other issues — such as product safety, conflict minerals, and other issues involving breakdowns in the integrity of a supply chain — making this a fertile field for research and one relevant to business. FINDINGS The responsible supply chain practices in which buyers engage can be captured in three main categories: (1) management systems, (2) methods to increase supply chain visibility and (3) actions to improve social, environmental, or ethical performance. We argue that there is a spectrum of maturity with respect to each of these categories (see diagram below). As part of a continuous improvement model, buyers can keep shifting 2 practices toward the higher end of the spectrum. In the next phase of research, we plan to compare this spectrum with established RSC rankings and examine correlations between RSC maturity and supply chain performance. We will also administer a survey to over 50 firms to explore correlations between maturity in specific issues (e.g., intellectual property and other issues) and supply chain performance. Lagging Management Systems Policies Policies not uniform across supply base. Policies include base minimum legal requirements. Policies not clearly communicated to managers & suppliers. Commitment to continuous improvement program, clear communication of policies to managers. Leadership & Resources Clear organizational structure for managing RSC issues is not in place, little or no training is provided to staff. Few resources are dedicated to “sense” and “respond” activities. Senior management commitment, accountable company representatives are identified, training is offered for managers and workers. High levels of resources are dedicated to “sense” and “respond” activities. Incentives Strong supplier RSC practices are not rewarded. Align incentives by integrating sustainability into supplier scorecards so that it becomes a larger factor in awarding business. Sense (Visibility) Monitoring Reactive efforts: gain visibility into Proactive efforts: gain visibility into processes violations that have already occurred. and r isks b
efore v iolations o ccur. Information Comprehensiveness Perform legal minimum company audits. Perform more comprehensive audits and Do not provide feedback to suppliers incorporate external data sources (NGOs, based on audit results/risk assessments. crowd-­‐sourcing, supplier self-­‐reported data). Examine internal operations and a limited number of tier 1 suppliers. Monitor key strategic suppliers and support suppliers in monitoring their own extended supplier networks. Extend to material source providers if that is where greatest impacts and risks lie (e.g., conflict minerals in electronics, materials suppliers in apparel). Reactions to violations Supplier may receive a warning. Supplier business is not affected by violations (orders are not reduced, contract is not terminated). Conduct collaborative root cause analysis, investigate both buyer and supplier roles in violations. Engage with supplier senior management. Provide corrective action plans with reasonable time horizon. Proactive practices Social, environmental and ethical factors throughout product life cycle are not considered in product & process design. Consider impacts throughout product life cycle when designing products and processes in order to minimize violations and maximize returns/value. Developing supplier capability Buyer dictates standards but does not work with supplier management to improve practices. Targeted collaboration with suppliers that need greatest support. Broader strokes such as supplier training in best practices raise standards across the supply base. Level of inclusion of the extended supply network Respond (Practices) Leading 3 The framework above was developed based on specific findings related to the topics of excessive working hours, hazardous materials, and counterfeits. See Appendix A for a summary of these findings. Below, we provide background on RSC management breakdowns in the three chosen topics and discuss their causes. Next, we discuss examples of management systems, methods to increase visibility and actions buyers take that they believe improve performance. 1. Breakdowns in RSC Practices Despite the fact that multinational corporations have been auditing their supply chains for years, significant problems of noncompliance (violations of industry codes of conduct or law, or both) still exist. In 2011, the Fair Labor Association found that 90% of factories audited in Asia had overtime violations.2 Apple received attention in early 2012 after The New York Times reported on explosions and excessive working hours at Foxconn, a subcontract manufacturer to Apple and other electronics companies with operations in China.3 In China, as much as 70% of the rivers, lakes, and reservoirs are affected by water pollution; hazardous materials used by factories in industries such as apparel and electronics contribute to this pollution.4 Intellectual property theft is a huge and growing challenge, costing businesses across the world around $1 trillion annually in lost sales.5 A 2009-­‐2010 investigation by the US Senate Armed Services Committee uncovered 1,800 cases of suspected counterfeit electronic components in contracts with defense companies such as Raytheon, Boeing, and Lockheed Martin.6 2. Causes of Breakdowns Breakdowns in RSC practices are complex and influenced by various internal and external forces. Suppliers may not have the leadership, capability, or training needed to comply with requirements. On the buyer side, if a buyer is a major customer of a supplier, the buyer may have more power to promote responsible practices at the supplier. On the other hand, this leverage can result in negative consequences. For example, when a buyer has the power to push through large or late orders or demand short lead-­‐time on an order, the supplier may respond by pushing its workforce to work longer hours than allowed. Other causes of breakdowns include: lack of regulation, lack of enforcement or penalties, non-­‐standardized regulation across and within countries, and regional or cultural factors (e.g., workers in China may desire to work more hours, hence making working hour compliance more challenging). Finally, given the limited evidence showing a correlation between RSC practices and supply chain performance, buyers may not be sufficiently motivated to invest in these practices. 3. Management Systems > Policies When RSC policies are not uniform across the supply base, it can cause confusion with buyer and supplier staff. Often, policies include base minimum legal requirements only, and these may not always be clearly communicated to managers and suppliers. If a buyer clearly communicates RSC policies to managers, this increases chances that policies will be adhered to consistently across the supply base. Integrate RSC management into supplier scorecards: There is some evidence to suggest that further integrating sustainability into traditional supplier management has benefits. Nike recently redeveloped its supplier scorecard, called "The Manufacturing Index". It now weights sustainability at 25% of the total supplier score -­‐ a high weighting when compared to other firms we interviewed. Other scorecard metrics cover cost, quality and delivery. Sharla Settlemier, Senior Director of Sustainable Manufacturing and Sourcing, reported that, as part of the shift toward further integrating sustainability into supplier management, departments had to collaborate in order to understand how various elements related to each other. When asked why collaboration was important, she noted "You can't have consistently high quality if you don't have good compliance to ensure good working conditions for the people making your product." 4 > Leadership and Resources From our interviews it is clear that accountability for sustainability and responsibility issues are migrating higher up the supply chain organizational tree. Buy-­‐in and leadership from top executives on the importance of managing social, environmental, and ethical issues are paramount as such issues can have profitability and reputation implications. Leaders also need to dedicate resources to proactively manage responsibility issues in the supply chain. The Ethical Trading Initiative, an alliance of companies, trade unions and voluntary organizations, has outlined a maturity framework for managing “Meeting social and environmental workforce issues in a company’s supply chain. It defines the regulations is not only the right thing resources maturity to be that the “company makes available to do, but is a customer expectation sufficient resources to ensure that its commitments are fulfilled and and should be considered a part of that there is continuous improvement in the application of these doing business.” principles”.7 We saw examples of such maturity from our interviews — Supplier where companies deploy responsibility teams to work with key first-­‐
tier suppliers, conducting frequent internal assessments and helping to implement continuous improvements. These dedicated resources are helping to identify key risks, problems, and facilitating continuous improvement of social, environmental, and ethical issues at suppliers. We also observed examples where companies are not allocating the sufficient resources to address supply chain social and environmental issues, either due financial constraints or lack of leadership commitment. One executive commented that they do not have sufficient resources to analyze data from the supply chain to proactively solve compliance problems and deliver training to suppliers regarding best practices. > Structuring Incentives When asked how they structure incentives for suppliers to comply with RSC requirements, one buyer commented, “The incentive is that they receive our business”. Still, we found evidence of positive incentives. Cisco and Intel factor RSC criteria into annual supplier awards. Cisco includes RSC criteria when determining preferred suppliers. Example: When Starbucks began to require coffee growers to improve responsible labor and environmental practices, it realized the changes it desired could impose a significant financial burden on the growers. Hence, the company offered various levels of preferred supplier status for farmers, some of which included Starbucks offering a premium price for coffee beans. By rewarding suppliers for responsible practices, Starbucks saw increased supplier retention, improved risk management, and increased visibility and control. In addition, it established its competitive advantage as a socially, environmentally, and ethically conscious coffee seller.8 In terms of penalties, several companies interviewed stated that if suppliers could not implement corrective actions, they would either be removed from preferred supplier lists or lose business altogether. Nike recently announced that suppliers who do not adhere to its labor and sustainability standards risk losing Nike’s business.9 Such penalties can be difficult to enforce in practice, especially if suitable alternate suppliers do not exist. 4. Methods to Increase Visibility (“Sense”) Visibility can be defined as the increase of available data that can be analyzed to make recommendations and determine strategies to improve and strengthen a supply chain.10 Below, we describe examples of leading methods to increase visibility. 5 > Monitoring While research suggests that RSC audits do not tend to identify “We need more data to drive the root cause of a problem,11 they are a standard instrument of decisions on how to prioritize the supplier monitoring. Comprehensive, risk-­‐based audits can suppliers that need support.” provide a good snapshot of supplier operations. In order to avoid — Katie Schindall, Principal “audit fatigue” caused by multiple buyers auditing the same Program Manager, Sustainability, supplier, some companies have been conducting shared audits, EMC which can alleviate the monitoring burden for both buyers and suppliers. “A big step forward that has been made in the last Example: In the apparel industry, companies such as couple of years is industry collaboration. Efforts Adidas, Nike, and Levi Strauss use the Fair Factories are more efficient as we can share and develop Clearinghouse's (FCC) compliance database to store best practices together in terms of supply chain supplier compliance performance information. The responsibility.” FFC enables members to share factory audit reports and corrective action plans, thus increasing the — Suzanne Fallender, Director of CSR Strategy & Communications, Intel efficiency of both buyers’ and suppliers’ efforts. Adidas reported that in 2011, through the FFC, it increased common corrective action plans in shared collaboration with other brands by harmonizing or creating factories in Brazil, Indonesia, Mexico, Honduras, Turkey, Egypt, and Israel.12 While audits can provide a snapshot into supplier operations, ongoing monitoring provides a more regular view into RSC practices and can facilitate ongoing management decisions as part of continuous improvement. As one example, as mentioned earlier, is to deploy a responsibility teams to work with key first-­‐tier suppliers, conducting frequent internal assessments and helping to implement continuous improvements. Furthermore, buyers are increasingly incorporating social and environmental performance measures into supplier scorecards, increasing the incentive for suppliers to engage in more responsible practices. Example: In 2006, Walmart launched a Packaging Scorecard to help suppliers evaluate their packaging, with the aim of helping Walmart reduce packaging weight across its global supply chain by 5% by 2013 (compared with 2008 levels). The Packaging Scorecard increased Walmart’s visibility into its suppliers operations, and the company on track to meet its target.13 In 2013, Walmart plans to turn its focus to a scorecard for sustainability metrics, aimed at helping buyers decide where to source products. Walmart has partnered with The Sustainability Consortium in order to develop this common global platform, called the Sustainability Measuring and Reporting System, which is designed to measure and share key sustainability data.14 Ideally, suppliers would truthfully self-­‐disclose all data desired by various stakeholders rather than being monitored. Beginning in 2013, Intel has asked its 75 top suppliers to publish sustainability reports using the Global Reporting Initiative (GRI) Guidelines.15 While the accuracy of self-­‐reported data can be a concern, this is a step towards increasing the suppliers’ role in improving transparency. In 2012, Cisco introduced a question on its supplier scorecards that enables suppliers to report noncompliances with no impact to their scores. This encourages suppliers to disclose problems rather than conceal them. For counterfeit monitoring, issues can potentially be identified by looking at data from non-­‐traditional sources and using forensic-­‐like techniques. A decrease in sales, a rise in warranty claims, or an increase in orders for replacement of proprietary parts are all warning signs that counterfeit components may have entered the supply chain.16 6 > Information Comprehensiveness Comprehensive risk assessments take into account factors such as past audit results, criticality of the supplier, geography, scans of media coverage, and other external data. Today, buyers can make use of information from many different sources to assess risks, from investigative reports by nongovernmental organizations such as the Institute of Public and Environmental Affairs, media reports, and worker hotline programs. And with the advent of social media, the number of avenues by which buyers can gather information about supplier RSC performance continues to increase. For example, LaborVoices enables factory workers to comment on working conditions through a mobile phone platform. Buyers can then use this information to monitor their suppliers’ labor practices. An example of another external data source which can inform risk assessments is the Supplier Ethical Data Exchange (SEDEX), a not-­‐for-­‐profit organization with over 25,000 members in 150 countries that enables the sharing of ethical and supply chain data. > Level of Inclusion of the Extended Supply Network Social, environmental, and ethical issues often stem from suppliers far upstream. For example, when Mattel had to recall its toy products in 2007 due to the use of lead paint in production, the source of the lead was a tier 2 supplier. This example highlights the importance of a buyer having visibility along the length of the supply chain as to where its biggest risks lie. Furthermore, industry codes of conduct such as the one administered by the EICC are recommending its standards are required at each tier of the supply chain. However, reaching beyond tier 1 is challenging; it requires resources, collaborating with tier 1 suppliers, and is hampered when a buyer only accounts for a small percentage of the upstream supplier’s business. Nike is one company that has realized its greatest risks lie at its material suppliers rather than its contract manufacturers. In August 2011, Nike launched a material traceability pilot for organic cotton and recycled polyester with six of its strategic supply chain partners. Pilot objectives include evaluation of process certification standards, traceability software tools, and resource requirements to scale a material traceability program across material supply chains.17 4. Buyer Performance Improvement Actions (“Respond”) A common framework for continuous improvement is the plan-­‐do-­‐check-­‐act cycle, a four-­‐step method for carrying out change used by the International Organization for Standardization (ISO) and other groups. We now focus on the “act” step and describe examples of leading actions buyers can take in response to the information they gather from visibility efforts. > Reactions to Violations Often, audits can generate findings that are not acted upon. For example, in November 2012, at least 112 people were killed in a garment factory with no emergency exits in Bangladesh that supplied product to WalMart without the company’s knowledge. An assessment of the factory was conducted in May 2011, when the factory was deemed “high risk”. It was deemed “medium risk” in August 2011. WalMart reported that it had terminated its relationship with Tazreen Fashions Ltd., but that it had contracted with another company that, without its knowledge, subcontracted with Tazreen18. In this case, the supplier had received a citation but there appeared to be no follow up to see if corrective actions had been implemented. Instead, when buyers conduct collaborative assessments with suppliers to understand the buyer and supplier roles in violations, and when the supplier is given a reasonable time horizon to implement a corrective action plan, there is a greater chance that the violation will not occur again. > Proactive Practices Addressing root causes: Targeting the root cause of a problem is clearly a powerful way to resolve it, but the complexity of root causes makes this difficult in practice. Design for Environment is one example of a method that has successfully helped to minimize environmental impact during a product’s life cycle, from raw 7 material extraction to disposal or recycling. This method can reduce or eliminate, for example, the amount of hazardous materials used in a product or manufacturing process, addressing the problem at its very essence. Examples: Timberland’s “Green Index” rates products on environmental impact and enables product designers to choose less harmful materials and processes. Apple has made reducing overtime its top priority for its 2012 supplier responsibility program. It has begun weekly tracking of working hours in 110 of its supplier factories. In 2011, Apple reported it had required facilities to change work shift patterns and make hiring decisions to drive compliance. The company also hired a consultant to train factory personnel on how to avoid excessive work hours.19 These proactive actions seem to have had a positive effect – in July 2012, Apple reported that working hours compliance was at 97% (with regards to the EICC 60-­‐hour maximum work week).20 Developing an end-­‐to-­‐end focus: Companies are increasingly looking at social, environmental, and ethical impacts along the entire supply chain, from product design and sourcing materials through to a product’s end of life. A common method for assessing the environmental impact of products from cradle to grave is life cycle assessment. Nike reported seeing a large reduction of waste from using its "Considered Design Index," which helps the company integrate environmental considerations into the design of products. However, the supply chain becomes increasingly opaque further down the tiers, making it challenging to develop an end-­‐to-­‐end focus. Consider the challenge of preventing counterfeits. Microsoft established a policy four years ago where Tier 1 partners must agree to purchase components directly from approved manufacturers. Otherwise, they need authorization to purchase from an alternative distributor. This policy ensures quality and minimizes counterfeit risk. EMC uses a similar “Approved Manufacturer List” to create a “closed supply chain”, which helps to ensure that the chain of custody remains strong and intact as the product moves up through supply chain tiers. The Center for Responsible Enterprise and Trade (CREATe.org) recommends conducting strategic assessments of a company’s trade secrets, identifying secrets that may be safely shared with suppliers, and considering how best to structure operations to minimize vulnerabilities.21 Collaboration across and within industries: RSC standards appear to be increasingly converging within and across industries. All technology firms interviewed use the Electronics Industry Citizenship Coalition (EICC) code of conduct to promote standardization across the industry and collectively “raise the bar” for compliance. The Global Social Compliance Program (GSCP) is working to harmonize efforts across industries to promote continuous improvement of working conditions and environmental performance. Example: The Sustainable Apparel Coalition (SAC) is an example of a major multi-­‐stakeholder membership group providing a platform for collaborative work in addressing the apparel industry’s social and environmental problems. Members include Nike, H&M, Adidas, Puma, Coca Cola, Gap, Levi’s, and suppliers like Li & Fung. In July 2012, the SAC launched “The Higg Index,” a self-­‐assessment tool to help firms evaluate materials types, products, facilities, and processes based on a range of environment and product design choices. In addition to internal considerations, the index can be used as a starting point for engagement, education, and collaboration between multiple stakeholders on environmental issues. The second release of the index will include social and labor impact areas.22 > Developing supplier capabilities Research suggests that using a commitment-­‐model approach is an effective way to develop supplier “It is important to get suppliers to own the solution.” capabilities.23 The commitment model is based on — Gabriela Cruz Thompson, Supplier Continuous joint problem solving, information exchange and the Quality Improvement Program Manager, Intel diffusion of best practices. The model uses audit information and the frequent presence of auditors or dedicated support from the buyer in factories to engage, for example, in root-­‐cause analysis. Cisco is taking a collaborative approach by asking suppliers for ideas to improve their RSC practices. Most firms interviewed focused more on traditional compliance methods. While some described capability-­‐building activities in the pipeline, in general, they seemed limited. 8 Examples: Walmart has found success with its supplier capacity-­‐building program. Each year, Walmart partners with 100 of its suppliers for its “Supplier Development Program” to improve factory working conditions and supplier management systems. Walmart forms an internal consulting team to conduct a thorough analysis of each supplier’s social and environmental management systems and develops a customized program to fit the supplier’s business model. Suppliers have seen reduced worker turnover and injuries and increased worker satisfaction. Walmart continues to work closely with suppliers after the completion of the capacity building program to facilitate continuous improvement. One participant, textile manufacturer Welspun India, reduced its energy consumption by 18% after developing a systematic approach for internal factory audits, and also started harvesting rainwater from retention ponds for production needs. A 2007 study by Professor Richard Locke and Monica Romis of MIT found that the most effective way to influence the improvement of working conditions in supplier factories was by providing technical assistance to suppliers and empowering employees on shop floors. This was opposed to buyers simply monitoring compliance to supplier codes of conduct. The study compared two Nike footwear and apparel factories in Mexico that were both compliant with Nike’s code of conduct, but one factory had significantly higher worker satisfaction. This supplier had implemented Lean-­‐manufacturing methods with guidance and collaboration from Nike, and workers were given greater autonomy and power to make day-­‐to-­‐day decisions on the shop floor.24
CONCLUSIONS AND NEXT STEPS We propose that there is a spectrum of maturity with respect to each of the management systems, “sense” and “respond” categories described in this paper. We have not identified a clear progression to higher maturity for each of the elements in the framework, but rather, we have listed examples of lagging and leading practices in each element. The level of maturity in each responsibility dimension will be determined based on the degree of formality and comprehensiveness of a firm’s efforts. We expect the progression up the “maturity spectrum” to be complex, given the many factors that can influence RSC practices. In addition, noncompliance can persist despite a buyer implementing strong practices. Looking ahead, we plan to: (1) Determine whether high supply chain social, environmental, and ethical rankings correlate with stronger operational supply chain performance. (2) Examine whether maturity in intellectual property protection correlates with other responsible supply chain dimensions (e.g., working hours management, environmental sustainability). (3) Examine whether maturity in intellectual property protection correlates with stronger operational supply chain performance. (4) At a later stage, depending on the level of financial support, we may explore other topics such as working hours management, waste management or other environmental sustainability dimensions. Acknowledgements We would like to thank SISSCR sponsors Microsoft, CREATe.org, Cisco, PwC, Intel, Ryder, and EMC, and research partners MIT and Business for Social Responsibility (BSR). 9 We would like to especially acknowledge Professor Richard Locke, Head of Political Science, Class of 1922 Professor of Political Science, and Professor of Management, at Massachusetts Institute of Technology, and Professor Joshua Cohen, Marta Sutton Weeks Professor of Ethics in Society and Professor of Political Science, Philosophy, and Law, at Stanford University, for their continued guidance in this research. Membership in the Stanford Initiative for the Study of Supply Chain Responsibility To inquire about opportunities to join SISSCR and participate in the quantitative phase of this research, please contact Sonali Rammohan at rammohan_sonali@gsb.stanford.edu. SPONSORS Intel, the Intel logo are trademarks or
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