Executive Briefings

Forging Responsible Supply Chains: Are Companies Growing Up?

Now that corporations are "persons," I suppose it's no stretch to describe supply chains as "mature" or "immature." In fact, the words are especially useful when it comes to determining a company's level of supply-chain responsibility.

That can be a difficult term to define. In a time of so many reports of unfair labor practices and environmental damage, however, it's an important one to address.

Even a cursory review of multinationals reveals that many are far from achieving maturity in their approach to crucial concerns such as working conditions and the environment. It's not for lack of effort; according to the 2011 Chief Supply Chain Officer Report from SCM World, more than 80 percent of the 750 companies polled had some kind of internal system for monitoring their social and environmental practices. Fewer than a third, however, had extended such efforts to their supplier networks. And that's where many of the worst problems occur.

What exactly is "supply chain responsibility," anyway? A new working paper from the Stanford Initiative for the Study of Supply Chain Responsibility breaks it down into three elements: social compliance, environmental impact and intellectual property protection (IP). (Saddled with the ungainly acronym SISSCR, this recently formed consortium counts among its members such companies as Cisco Systems, Inc., Microsoft, PwC and Ryder Supply Chain Solutions.) The group has identified major problems in all three areas.

On the topic of social compliance, 90 percent of Chinese factories audited by the Fair Labor Association in 2011 had overtime violations, according to Hau Lee, professor at Stanford University's Graduate School of Business and a co-author of the SISSCR working paper. On the environmental side, he said, 70 percent of China's rivers, lakes and reservoirs are affected by industry pollution. And in the area of IP, a May 2012 report from the U.S. Senate Armed Services Committee uncovered 1,800 cases of suspected counterfeit electronic components in defense contracts.

Supply-chain executives have plenty to keep them up at night. Speaking at Stanford's recent Socially and Environmentally Responsible Supply Chains Conference, Lee enumerated their chief concerns. They related the usual nightmares - material supply shortages, logistics disruptions, supplier failures, legal and regulatory issues. But in SCM World's latest Chief Supply Chain Officer Survey, close to 70 percent of respondents cited compliance and environmental regulations as major headaches. In addition, the survey's authors were "shocked" to learn that 60 percent worried about counterfeit products. "Increasingly," said Lee, "there are significant risks in the supply chain related to responsibility issues."

To gauge the progress of companies toward supply-chain responsibility, the SISSCR paper sketches out a "maturity spectrum" with two parts: efforts to increase visibility (the cure-all for the vast majority of supply-chain problems, I would say) and those to improve social, environmental and ethical performance. Digging deeper, it defines leading practices for seven distinct corporate initiatives. In the area of risk assessments and audits, for example, best practices include drawing on outside data, such as from NGOs, to better identify risks, and sharing audits between suppliers and buyers. To motivate suppliers, a leader might align positive and negative incentives to encourage responsible practices. (A laggard might be the buyer that said its incentive for suppliers to comply with requirements "is that they receive our business.")

SISSCR's maturity spectrum is a work in progress. Soon to come, says the group, is a survey that would compare a given firm's maturity level against established responsibility rankings and actual supply-chain performance.

Meanwhile, a number of companies are making progress. In a bid to improve its labor and environmental practices, Starbucks offers coffee farmers "preferred supplier" status, including a premium price for their beans. The program is meant to offset the added financial burden on growers of complying with strict labor standards. At the same time, it burnishes Starbucks' public image as a "socially, environmentally and ethically conscious coffee seller."

Intel has been working with NGOs like the Enough Project to eliminate the use of conflict minerals from the Democratic Republic of the Congo in its products. Vice president of global procurement and sourcing Jackie Sturm said the company has sent representatives directly to the mines to determine the origin of key minerals such as tungsten, tin, tantalum and gold. It has also collaborated with the Electronic Industry Citizenship Coalition and Global e-Sustainability Initiative to develop a program for identifying material origins at the smelter. Intel has set a corporate target to be completely conflict-free for tantalum by the end of 2012, and plans to extend that designation to all four materials by 2013.

The company is also drawing on the help of NGOs, government officials and Chinese factory heads to understand the labor issues faced by suppliers. The goal is to "work together to outsmart the problem," said Sturm.

There are no overnight solutions. Sturm likened Intel's environmental and social governance efforts to the company's ongoing quality program, launched 30 years ago. "It is a journey," she said. "It takes some time. Companies need to see that it can work."

Microsoft is experimenting with the use of facial-recognition software, to cut down on the use of fake IDs that can result in the employment of underage labor at suppliers' factories. Anne Kelley, senior director of supply chain and IP, said the company monitors plant employees directly. "In social responsibility," she said, "the voice of the worker is king. We need to hear things that don't come from the supplier."

The problem has to be attacked at multiple levels. The SISSCR paper cites a 2007 MIT study, which found that the best way to promote improved 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."

So is progress toward supply-chain responsibility being made? No question about it. But when it comes to assessing the maturity of those efforts, a lot of companies are still in their teenage years.

Comment on This Article


Keywords: supply chain, supply chain management, international trade, supply chain responsibility, China labor practices, conflict minerals, supply chain planning, supply chain risk management

That can be a difficult term to define. In a time of so many reports of unfair labor practices and environmental damage, however, it's an important one to address.

Even a cursory review of multinationals reveals that many are far from achieving maturity in their approach to crucial concerns such as working conditions and the environment. It's not for lack of effort; according to the 2011 Chief Supply Chain Officer Report from SCM World, more than 80 percent of the 750 companies polled had some kind of internal system for monitoring their social and environmental practices. Fewer than a third, however, had extended such efforts to their supplier networks. And that's where many of the worst problems occur.

What exactly is "supply chain responsibility," anyway? A new working paper from the Stanford Initiative for the Study of Supply Chain Responsibility breaks it down into three elements: social compliance, environmental impact and intellectual property protection (IP). (Saddled with the ungainly acronym SISSCR, this recently formed consortium counts among its members such companies as Cisco Systems, Inc., Microsoft, PwC and Ryder Supply Chain Solutions.) The group has identified major problems in all three areas.

On the topic of social compliance, 90 percent of Chinese factories audited by the Fair Labor Association in 2011 had overtime violations, according to Hau Lee, professor at Stanford University's Graduate School of Business and a co-author of the SISSCR working paper. On the environmental side, he said, 70 percent of China's rivers, lakes and reservoirs are affected by industry pollution. And in the area of IP, a May 2012 report from the U.S. Senate Armed Services Committee uncovered 1,800 cases of suspected counterfeit electronic components in defense contracts.

Supply-chain executives have plenty to keep them up at night. Speaking at Stanford's recent Socially and Environmentally Responsible Supply Chains Conference, Lee enumerated their chief concerns. They related the usual nightmares - material supply shortages, logistics disruptions, supplier failures, legal and regulatory issues. But in SCM World's latest Chief Supply Chain Officer Survey, close to 70 percent of respondents cited compliance and environmental regulations as major headaches. In addition, the survey's authors were "shocked" to learn that 60 percent worried about counterfeit products. "Increasingly," said Lee, "there are significant risks in the supply chain related to responsibility issues."

To gauge the progress of companies toward supply-chain responsibility, the SISSCR paper sketches out a "maturity spectrum" with two parts: efforts to increase visibility (the cure-all for the vast majority of supply-chain problems, I would say) and those to improve social, environmental and ethical performance. Digging deeper, it defines leading practices for seven distinct corporate initiatives. In the area of risk assessments and audits, for example, best practices include drawing on outside data, such as from NGOs, to better identify risks, and sharing audits between suppliers and buyers. To motivate suppliers, a leader might align positive and negative incentives to encourage responsible practices. (A laggard might be the buyer that said its incentive for suppliers to comply with requirements "is that they receive our business.")

SISSCR's maturity spectrum is a work in progress. Soon to come, says the group, is a survey that would compare a given firm's maturity level against established responsibility rankings and actual supply-chain performance.

Meanwhile, a number of companies are making progress. In a bid to improve its labor and environmental practices, Starbucks offers coffee farmers "preferred supplier" status, including a premium price for their beans. The program is meant to offset the added financial burden on growers of complying with strict labor standards. At the same time, it burnishes Starbucks' public image as a "socially, environmentally and ethically conscious coffee seller."

Intel has been working with NGOs like the Enough Project to eliminate the use of conflict minerals from the Democratic Republic of the Congo in its products. Vice president of global procurement and sourcing Jackie Sturm said the company has sent representatives directly to the mines to determine the origin of key minerals such as tungsten, tin, tantalum and gold. It has also collaborated with the Electronic Industry Citizenship Coalition and Global e-Sustainability Initiative to develop a program for identifying material origins at the smelter. Intel has set a corporate target to be completely conflict-free for tantalum by the end of 2012, and plans to extend that designation to all four materials by 2013.

The company is also drawing on the help of NGOs, government officials and Chinese factory heads to understand the labor issues faced by suppliers. The goal is to "work together to outsmart the problem," said Sturm.

There are no overnight solutions. Sturm likened Intel's environmental and social governance efforts to the company's ongoing quality program, launched 30 years ago. "It is a journey," she said. "It takes some time. Companies need to see that it can work."

Microsoft is experimenting with the use of facial-recognition software, to cut down on the use of fake IDs that can result in the employment of underage labor at suppliers' factories. Anne Kelley, senior director of supply chain and IP, said the company monitors plant employees directly. "In social responsibility," she said, "the voice of the worker is king. We need to hear things that don't come from the supplier."

The problem has to be attacked at multiple levels. The SISSCR paper cites a 2007 MIT study, which found that the best way to promote improved 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."

So is progress toward supply-chain responsibility being made? No question about it. But when it comes to assessing the maturity of those efforts, a lot of companies are still in their teenage years.

Comment on This Article


Keywords: supply chain, supply chain management, international trade, supply chain responsibility, China labor practices, conflict minerals, supply chain planning, supply chain risk management