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Companies need to get a firm handle on the ethical issues in their supply chains, then take meaningful

action to mitigate risks to safety and reputation.

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Supply chains are the lifeblood of a healthy company, with sup-pliers having a direct impact on quality, profitability and innovation.

Unfortunately, the supply chain can also poison a company.

It’s hard to miss these recent headlines: Chipotle’s supply chain shortcomings for food safety, and Nestle and Jacobs Douwe Egberts, two of the world’s largest coffee companies, currently facing allegations of slave labor in their supply chains after an investigation by research firm Danwatch. Today, having a transparent and ethical supply chain is worth its weight in (conflict-free, ethically-sourced) gold. And that’s why supply management pro-fessionals are paying closer attention to sup-pliers — and their suppliers, further down the supply chain — than ever before.

There are a number of ethical supply chain issues facing companies, but two of the more pressing concerns involve human labor viola-tions and environmental sustainability. Thanks to the internet, customers have more tools than ever to research products and determine which ones to buy, and that means compa-nies must stand up to unprecedented levels of scrutiny. “Visibility into supply chains is something that resonates with customers, particularly the younger generations,” says Robert Handfield, Ph.D., Bank of America Distinguished University Professor of Supply Chain Management and executive director of the Supply Chain Resource Cooperative at North Carolina State University. “They really want to know where their food comes from, where their clothing is manufactured, and the demand for transparency is only going to increase. The corporate world is facing a much more informed group of people that say we need to make more effort to be ethical in our actions.”

Although the onus to mitigate supply chain problems ultimately lies with individual companies, governments are taking steps to eradicate products with dubious origins from entering their countries. In mid-February,

MATTERSBy Lisa Arnseth

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President Barack Obama took action to make sure fish imported to the United States has not been caught by providers using forced or slave labor in Asia’s Southeast region. The Port State Measures Agreement gives officials the right to keep for-eign ships from docking in U.S. ports if they are suspected of illegal, unre-ported or unregulated (IUU) fishing activities. In addition, the President signed a new rule that requires more reporting on the origin of fish on a list that includes threatened and at-risk species including cod, mahi-mahi and snapper. The measures will help track illegally-caught fish and are also intended to fight human labor rights abuses — abuses that came to the public’s attention in July 2015, when The New York Times published a story about the use of child and slave labor aboard Taiwanese fishing vessels.

In the United Kingdom, the Modern Slavery Act 2015 (MSA) requires companies with global rev-enues of $51.1 million (£36 million) or more to release statements each year to outline their actions to ensure slavery and human trafficking has not taken place anywhere in their supply chains. Interestingly, many compa-nies may not be prepared to comply with the MSA, according to a January survey of U.K.-based supply chain managers by the Chartered Institute of Procurement and Supply (CIPS). One in five was not aware of their obligations under the MSA, and one in four of those surveyed told CIPS they would “not know what to do” if they found out a supplier was guilty of using slave labor.

The Challenge of Taking Meaningful Action

As it turns out, “not knowing what to do” is a common challenge. “It’s very difficult, from an analytics perspective, to track all supply chain activity for human rights abuses. You might have a contract with a certified

strategic supplier you have audited, and you’re confident it treats its own workers right, only to find out later that the supplier subcontracted out some of its work to a factory that’s not compliant with your company’s standards,” explains Handfield, who says this is a tremendous concern in the apparel industry. “Then, when a tragedy happens like the factory collapse in Bangladesh, that’s when retailers find out the hard way they actually had product with their name on it in one of these unsafe, subpar manufacturing facilities.”

In some cases, providers are developing innovative tools to gain visibility through different segments and commodities within supply chains. Chris Haydon, who leads cor-porate strategy and business develop-ment for SAP Ariba, says his company is working to help customers link supply chain management technology with databases that track human rights violations. However, the first step to finding these violations is recognizing you might have a problem. “It’s not as if companies don’t strive to have supply chain security and continuity, and they are not trying to be poor corporate citizens. Rather, they just don’t know how to deal with getting their arms around some very complex and difficult problems,” says Haydon. “Systems and processes need to be in place that enable users to examine and track as many suppliers as possible, not just the top 50, if you’re serious about rooting out unethical behavior in your supply chain.”

Working with providers, third-party groups and government resources can be ideal options to get started in tracking down abuses in the supply chain. Every year, more orga-nizations are working to track uneth-ical labor practices in supply chains, depending on the type of goods and countries of origin. For example, the U.S. Department of Labor’s Bureau of International Labor Affairs has a list

of goods produced by child or forced labor. Supply management practi-tioners can look up a country to find out which products and commodities are likely to have been sourced using either child labor or forced labor. Sugarcane in the Dominican Republic may be farmed and processed by forced labor, and furniture factories in Turkey may have child labor, for instance. India has the most product categories likely to be produced by unethical labor with 22 product cat-egories, ranging from soccer balls to silk thread, on the list.

The California Transparency in Supply Chains Act of 2010 (SB 657) also helps shine a light into workforce issues including slave and child labor, and a number of companies have been complying with this act to the best of their abilities. In a few cases, manufac-turers not only comply with the regula-tions set forth by government — they go even further and create their own strict codes of conduct. One of the most well-known examples of this is outdoor clothing company Patagonia, which is not only a member of the Fair Labor Association, but one of the association’s founders. And well before SB 657, the company devel-oped and implemented its Workplace Code of Conduct and factory auditing program in the mid-1990s. A detailed disclosure statement is available to the public on its website, and the company has a reputation as being one of the most transparent clothing companies in the world on a range of issues. Even the down feathers used in its parkas must be ethically sourced from audited geese farmers.

Making Business ‘A Force For Good’

Another company dedicated to ethical sourcing with a stringent code of conduct in place is Method Products, the San Francisco-based cleaning and home product man-ufacturer. “Ethical supply chains

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should be transparent,” says Garry Embleton, vice president of supply chain for Method. According to Embleton, Method defines an eth-ical supply chain through three key components:

1) Ethical sourcing. It’s about understanding where all ingredi-ents and packaging comes from — at the earliest downstream point in the supply chain — to ensure they have been developed and pro-duced to Method’s high standards. “We expect suppliers to follow and exceed all labor and code of conduct guidelines. Whenever possible, we also look for suppliers aligned with our environmental and community goals,” he says. “And where an industry is less progressive, we do whatever is possible to influence them, including supplier incentive programs.”

2) Transparency. From ingre-dient disclosure, origin information about ingredients and materials, and details about water, waste and carbon footprint involved in man-ufacturing, the requirements for transparency are “powerful tools in building ethical and sustainable soil-to-shelf supply chains,” says Embleton. “Very few, if any, compa-nies have the complete data set to have absolute transparency, but one of the benefits of doing this is that it creates an urgency and incentive to get better every day.”

3) Setting an example. “We strive to set the bar higher in places where we operate manufacturing or distribution centers,” says Embleton. Method’s factory in Chicago’s South Side is creating jobs and opportuni-ties for the community there — and boasts the world’s largest rooftop greenhouse. More than 500 tons of fresh produce is harvested from this greenhouse each year for the South Side community, an area Embleton says is considered a food desert. “By setting examples such as this,

we are able to do our part to push the boundaries to prove how busi-ness can be a force for good, and not focused on profit alone.”

Adhering to Method’s code of conduct means that suppliers must provide written documentation and confirmation of their practices, and many must submit to tours of facili-ties by Method supply management personnel. “Basically, we take every possible measure when bringing in a new supplier. We also include our code of conduct and labor practices in every contract as non-negotiable clauses,” says Embleton.

Finding Workers Closer to Home

Consolidating the supply base — rather than proliferating it — is another strategy Method has employed. Many companies are taking this approach, says Handfield. “There is movement toward using fewer suppliers, but this is not done solely to lower costs,” he says. “Rather, companies want to work with vetted suppliers and build better relationships so both parties know it’s about a way of doing eth-ical business. I’m also an advocate of working with supply partners that are agreeable to being more trans-parent in their actions. It’s all about acknowledging that there could be issues that come up while doing business, but it’s fine to admit you’re not perfect as long as you’re willing to make adjustments and correc-tions by addressing them with the right mentality.”

Moving manufacturing away from foreign countries with lax reg-ulations is another way to combat human labor violations in the supply chain. To that end, reshoring is gaining momentum, says Handfield. “For North American-based companies, Mexico is seen as a positive alterna-tive to Asia, particularly in electronics and automotive industries, because

the labor costs are lower, logistically it is much closer and Spanish is spoken by a growing number of Americans and Canadians,” he says. “It’s less challenging to track labor violations there, but overall it’s easier to deal with because Mexico’s population is becoming more trained all the time, and the companies there are much more compliant and willing to accept standards.”

An Opportunity and a Journey

Going forward, the focus on developing ethical supply chains is a powerful and ongoing opportu-nity for supply management practi-tioners, says Haydon of SAP Ariba. “Procurement was not traditionally viewed as anything beyond a tactical role, but now it’s a function with a chance to make the world a better place by choosing to work with eth-ical suppliers and do as little harm to the environment as possible. That’s pretty compelling.”

It might seem daunting to dive into the often-murky waters of supply chain human rights and envi-ronmental issues, but remember the old saying about Rome not being built in a day. The important thing is to start somewhere. Embleton gives this advice for supply management practitioners seeking to make pos-itive changes in their own supply chains: “Commit to a few key areas for your business first, rather than trying to make too many changes all at once. Then clearly define what success in those areas looks like,” he says. “Integrate these goals into day-to-day decisions. Ethical supply chain concerns shouldn’t be treated only as add-ons or ‘nice-to-have’ propositions. Always view this as a journey, something that you can — and will — improve over time.” ISM

Lisa Arnseth is a publications coordinator

for Inside Supply Management®.

© Institute for Supply Management®. All rights reserved. Reprinted with permission from the publisher, the Institute for Supply Management®.