News focus: A collapse in confidence

7 June 2013

Are firms taking sufficient steps to undo the damage caused by rogue supply chains? Andrew Allen reports.

The debate around transparency in extended global supply chains has taken on a new intensity in the wake of the Rana Plaza garment factory disaster in Bangladesh in April, where more than 1,000 workers died. Even UN secretary general Ban Ki-moon told businesses: “It is time for all companies to police their supply chains, not distance themselves from them.”

With supply lines for many products so stretched, experts are asking how companies such as the clothing chains that knowingly used the factory can realistically claim to be sourcing responsibly. Food supply chains were already under scrutiny after horse meat contaminated supermarket ready meals and traces of a veterinary painkiller, Bute, were found in supermarket beefburgers.

A Which? survey, released in March, found six out of 10 consumers had changed their shopping habits as a result of the horse meat scandal, showing how such supply chain failures can cause consumer backlashes.

The survey found that consumer trust in the industry has fallen by a quarter. Thirty per cent of consumers said they were now buying less processed meat and a quarter buying fewer ready meals with meat or choosing vegetarian options.

The discovery of unethical practices in the supply chain can also lead to long-term reputational damage. Shaun McCarthy, director of Action Sustainability, says while the risks from unethical supply chain practices were greatest for premium and mid-market consumer brands, lower-end and business-to-business (B2B) brands could also be affected.

“Your customer base may not desert you, but it can still lead to a devaluing of your brand and a gradual erosion of confidence among shareholders or stakeholders,” he says.

According to a survey of 131 directors, procurement managers and buyers carried out earlier this year by vendor management company Achilles, almost one in five businesses hold no data about their suppliers’ suppliers.

Yet even world leaders in supply chain management can find themselves caught out by events such as the Bangladesh disaster.

Six months ago, it emerged that a Wal-Mart supplier had sourced clothing from a factory where 112 workers had died in a fire, also without the retailer’s knowledge. This led to the introduction of strict subcontracting rules by Wal-Mart.

Steve New, a specialist in supply chain management at the Saïd Business School at Oxford University, said it was not unusual for suppliers to outsource manufacturing to other companies without informing buyers that they were doing so.

“Some of these supply chains are so complicated that it is mathematically impossible for a firm to employ enough auditors to keep tabs on all suppliers,” he says.

Many old-school buyers are reluctant to sacrifice commercial confidentiality for transparency in case competitors gain an advantage or suppliers establish direct relationships with their own customers. But New believes such fears are outdated in an age where information is so freely available. He cites the cases of businesses like Hewlett-Packard and Timberland, which decided several years ago that there was nothing to be gained by hiding supplier provenance.

McCarthy says of commercial confidentiality: “We need to get over these hang-ups. It’s a big hurdle, but it can be done.”

He recalls that when London 2012 organising committee LOCOG was asked to supply the names of the factories where merchandise was made, only Adidas provided the information. However, another 20 suppliers came forward with provenance details later. It emerged that LOCOG had been reluctant to ask the suppliers to disclose factory locations, rather than that the suppliers had not wished to do so.

Debbie Coulter, head of programmes at the Ethical Trading Initiative, says there is a large contrast between companies’ familiarity with their first-tier suppliers, compared with the rest of the supply chain.

In many cases, first-tier suppliers will generally comply with codes and enjoy long-standing relationships with purchasers. But, she adds: “It can be daunting for businesses to seek transparency beyond their first-tier suppliers. They’re afraid of what they’re going to find when they lift that stone.”

Yet supply chain audits – much trumpeted in corporate CSR reports – are widely recognised as an ineffective way of enhancing supply chain visibility.

In 2009, the former UN secretary-general’s special representative for business and human rights John Ruggie cast doubt on the entire auditing industry when he said in 2009: “Monitoring doesn’t work.”

Coulter says: “In some parts of the world, it’s common knowledge that audits are corrupted. We come across cases all the time where suppliers are given a clean bill of health only to find that children have been recruited back into the factory several weeks later.”

Alan Frampton, managing director of Fairtrade jewellery company CRED, was formerly a horticulturist supplying major UK retailers and believes that auditing can have a very positive effect. He recalls his shock upon entering the jewellery industry, which he found was “about 30 per cent behind the fresh produce business in its traceability and transparency”.

He says: “Take fresh roses in a supermarket – you can find out not only which farm they come from, but what the education of the indigenous people is as a result of the farm, their healthcare and the environmental benefits that the farm brings.”

So far, the most encouraging response to the Bangladesh disaster by Western clothing companies has been from the 24 brands who signed up to the Bangladesh Fire and Safety Act. Negotiations for the agreement, which obliges signatories to help strengthen workers’ rights and training and to make a financial commitment, were led by global union IndustriALL alongside Bangladeshi trade unions.

Coulter, along with many others, maintains that the only credible way for organisations to know what’s taking place in their supply chain is to allow collective bargaining so that workers themselves can make them aware of conditions in their factories.

“You need to have systems in place to allow workers to have a voice. And it can’t just be a hot line, or management-appointed worker representation.” She says of the Rana Plaza disaster, where safety concerns had been raised in the days before the collapse: “If only workers had had the confidence and facility to voice their concerns, lives could have been saved.”

 

5 transparency tips

1. Buyers should not see transparency as a ‘silver bullet’ for eliminating CSR risks in the supply chain, but rather as a way of turning a potentially serious problem into one that is much more manageable, says Steve New. 

2. Establish long-term relationships with suppliers wherever possible and encourage them to do the same with their suppliers.

3. When purchasing high-risk goods, a local supply chain may be considerably more manageable than a cheaper – but less visible – cross-border supply chain, says Shaun MCarthy.

4. Encourage collective bargaining and make sure workers have a genuine voice and that representatives are chosen by the work force, not management, says Debbie Coulter.

5. Shaun McCarthy says while he was head of utilities and sustainability at BAA, he would always ask a buyer selecting a supplier in a high-risk category to prepare a briefing for the press office to show what steps they had taken to minimise risk.

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