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In this issue of SCMR: The ethical supply chain

New research from APICS, Supply Chain Management Review and Loyola University Chicago finds that operating a responsible supply chain is an increasing priority. But gaps remain between practice and the goal.

By ·
By ·

At a recent supply chain conference, futurist Gerd Leonhard observed that as business becomes digitized, supply chains increasingly rely on technology and our customers increasingly use the technology tools we provide, the challenge will be to look beyond what the technology can do to how it impacts our lives. “Companies will have to start caring when customers use their stuff,” he said. “That’s called ethics.”

That quote raises some questions: Do supply chain managers and the organizations they work for value ethics in the way they operate and conduct business? If so, where are they investing their time and resources? More importantly, just what is an ethical supply chain?

Those questions were at the center of a conversation between the co-authors of this research last summer. None of us had answers, which is one of the reasons we launched a project to “better understand organizations’ current state and future intentions for ethical supply chains.” We were not alone in asking questions about ethical or responsible supply chains: While we were designing our study, Loyola University Chicago’s Supply and Value Chain Center was in the process of surveying its members on their corporate social responsibility practices and priorities (See below).



See the full presentation from APICS, Loyola – Chicago, Peerless Research Group and SCMR examining the role of ethics in supply chain management.


In one sense, the results surprised us, especially the finding that 83% of supply chain professionals say that ethics are extremely (53%) or very important (30%) to their organizations. In part, that could be because we didn’t know what to expect. At the same time, the responses to our survey came as no surprise to John Caltagirone, a veteran supply chain practitioner and the founding director of the Loyola Business Leadership Hub. “Our survey results, as well as conversations with SCM executives, customers, suppliers and trading partners, has solidified that ethics matter, are a priority and has brought them to the forefront of global supply chains,” Caltagirone says.

Still, as you’ll see in the following pages, in some instances practice falls short of theory—for instance, far more organizations have a supplier compliance initiative than actually audit their suppliers’ performance. There is more work to be done. More importantly, this survey sheds some light on what organizations are doing but not on why they’re doing it. The full survey results can be found online on scmr.com.

With that in mind, both Supply Chain Management Review and APICS view this research as a starting point, one that we’ll continue to follow in the future.

Supply chain’s emerging role

Over the past decade, we’ve seen supply chain take on a more strategic role in corporations. While in the past, supply chain managers could be relied on to drive cost and efficiency, now supply chain is a differentiator for companies’ strategic initiatives. Supply chain professionals are not only working in the back room, they are evaluating customer demands, production times and speed of customer delivery—their work has become more front facing.

With these changes, professionals in the field increasingly find themselves monitoring ethics.

APICS CEO Abe Eshkenazi, CSCP, CPA, CAE, ascribes this to two things. First, supply chains that rely on items produced because of slave or child labor, for example, aren’t sustainable. The minute a company uncovers that its supply chain is compromised in this manner, it faces the possibility of a complete overhaul. That’s expensive and could create production delays.

Second, consumers are now demanding to know that the products they buy are made in socially, ethically and environmentally conscience ways. Social media amplifies this ability and the negative blowback by providing quick access to information that can sway purchasing decisions. Experts suggest that Millennials in particular expect companies to adhere to socially and environmentally responsible practices and to tell consumers how they are doing so.

Thus, the supply chain best practices of transparency and visibility take on more significant meaning when applied to assuring supply chain ethics, but the implementation of these best practices remains the same. And, it is supply chain professionals who are charged with the task. “Building ethical supply chains isn’t just a requirement, it’s an opportunity,” says Eshkenazi. “Here’s where supply chain professionals can really demonstrate their value to their organizations.”

The research points to a variety of methods companies use to monitor the ethics throughout their supply chains, but no standard across industries. Eshkenazi says it’s that void APICS is looking to fill with its new Supply Chain Operations Reference for Enterprises (SCOR-E), the first corporate supply chain designation that evaluates supply chains across three dimensions: ethical, economic and ecological. These three dimensions are part of a SCOR-E framework that contains key considerations within specified areas of supply chain processes, based on the SCOR model: plan, source, make, deliver and return.

The ethical priority

As noted above, 83% of respondents indicated that supply chain ethics were extremely or very important to their organization, with only 5% indicating that they were not very (4%) or not at all (1%) important. What’s more, those findings spanned geographic borders and industries: While 62% of respondents were based in the United States, the remaining 38% represented all regions of the world, more than 27 countries and more than a dozen industry verticals (see sidebar: About our research).

In a similar vein, the topic is of importance to supply chain managers individually: 94% indicated that their organizations should have a plan in place to operate an ethical supply chain.

Another surprising response: While not a majority, a significant percentage of respondents (42%) identified their organizations as innovators (13%) or early adopters (29%) of strategies related to ethical supply chain practices. The implication is that these organizations are proactive in their approach rather than reactive. Another third identified as part of the early majority: They’re cautious and practical about adopting. The remaining 25% identified as late majority (18%), indicating that their organizations take a wait-and-see approach, adopting new strategies once their part of the main stream, or as laggards who are slow and among the last to adopt new strategies.

Ethical supply chains are everyone’s responsibility, from an organization’s employees to its suppliers, customers and trading partners

By John Caltagirone, Brndon Chua, Demitra Giannara and Harry Haney

Corporate Social Responsibility (CSR) is steadily becoming more important to businesses due to internal and external pressure. Governments, activists and the media are increasingly holding companies responsible for the social implications of their actions. Internally, it is becoming critical to attracting and retaining quality people who want their employer’s values to mirror their own. The elements of ethical supply chains include: labor wages and discrimination, human trafficking, green certification and sustainability.

Loyola University Chicago’s Supply and Value Chain Center recently conducted a survey to assess the latest actions companies are taking or planning to take in the next year in the area of Corporate Social Responsibility.

Linking compensation and ethical results
According to the survey, there is strong interest in tying compensation—particularly at the senior levels—to ethical results, with over 64% of companies indicating plans to do so in the next year. We believe this linkage is one of the actions that will have the greatest impact on ethics in supply chain. In our opinion the trend of tying compensation and performance to ethical results will become standard operating practice by 2024.

Other positive trends include that over 70% of the respondents have a functional group whose responsibilities include CSR. In addition, 39% of respondents expressed that their companies would begin employee training in topics related to responsible supply chains in the next year. These promising trends can solidify the importance and success rate of CSR initiatives. We believe that these trends will be embraced by 80% to 90% of firms in the next few years and training will take place at the majority of firms as well. Adoption of such tactics as Supplier Codes of Conduct and updating contracts to ensure supplier compliance is widespread at over 75% and 85%, respectively.

The myth of higher cost
However, there are obstacles that organizations need to overcome in order for CSR practices to be optimally effective. One problem is the way that the business world views CSR. Forty six percent of the survey respondents shared what they believed to be a moderate level problem—their companies have the perception that a responsible supply chain leads to increased costs. Corporate success and social welfare are mistakenly treated as a zero-sum game. This myth is similar to the one that holds that logistics is a necessary evil and a cost of doing business. Quite the contrary, CSR will drive more revenue, profitability and be a competitive advantage.

A close analysis will likely reveal that there are elements of your supply chain that are good for both people and the planet. United Parcel Service (UPS) recently illustrated this with their $130 million investment in compressed natural gas (CNG) fueling stations as well as 730 CNG vehicles in both Canada and United States, recognizing that in the long run costs will be both lower and more stable.

What else can be done?
Utilizing tools and resources external to your organization to enhance responsibility of your supply chain such as EPA SmartWay, Rainforest Alliance and grants are another great way to expand your capabilities. These organizations want to be of service and have terrific resources. About two-thirds of the organizations do this now.

Also, in our experience, environmental sustainability is one of the easiest topics to talk about with external organizations, since we are all sharing the planet. We are reaching the tipping point where a successful supply chain organization must put the same focus on ethics as any other measure of performance.

Supply chain mapping is a key element in understanding the reach of your supply chain. The Loyola survey indicates some 46% of organizations currently map their supply chain and another 26% plan to do so in the next year.

For organizations yet to commit to operating a transparent, ethical supply chain, the time to begin the journey is now. Start with the basics in areas of your supply chain where improvements are clearly better for both the planet and the profits. One example is fuel economy on the shipments of your product. Another might be to do a waste audit: Look at what is going in the dumpsters and ask why and what else could be done with it—such as recycling.

The ubiquity and speed of social media nearly guarantees no misstep will go unreported. The benefits of the higher-caliber, more engaged workforce and meeting the expectations of your customer base to operate responsibly are well worth it.

John Caltagirone is the founding director, Loyola Business Leadership Hub; Brandon Chua and Demitra Giannaras are MBA candidates at Loyola University Chicago; and Harry Haney is the associate director, Supply & Value Chain Center, Loyola University Chicago.

Nor is supply chain ethics a once and done event, but is now part of the business conversation at just over 60% of the responding organizations: 24% indicated that the topic is discussed one or more times a month, 26% said it comes up every few months; and 11% indicated that discussions take place once every 6 months. Another 21% indicated that conversations take place one or more times a year. More importantly, only 6% said that supply chain ethics discussions never occur within their companies.

Still, it is an evolving practice. Asked how much progress their company has made in creating an ethical supply chain over the last two years, 31% said they have advanced their initiative; while 33% are in the process of implementing a plan; 17% are in the planning phase but have not yet implemented and 19% said they had made no progress at all. And while ethical supply chains are deemed important by nearly all respondents, 62% are monitoring their supply chains for ethical practices and 38% are not.

Supply chain owns ethics

No one doubts that supply chain has a significant impact on a company’s bottom line; when procurement, manufacturing, logistics and distribution are hitting on all cylinders, margins and customer service improve.

Supply chain is also where the rubber hits the road when it comes to ethics, whether that has to do with an organization’s sustainability and carbon footprint efforts or how it treats its suppliers and the communities in which it does business. In other words: supply chain owns ethics.

That was reflected in responses to the question of the areas and titles within an organization responsible for supply chain ethics: While respondents identified seven areas as most responsible for ethical supply chain compliancy within their organizations, three of those areas, representing 62%, were supply chain functions: supply chain (31%), procurement (20%) and operations (11%). Corporate, legal and finance accounted for the remainder. Similarly, supply chain positions represented nearly 50% of the job titles of the person most responsible for ethical supply chain compliancy at their organizations, including the head of supply chain (21%), head of procurement (12%), head of operations (7%); directors of plants, production, logistics, and materials (4%); and quality control (2%).

What matters

When it comes to corporate responsibility, we often hear about the three-legged stool representing a company’s practices when it comes to the environment, economics and ethics, or how it interacts with the communities where it does business. We wondered: When it comes to supply chain practices, are companies following the three-legged stool model? And, if so, what are they doing today, and what might they be doing in the future?

In theory, at least, the responding organizations are adopting the three-legged stool model. Asked what area is important to their organization at the present time and will be important two years in the future, 74% said that safeguarding against corruption is highly important now and another 20% indicate it is somewhat important. Similarly, 94% indicated that responsible labor practices are highly (68%) or somewhat (27%) or somewhat important now; 92% indicated that environmental sustainability is highly (60%) or somewhat (32%) important now; and 91% indicated that defending human rights is highly (58%) or somewhat (33%) important now. Respondents expected that all four areas would be more important two years from now than they are today.

In a separate question, 59% of responding companies said their companies assist in improving working conditions in the communities where they do business.

In our view, those responses reflect the global nature
of today’s supply chains given that concerns such as
safeguarding against corruption and defending human rights might be more applicable to operations outside of North America. That said, given the global war for talent and the shortage of workers experienced by manufacturers, logistics providers and warehouse operators alike, improving working conditions to attract and retain employees in operations is rapidly becoming an issue for North American supply chain organizations. You don’t have to look any further for evidence than Amazon’s decision to raise entry level pay for full and part-time warehouse workers to $15 an hour.

Respondents are also now following more than a dozen practices and principles associated with ethical supply chains, ranging from ethical sourcing (54%) to eliminating child (45%) and forced (42%) labor. The top five categories organizations are following now include:

  • 69% are eliminating discrimination in the workplace;
  • 63% are making efforts to uphold environmental responsibility;
  • 57% are monitoring labor conditions;
  • 56% are fighting corruption (extortion, bribery); and
  • 55% are deploying environmentally-friendly technologies.

While all of the above is encouraging, one measure of a company’s commitment in any given area is its participation in organizations encouraging that practice. Yet only 19% of respondents said that their company was a member of an organization like the UN Global Compact or the International Labor Rights Forum that encourages ethical supply chains. That is an area that supply chain organizations committed to ethical supply chains may explore in the future.

Monitoring supply

Suppliers play a bigger role than ever in today’s supply chains. That is true for manufacturers, who often procure 70% or more of the materials, parts and components that go into their products, and distributors and retailers who may procure all of what they sell. At the same time, given the global nature of today’s supply base, supply chain organizations may have less visibility into or control over their suppliers’ practices than ever. Yet, consumers increasingly hold the companies they do business with responsible for what happens across their supply chain, including their supply base. One viral social media post about poor labor or environmental practices can devastate a company’s market share and market price.

It will come as no surprise that nearly 50% of respondents indicated that they outsource or subcontract their manufacturing and/or kitting/assembly tasks. If anything, we might have expected the response rate to be higher. The leading locations for subcontractors included:

  • 62% United States;
  • 55% Asia;
  • 32% Europe;
  • 24% Mexico; and
  • 17% Canada.

A significant majority of respondents said they have a formal code of conduct for suppliers. Among others, those guidelines require suppliers to meet certification codes and comply with local regulations (77%); to comply with environment, health and safety policies and practices (75%), ethics (avoid corruption) (73%); employ sustainable business practices, such as minimizing the use of hazardous materials (66%); and follow fair labor practices (58%). Some 37% of respondents who follow a code of conduct reported that they have lost suppliers as a result of enforcing compliance.

However, this is an area where there were gaps between theory and practice. Of the 71% of companies that have a code of conduct, 51% enforce it while 20% said it is not enforced and 29% have no code of conduct.

Similarly, while 70% of respondents indicated that they have a formal policy to understand where their supply is manufactured, who manufactures it or who handles kitting processes, only 43% of respondents have an initiative to better understand how their suppliers operate. 59% indicated that they audit their suppliers; of those 68% are auditing labor rights and working conditions and a similar number are auditing the environmental impact of their suppliers. Most (85%) use internal auditors while 36% use independent, third party auditors. Additionally, 47% utilize software or technologies to monitor supplier compliance.

Moving forward

If the results of our and Loyola University Chicago’s surveys are any indication, environmental, economic and ethical issues have risen, and will continue to rise, to the fore in supply chain management. And, if the ethical supply chain is defined by where companies are investing their resources, then it appears that a lot of that effort today is focused on issues related to the supply base. Given the potential impact of social media on a company’s value, that makes sense. Going forward, savvy supply chain managers will not only need to consider the price and quality of the trading partners with whom they work, but also how they and their suppliers operate when it comes to the three-legged stool of responsible and ethical supply chains. More importantly, going forward we will need to close the gap between areas like the number of companies that actually audit their supply chains for compliance versus the number that have a compliance survey.

In this initial survey, Supply Chain Management Review and APICS have learned much about what supply chains are doing today. As we revisit these issues in future issues of the magazine and at APICS events, we hope to learn more about the why that is driving ethical supply chains.

About Our Research

This research was conducted by Peerless Research Group in conjunction with Supply Chain Management Review magazine and APICS, the leading professional association for supply chain and operations management. The results are based on 710 respondents.

63% of respondents were from manufacturing organizations, representing more than 12 vertical industries. The remaining respondents were from consulting firms, wholesale and retail organizations, third party logistics providers and e-commerce. None represented more than 7% of respondents.

62% of respondents were based in the United States, followed by Asia (11%), Europe (8%) and Canada (6%). The remaining 13% were based in Africa, South America, the Middle East and Central America.

While 20% worked at companies with more than
$5 billion in annual revenue and 32% at companies with less than $100 million in revenue, the average company size was $1.544 billion and the median was $454 million.

 


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