Consumers, investors, and regulators are demanding that global companies disclose more about the steps they are taking to improving their social and environmental footprint. Such demands are driving innovations in how companies get better visibility into their complex web of supply chains and reduce compliance and ethics risks.
At our inaugural West Coast conference last week, Compliance Week West, a panel of executives in the consumer product and retail industries shared their approaches to fostering greater transparency and collaboration among their network of suppliers.
One of the biggest difficulties for companies that want to ensure the products they sell or put their names on aren't made in factories with deplorable, or even questionable, work conditions is increasing complexity in supply chains. Suppliers use sub-contractors and outsources that could go down several layers. It's a mistake to focus only on first-tier suppliers, said Scott Lercel, director of social responsibility and sustainable at retail giant Target. “That's not good enough,” he said.
Executives on the panel agreed that stakeholders today are demanding to know more about the overall product lifecycle—from design and manufacturing to packaging, transportation, and disposal after they are used.
For clothing retailers, for example, the scope of supply chain transparency no longer extends to just the sewing factories, but also down to the fabric mills and the cotton fields, said Kindley Walsh Lawlor, vice president of social and environmental responsibility at $14.5 billion clothing retail company Gap Inc.
The relationships with suppliers are also changing dramatically. Traditional relationships were based primarily on the supplier's price and ability to satisfy product demand, but relationships with suppliers today are much more dependent on trust and building collaborative partnerships in order to reduce risk for both parties.
Companies also use various techniques to ensure compliance beyond penalizing their suppliers when they don't hold up their end of the bargain. “We've learned we can get more with a carrot than a stick,” said Walsh Lawlor. “You can help them make sure they have the right management systems and that they track and trace their employees in the right way.”
Companies are also doing more to make the business case to their suppliers of treating employees better. They are helping them understand that they need “to create shared values,” and that “treating workers better means that they get more from a business perspective,” Lawlor added. “That's something we've been working very heavily on over the last five to eight years.”
To obtain better visibility into supply chains, companies are using new technology, such as sophisticated monitoring and tracking systems and data analytics, but they also realized that at least part of the solution is people-based. “Localization matters,” said Keri Dawson, vice president of compliance online advisory services for MetricStream, a provider of enterprise-wide governance, risk, and compliance solutions. Driving transparency in the supply chain specifically entails “having people on the ground, establishing personal relationships, understanding the cultures, speaking local languages, and being extremely sensitive to those types of factors,” she said.
The way that Gap has achieved better visibility into its supply chain, for example, has been to establish an internal team of over 70 people who speak at least 40 languages and are local to each of the 22 countries where they source products and raw materials. This is so that management and vendors can develop personal relationships with each other, “and so they can have conversations in their native language,” said Walsh Lawlor. “That's very important.”
More Monitoring
They are also sharing more information and linking systems to exchange data in real time. “What we're seeing is an extension of those relationships evolving into technology,” said Dawson. More and more companies are beginning to make direct connections with their suppliers and their systems to flow information back and forth, so as not to rely on audits every six months or every year, she said.
“Companies have to find a way to streamline audit activities and leverage the work they're doing in a way that gets the right results, but doesn't create unnecessary burdens on the business.”
—Keri Dawson,
VP, Compliance Online Advisory Services,
MetricStream
The fewer audits companies have to perform on their suppliers, the better. “Companies have to find a way to streamline audit activities and leverage the work they're doing in a way that gets the right results, but doesn't create unnecessary burdens on the business,” said Dawson.
Executives on the panel said one of the most effective ways they are working to reduce audits and improve supply chain transparency in the consumer product and retail industries, in particular, is through joint industry initiatives. Developing consistent, industry-wide health and safety standards that every factory must follow, versus each company developing their own set of standards, helps “stop some of the insanity of audit after audit after audit,” said Walsh Lawlor.
“There has been a lot more of a cohesive movement in the apparel sector, so that we're doing more together,” Walsh Lawlor added. “We've learned that partnerships are integral—and not just partnerships with each other in the industry.”
Working groups like The Sustainability Consortium and the Sustainable Apparel Coalition bring companies, government, non-profits, labor groups, and trade unions together to share their expertise and resources. “Collaboration is definitely the way of the future,” said Target's Lercel.
That's not to say that collaborative efforts are not without their flaws. “Sometimes we have fundamentally different approaches to what we're trying to solve, but I've seen more happen when we work together than when we work alone,” said Walsh Lawlor.
Internal Measures
Executives on the panel also discussed what internal processes they have adopted in order to hold vendors accountable and ensure that they understand what practices are not going to be condoned.
SOCIAL COMPLIANCE
Below is an excerpt from the CW West presentation on supply chain risk offering details on Target's social compliance program:
Below is an excerpt from the CW West presentation on TK regarding Targert's social compliance program:
The mission of Target's Social Compliance team is to ensure that our products are produced ethically and in accordance with the local laws, Target's Standards of Vendor Engagement (SOVE), and our Vendor Conduct Guide. Our SOVE are eight business principles that form the basis of our Social Compliance program. We will not knowingly work with any company that does not comply with our ethical standards, we benchmark our standards against those of other companies, and we work closely with nongovernmental organizations (NGOs) that focus on social responsibility.
1.Our business partners must provide safe and healthy workplaces that comply with local laws. If our partners provide residential facilities for their workers, these must be safe, healthy and in compliance with local standards.
2.No forced or compulsory labor. We will not knowingly work with business partners who use forced labor in the manufacturing of products.
3.No physical or mental punishment used against employees.
4.While we respect cultural differences, we believe workers should be employed based on their abilities, and we encourage our business partners to eliminate workplace discrimination based on race, gender, personal characteristics or beliefs.
5.We seek business partners who do not require a work week that exceeds local laws or business customs and who do not require a week of more than 48 hours, plus a maximum of 12 hours overtime, on a regularly scheduled basis. Workers shall have at least one in seven days off.
6.Fair wages and benefits must be provided in compliance with local laws; in addition, we encourage our partners to improve wages and benefits to address the basic needs of workers and their families.
7.No child labor, which we define as being below the local minimum working age or age 15, whichever is greater.
8.We will not work with business partners who use deceptive practices to deliberately misrepresent country of origin to evade quota or import restrictions or duties on products that will be sold in our stores.
Audit Process
Our audit process includes 100 percent unannounced audits. We use our own internal audit forms and tools and, in most countries, our own auditors, who complete robust training in our standards and audit processes. In countries where we use a third-party auditor, we train them and require them to use our processes and tools.
The unannounced visit consists of a meeting with facility management to explain the purpose of the visit and collect documentation, a robust tour of the facility, and interviews with management and select employees to determine working conditions, treatment of workers and the hiring process. The auditor also reviews personnel, wage and time records to verify the facility meets local labor law requirements. At the conclusion, the auditor explains any violations with management and discusses corrective actions and next steps.
A facility is allowed up to 20 minutes after the auditor arrives before the audit begins. If the audit does not begin within this time, the auditor will leave and Target will consider this a denied audit. In 2010, 1.9 percent of all audits were denied; in 2011, 1.6 percent audits were denied.
Audit Results
Acceptable
Needs Improvement
At-Risk
Non-Compliant
Source: CW West.
To make products for Target, for example, suppliers must go through “extensive on-boarding and training,” explained Lercel. They must disclose information not only about their company, but also about their factories and about sub-contractors they plan to use.
Target then verifies that its suppliers have chosen factories and sub-contractors that can meet its standards. “We're in their facilities and factories to make sure they understand our standards of vendor engagement,” said Lercel. “We do shadow auditing with them to make sure we feel confident that they have a program in place, so we are very proactive.”
In the event that a violation is uncovered, depending on the severity of the violation, Target will work with the supplier “to help them identify what needs to get done and how they need to accomplish that,” said Lercel. In some cases, suppliers are put on hold for a year as they remediate the problem and then are evaluated for reinstatement.
For some violations, however, Target has a one-strike-your-out policy. Any vendor or supplier caught practicing child labor, human abuses of any kind, or bribery—all practices that Target has a zero-tolerance policy for—are immediately terminated.
With as much as 3,500 registered factories in 50 different countries, Lercel said that one hundred percent of the audits that Target conducts are unannounced audits. In addition, 90 percent of the people conducting the audits are Target-trained employees, he said.
In countries with fewer factories, Target enlists the help of third parties to conduct the audits. “We do subsequent monitoring of our third parties as well,” said Lercel. “Those are usually unannounced to make sure third parties are abiding by our standards.”
Suppliers who make products for Gap go through a similar process. Since 1996, Gap has had in place a Code of Vendor Conduct, which seeks to safeguard workers' rights in the 1,200 factories where Gap's products are made. A team of social responsibility specialists work with the factories, monitoring to ensure vendors are meeting those requirements.
This team of social responsibility specialists does more than just check items off a list. They are charged with gaining the trust of workers, looking beyond the obvious to truly understand how a factory operates, “ensuring that we were not just finding issues and identifying them, but actually following up and fixing them,” said Lawlor.
Mishaps in the supply chain are going to happen, said Dawson, but customers, investors, and regulators are far more willing to forgive mistakes when companies can demonstrate they are doing the right thing.
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