Like a tsunami created by an unpredictable earthquake, last year’s recall of nearly 1 million lead-tainted products by toy maker Mattel created a chain reaction that continues to create ripple effects throughout Corporate America.
Cellini
“There was a seismic change at the end of the last year, where larger branded, global companies realized they had to take responsibility for … what happens within their entire supply chain,” says Richard Cellini, head of marketing for software company Integrity Interactive. Prior to the Mattel recall, he says, companies were only held responsible for the actions of their own employees. Now they can be on the hook for what companies in their supply chain do as well.
In response to market pressures, he says, more and more companies “are moving very aggressively to be able to drive ethics and compliance into their supply chains for the simple reason that shareholders, customers, business suppliers, and journalists will hold them responsible for compliance lapses,” he says.
Also driving the movement for stricter supply chain management is a growing awareness by companies to reduce their carbon footprint. Kara Hartnett Hurst, managing director of the nonprofit Business for Social Responsibility, tells Compliance Week: “As the field of corporate responsibility grows, companies are more aware of the responsibility for the entire lifecycle of their products.”
Dickinson
The most notable example is the Carbon Disclosure Project, a group of institutional investors with a combined $57 trillion in assets that are pushing 3,000 of the world’s largest companies to measure and manage their supply chains’ greenhouse-gas emissions. The intent of the pilot scheme—the final project is scheduled to roll out in May—is to create a single standardized format of disclosure to “decrease the burden on suppliers who might otherwise receive several separate requests for similar information,” according to Paul Dickinson, CEO of the Disclosure Project.
Vendors, too, are increasingly jumping on the supply chain management bandwagon with similar initiatives. In February, Integrity Interactive created a Web-based platform that enables companies to receive certification from their suppliers to ensure that they are operating in accordance with desired standards.
Such a platform—and several others on the market like it—highlights the help technology can bring to companies for supply chain management. E-mail, databases, and Websites have now made what used to be a very “onerous, difficult process” much easier, Cellini says.
Narine
One example is $6.6 billion Ryder System, which is both a provider and procurer of supply chain services to more than 100 large enterprises. Ryder has more than 60,000 suppliers in the United States alone.
“Ryder has tens of thousands of vendors around the world,” says Marcia Narine, the company’s vice president of global compliance and deputy general counsel. Online services “enable us to communicate with certain of those vendors, reiterate policies or inform them of changes, and have a mechanism to track responses so that we can follow up or conduct audits, if necessary,” she says.
Improved Codes of Conduct
Supply chain codes of conduct have become another area of growing importance to companies. Initiated by Levi Strauss & Co. in 1991, the first code focused on labor practices within the supply chain. Codes still seem to be only mildly popular today; of 110 large companies recently surveyed by Integrity Interactive, only half had such codes. In that group that did have them, only 20 percent—that is, about 11 companies in total—expressed confidence that they are doing enough to manage supplier ethics.
GOOD BEHAVIOR
Integrity Interactive polled senior ethics and compliance officers at 108 companies; Below are the responses to ten ethics risk questions:
Does your company maintain a communication portal for
suppliers?
Yes: 88%
No: 12%
Who is included in your company’s primary code of conduct?
Suppliers Included: 14%
Suppliers Not Included: 86%
Who is included in your company’s broader ethics & compliance
programs?
Suppliers Included: 22%
Suppliers Not Included: 78%
Does your company have a separate code for suppliers?
Yes: 50%
No: 50%
Does your company require suppliers to take any action relative to
a code?
Require Action: 40%
Require Nothing: 60%
Does your company audit supplier compliance with code
standards?
Yes: 44%
No: 56%
Does your company regularly assess ethics risk in the supply
chain?
Yes: 42%
No or Not Sure: 58%
Do you plan to include suppliers in your ethics programs in the
next 2 years?
Yes: 57%
No: 31%
Not Sure: 12%
Who should drive supplier participation in your company’s ethics
& compliance programs?
Purchaser: 14%
Suppliers or Someone Else: 86%
Who should pay for providing your company’s ethics &
compliance programs to suppliers?
Purchaser: 25%
Suppliers Should Share/Bear the Cost: 86%
Source
Integrity Interactive (October 2007).
“In creating a code of conduct, whether for one specific company or for an industry initiative, companies should be aware that the code itself is only that: a set of expectations or guidance for suppliers,” Hurst says. “The real work comes in how the company will work with the supplier(s) to build their awareness of why these practices are good for business, workers, and the communities.”
She adds: “They will also need to be cognizant of what issuing a code will mean. Are they willing to terminate suppliers or is it more appropriate to work with a supplier to remediate the problem or situation?”
And now, more Western consumers don’t want products that cause significant environmental or social damage, Cellini says. Well aware of that fact, companies are changing their supply chain operations. Staples, for example, recently severed all contracts with Singapore-based Asia Pulp & Paper, for its participation in destroying rainforests. The move was significant for the office-supply giant, which received 9 percent of its total paper supply from APP.
Wal-Mart, too, recently became the first nationwide chain in the United States to force its food product suppliers to meet standards set by the Global Food Safety Initiative. Suppliers must be fully certified before July 2009.
Code Enforcement
Hurst
Companies must also think about how they will enforce these codes with their suppliers. “Most companies who have been working at this for a while will tell you that compliance is not a realistic expectation, at least not initially,” Hurst says.
Complicating the situation are sensitive issues such as child labor, forced labor, and bribery and corruption—behaviors that are strictly prohibited in some countries and condoned in others, Cellini says.
“The issues that companies face with their suppliers are so similar, it does not make a lot of sense to go it alone,” Hurst says. Even the most sensitive issues “are more likely resolved through a joint commitment to implementing good management systems and a commitment to a continuous improvement process.”
Training is one such area where companies should take a collaborative approach, either focused by issue or industry, Hurst contends. “One interesting question in establishing training is who should be the audience, and once that is determined, how to shape the curricula and implementation of training. Training can include workers, factory managers, factory owners, or other community groups,” she says.
Continuous communication is also key. Ryder, for example, talks often with external supply chain providers and routinely solicits information from strategic partners and suppliers on their green initiatives, Narine says. Internally, Ryder also publishes its environmental priorities and objectives via employee newsletters, the company Intranet, and other communications.
Narine offers some other suggestions: “Know your own company and its risk profile. We conducted a risk assessment for our operations around the world and have a good idea of where things could go wrong in our supply chain.”
“Once you are aware of those risks, you should work with a cross-functional team to determine how to manage and mitigate those risks both internally and through the supply chain,” she continues. “You need to do business with companies that have similar values and you need to be able to communicate those values to the suppliers as well.”
For the most part, suppliers have been more than happy to comply with such efforts, Hurst says. “[M]any of the suppliers, particularly those in China and Mexico that work with large, U.S.-based multinational brands realize that doing business responsibly is now an expectation more than a business advantage.”
“These countries actually don’t want to see large, Western-branded companies pull their manufacturing or distribution operations out of their company,” Cellini says. “What suppliers have said is: ‘We’d be happy to follow a global code of conduct, but we can’t follow standards that you don’t set. We can’t meet expectations that you haven’t articulated.’”
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