Last week, China-based electronics manufacturer Foxconn, best known as the contract manufacturer of Apple iPhones, admitted that underage “interns” as young as 14 were found working at one its factories. Incidents and allegations of sweatshop-like conditions at Foxconn have caused constant embarrassment for Apple and other electronics companies.
Apple is hardly alone in having concerns of unethical behavior by suppliers. In August, the non-profit group China Labor Watch released a report stating that HEG Electronics, a major supplier to electronics giant Samsung, used child labor in its factory.
After the allegations surfaced, Samsung conducted its own audit, and while it said it did not find instances of child labor in the factory—some workers were under 18, but were over the legal working age in China of 16—it did find “several instances of inadequate management and potentially unsafe practices.”
Given consumers' growing awareness of the ways in which the goods they buy are produced, and the increased compliance risks from misdeeds by suppliers and other third parties, compliance officers face heightened demands to ensure that their suppliers operate in a manner that's ethical, demonstrate environmental and social responsibility, and comply with applicable regulations.
In fact, concerns about consumer retention and satisfaction are the greatest motivators in prompting companies to improve the sustainability of their supply chains, according to the report, “Managing sustainable global supply chains,” by the Network for Business Sustainability, a Canadian non-profit. Next on the list was a desire to better manage risks, followed by the need to comply with regulations.
At the same time, the growing complexity of many companies' supply chains increases the difficulty of gaining visibility into them. “The more widespread [the supply chain], the harder it is to monitor it,” says Betty Kildow, an Indianapolis-based business continuity consultant. A compliance officer is more likely to hear about the operations of a plant in his or her region of the country, rather than thousands of miles away, Kildow points out. And, of course, on-site visits are more difficult and expensive when a supplier is across the globe.
The rise of social media also means that negative publicity can spread in a viral fashion. “The speed with which information can move around the globe has exploded,” says Keri Dawson, vice president of ComplianceOnline Advisory Services at MetricStream, a provider of governance, risk, and compliance solutions.
And the permanence of social media posts can make it harder to put an embarrassing incident in the rear-view mirror. “Once an incident or allegation has made the news, it's generally out there forever,” says Shoshanah Cohen, director of the Stanford Global Supply Chain Management Forum at Stanford. “You can't put the genie back in the bottle.”
Regulatory costs also need to be considered. For instance, the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act “potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm,” according to guidance from the Department of Justice. That means that FCPA violations by a third party acting on a company's behalf can subject it to fines and penalties that can easily run into the hundreds of millions of dollars.
Reining in Compliance Risks
Given the challenges inherent in managing complex supply chains, the process to rein in compliance risks includes several steps. Most fall roughly into two categories, Cohen says, including actions that provide greater visibility into a company's supply base and steps to investigate when something doesn't look right.
One of the first steps occurs before even working with a supplier. “Avoid inheriting reputational disasters by factoring into the selection process a supplier's ethical principles and standards of conduct,” Kildow writes in her book, A Supply Chain Management Guide to Business Continuity. Ask suppliers for their codes of conduct, and check their labor practices and work environment, getting as close to first-hand reports as possible, she advises.
Once a company is working with a supplier, education and communication are imperative, Kildow notes. The goal is to make sure supply chain partners understand the business' policies and code of ethics, and to make them aware that the company manages its supply chain in accordance with national and international laws and practices, as well as its internal policies. These expectations also should be included as requirements in the contractual agreement between the supplier and customer, she adds.
Ongoing monitoring and auditing of suppliers also is critical. The movement is away from so-called “check-the-box” auditing and toward examinations that allow the auditor to use his or her professional judgment, Dawson says. “You want smart auditors that ask the questions to really drill down and get a true picture” of a supplier's operations.
When it becomes clear that a supplier isn't operating the way it should, identifying the root cause of the shortcomings is critical, Cohen says. For instance, poor planning on the part of a client firm may have meant the supplier's employees were coerced into working nonstop for several days in order to meet an accelerated deadline. The idea is that a company may bear responsibility for compliance and ethical lapses of a supplier, if it is putting pressure on it to meet unrealistic conditions. “If you plan better, you may get better control of the supply chain.”
“Once an incident or allegation has made the news, it's generally out there forever. You can't put the genie back in the bottle.”
—Shoshanah Cohen,
Director, Global Supply Chain Mgmt. Forum,
Stanford
Some companies will go as far as to provide financial assistance to upgrade a plant or implement a more effective planning system, which can pay dividends by lowering compliance risks. Although not every company is in a position to financially assist its vendors, those that can often benefit. By loaning the funds, the customer can maintain the relationship, while gaining a supplier that is able to better respond to the customer's needs.
Even companies that can't enter into a financial relationship with their vendors generally benefit when they partner with them. Dawson notes that many suppliers understand and accept the movement toward greater transparency and heightened operating parameters within supply chains. Often, their concerns focus on the practical—say, how to integrate their IT system with their customer's. “They're not balking,” she says.
Still, in extreme cases, a company may need to terminate its relationship with a supplier. Typically, this only comes into play when a supplier has been repeatedly warned about its egregious behavior, but hasn't taken steps to correct the situation, Cohen says.
Better Tools
For a compliance officer to distinguish the suppliers that are performing ethically and effectively from those that are coming up short typically requires some ability to collect and transmit data, Dawson says. “It's about getting the right information to the right people at the right time,” rather than waiting for someone to manually generate a report, she says.
This is where technology comes into play. After all, along with the suppliers themselves, a number of departments within a company often are involved in the supply chain, including purchasing, legal, sourcing, and manufacturing. It's not unusual to find each area using its own system and database of information.
An effective supplier management system will make the appropriate information available to multiple areas of a company, as well as the suppliers themselves. It may allow, for example, the compliance area to electronically transmit to suppliers the company's code of conduct and performance expectations, while also accepting results of completed factory audits. “You can use technology to make sure you have a complete picture of all that's happening,” Dawson says.
Implementing the processes and systems needed to maintain ethical or environmental standards throughout a supply chain typically requires an investment of management resources and money. However, education, communication, and partnering with suppliers can go a long way in cost-effectively getting suppliers to operate in the way that you expect them to, Kildow points out.
Moreover, failing to establish an effective, ethical supply chain also carries costs, and not just for companies that attract global attention. One example: in June, the Department of Justice announced that Data Systems and Solutions would pay a criminal penalty of $8.8 million to resolve charges that it violated the Foreign Corrupt Practices Act. The company used sub-contractors to funnel bribery payments to government officials in Lithuania in an effort to secure service contracts at a nuclear power facility.
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