Most companies have a hidden supply chain, thanks to complexities of global business. Here’s why they’re still responsible and what they can do about it.
Kathrin Bohr, Director of Sustainability Advisory Services for Intertek Sustainability Solutions, discusses the hidden supply chain and what it mean for business. Intertek is founder of the annual Ethical Sourcing Forum.
Reducing Blind Spots
What’s the biggest hurdle companies face when it comes to managing their supply chains?
KB: The biggest hurdle is lack of knowledge. Most supply chains today are so complex that companies don’t know exactly what’s happening in them. In other words, their supply chains lack “visibility.” At the most recent Ethical Sourcing Forum (ESF), experts were saying the average company knows about seven per cent of what’s going on in their supply chains.
So 93 per cent of most companies’ supply chains are invisible. What’s an example of something companies can’t see in a hidden supply chain?
KB: Unknown suppliers. Consider the tragic factory fires that killed hundreds of people in Bangladesh and Pakistan last year. Major brands, many with robust ethical sourcing programs, were unaware their suppliers had sub-contracted other factories to sew their clothes. And, unfortunately, the sub-contractors had unsafe working conditions that led to deadly fires.
A company like Walmart can have literally tens of thousands of suppliers and sub-suppliers in their supply chain. It would be impossible to audit and track all of them using the checks and balances standard auditing programs offer today. A supply chain manager needs to add complementary activities such as capacity-building, collaborative initiatives and worker education programs to their supply chain strategy.
The Importance of Proactive Transparency
Supply chain management is about risk and reputation management. Whey else does it matter that I know all the companies in my hidden supply chain?
KB: Legislation and litigation around supply chain issues are steadily increasing.
For example, in certain cases, the United States’ Securities and Exchange Commission now requires companies to disclose if their products contain conflict minerals.
And we’re starting to see more and more lawsuits for false claims relating to human and environmental issues. For example, Avon and Estee Lauder were sued for claiming their makeup was not tested on animals. That may have been true in the US and UK, but the products they sold in China were required by law to be tested on animals. Increasingly, wealthy activist groups are identifying misleading or dishonest company claims and taking those companies to court for them.
If an industry’s not facing new regulations or major lawsuits, are they in the clear?
KB: Not necessarily. There’s also increasing public pressure for companies to treat people and the environment more responsibly. Typically, public pressure targets large, consumer-focused brands like Nike, Walmart, Apple, etc. But that doesn’t mean the heat is off other companies.
If you’re in the same industry as a big brand that’s receiving complaints about worker safety or child labour, there’s going to be pressure for you to start cleaning up your supply chain, too.
And if you supply materials or products to any of those big brands, you better believe they’re going to start demanding transparency from you. No one – not even a small B2B company – wants to see their name in the headlines in association with unfair employment practices, child labour or human trafficking. It just isn’t the way to attract and retain customers, employees or investors.
Are some products or industries more sensitive to hidden supply chain issues?
KB: Absolutely. The less complex your product and the closer to home you source components, the more visible your supply chain becomes. If you’re producing a tin of tomato sauce, for example, with three ingredients, it’s likely you can manage your entire supply chain without too much difficulty. You’re more likely to know the tomato growers, the spice procurer and the tin manufacturer who all contribute to your final product and you can have conversations with those suppliers about how they each manage their own supply chains.
For goods like computers and cellphones, however, it’s a different story. Computers literally have thousands of components – many of which come from different suppliers in several different countries. Even worse, computers and cell phones are made using conflict minerals such as tungsten, tin and tantalum.
Making Progress on Human Rights
You’ve mentioned working condition hazards such as fire safety. What are some of the other issues that might be happening in a hidden supply chain?
KB: Human Trafficking and human rights abuses.
Every year, an estimated 22 million people around the world are subject to human trafficking. Many of these are unpaid or indentured workers, migrant workers whose papers are being kept by their employers. And the UN believes the actual numbers for human trafficking are much higher.
As for basic human rights violations: these include workers not being paid fairly, not receiving their wages on time, being forced to work overtime and being subjected to verbal or physical abuse and discrimination. In many places, workers have to hide their religion, gender or sexual preferences for fear of losing their job. There are workers who also lack basic grievance mechanisms to resolve workplace issues. Contrary to popular belief, these kinds of abuses don’t just take place in high risk countries. They even happen here in Canada.
How can a business leader ensure there are no human rights violations in its supply chain?
KB: Well, you can’t do it all at once and you can’t do it alone. My advice is to start by putting in place the basics like a supplier code of conduct and a robust auditing program. Then, once you’ve identified potential concerns, focus on a specific product line or a specific region of the world from which you source. This can be where you see the greatest risk to your business from a human rights perspective or where you could have the biggest impact in terms of creating a solution.
For instance, a food manufacturer could pick a particular chocolate bar, set environmental and social goals for the product, measure and track those goals and set targets for annual improvements. I also recommend joining industry groups and associations and engaging experts who can provide valuable insights and advice.