Corporate Social Responsibility Report: Buyers audit suppliers' ethics
A string of revelations about poor labor, environmental and ethics practices among some low-cost-country suppliers has prompted purchasing organizations to expand their monitoring of business practices in the supply base.
By James Carbone -- Purchasing, 11/13/2008 2:00:00 AM EST
Apple took a public relations beating in 2006 when newspapers in the U.S., Europe and Asia reported employee abuses at a factory in Shenzhen, China that builds the iPod.
The published stories said the contract manufacturer, Foxconn, forced employees to work overtime, punished them by making them stand at attention for long periods and housed them in overcrowded dormitories on Foxconn's campus.
Apple reacted quickly, sending a team of inspectors to investigate and interview employees. Foxconn ultimately agreed to correct the problems.
 As more global companies outsource manufacturing to low-cost countries, many have adopted socially responsible codes of conduct and insist their suppliers follow them to ensure fair treatment of workers and to protect the environment.  “Where the offense is serious, we will put them (suppliers) on business hold until they fix the problem. We will not engage with them on new business,” says Pascale Mardirossian, vice president, supply management worldwide operations at Sun Microsystems. |
It wasn't the first time that a U.S. company was stung by the labor practices of a low-cost-country supplier. Nike and Puma, among others, have had similar problems. In Puma's case, China Labor Watch, a non-government organization that investigates working conditions in Chinese factories, found several abuses common in many companies that source in low-cost regions: excessive overtime, low pay, excessive fines, poor management, poor dormitory conditions, questionable food, unsafe working conditions and inability of employees to resign.
The result of findings like these has been adoption by major U.S. manufacturers of social responsibility codes of conduct that cover labor practices, ethics and environmental issues.
Cousins to corporate efforts to promote diversity in supply chains, the codes of conduct set expectations on treatment of workers and the environment. And purchasing organizations are leading the charge to make sure suppliers meet those expectations.
John Paterson, chief procurement officer for IBM in Armonk, N.Y., says social responsibility is important for several reasons. First it is the right thing to do. Workers should be treated with respect and dignity, and a company should behave ethically and not pollute the environment, he says.
Social responsibility is also good business, he says. "In some ways it is defensive. We don't want our brand name tarnished," says Paterson.
Pascale Mardirossian, vice president of supply management, worldwide operations at Sun Microsystems in Santa Clara, Calf, adds codes of conduct "help ensure that work done on our behalf by suppliers is in compliance with how we treat our own individual employees."
But having a code of conduct is not enough, purchasing professionals say. Apple had one, but its supplier ignored it.
Corporate executives are increasingly relying on purchasing to educate the supply base about acceptable ethical practices, treatment of workers and monitoring compliance.
IBM has had a code of conduct since 2004 and was one of the founding members of the Electronics Industry Citizenship Coalition (EICC), a group that developed the electronic industry code of conduct which is used by 42 EICC members and many of their suppliers.
John Gabriel, manager of the supply chain social responsibility organization for IBM, is chairman of the EICC. He says it is important for a company to have a code of conduct and to have a means to implement it in order to maintain its reputation.
Focus on supply chains
 “Suppliers are now a visible extension of your business and your brand,” says John Gabriel, manager of supply chain social responsibility organization for IBM. |
Years ago a code of conduct may not have been necessary. The idea of brand was tied up in a company's products, services or its name, but not to its supply chain, Gabriel says.
"Large companies typically did not talk about supply chain in a public sense," says Gabriel. However, as companies continue to outsource much of their work, the focus has shifted more to supply chains.
"Your suppliers are an extension of your business," says Gabriel. "They always have been, but they are now a visible extension of your business and your brand."
Gabriel says the worldwide reach of the Internet allows large-scale communication very quickly so revelations about the wrongdoings of a company proliferate quickly and can damage a company's brand.
That's why buyers need to evaluate suppliers in emerging companies very carefully before considering them for business. "When you look to source in emerging markets there are opportunities for low cost and access to a market, but there are also challenges relating the supply chain," says Gabriel.
Such challenges could include behavior that is in violation of a company's code of conduct, such as the use of underage workers, excessive overtime, poor working conditions and disregard for the environment.
As a result, audits of existing suppliers and potential new suppliers are imperative.
Audits usually take two or three days and are conducted by internal auditors or third party auditors hired by the company. The auditors review a supplier's process and practices to make sure they meet the criteria spelled out in the company's code of conduct. They review records concerning work hours and overtime as well as environmental and health and safety records and overall conditions at a factory.
Alcatel Lucent Group (ALG), based in Paris, audits suppliers based on its "statement of business principles" which covers labor practices, ethics, environment and health and safety issues.
"We have a full assessment program and have assessed more than 550 suppliers worldwide," says Helene Fauve, quality system and corporate social responsibility, procurement and sourcing.
The company uses internal auditors who are independent from the purchasing organization. The auditors visit the supplier for several days and review the supplier's social responsibility practices. The auditors' report is sent to the CEO of the company and well as to purchasing.
"When we get feedback that there are problems, we are usually able to get improvement and resolution of the problem by the supplier," Fauve says. If a supplier does not improve, it will not get new business.
 “We have a strong preference to work with suppliers to improve the performance rather than disengage with them because of lack of performance,” says Judy Glazer, director of global operations social and environmental responsibility for Hewlett-Packard. |
Long hours
Problems vary, but most involve working hours and overtime, health and safety issues. Employees are often required to work long hours and sometimes are not properly compensated.
Auditing is important, but so is follow up and a little tough love with suppliers.
Mardirossian says Sun does surveys of supplier and audits to determine if they are in compliance with Sun's code of conduct.
"In areas where they are out of compliance, suppliers get written up," she says. "We then put performance plans in place for the supplier and the supplier has to tell us how they are going to correct the problem," she says.
Mardirossian says the supplier is audited again to see if the corrective action was taken and the issue resolved.
"Where the offense is serious, child labor for example, we will put them on business hold until they fix the problem," she says. "We will not engage with them on new business."
She says there have been times when Sun has put a supplier's business on hold because of environmental issues, such as storing of hazardous chemicals on site.
Buyers involved with social responsibility issues with suppliers say that even if suppliers are egregious offenders it is important to work with them to correct the problem rather than just dropping the supplier.
Don't cut and run
"A couple years ago there was more of a desire by some companies to change sourcing" when a supplier had a code of conduct issue, says Gabriel of IBM. "Leaving the problem is not a solution," he says. "Audit and then cut and run is not a viable practice."
Gabriel says companies need to audit suppliers, share results, encourage them to improve and re-audit them. "Award suppliers that are in compliance with a higher level of business and don't award suppliers with low compliance."
Hewlett-Packard follows that philosophy, says Judy Glazer, director of global operations social and environmental responsibility for HP in Palo Alto, Calf. "We have a strong preference to work with suppliers to improve the performance rather than disengage with them because of lack of performance," says Glazer.
She says by working with suppliers on such issues, working conditions of employees improve. "The beneficiaries are the workers in the factories and the community where that factory is located. If we walk away, we don't deliver those benefits and workers lose their jobs," says Glazer. "That may cause a lot of immediate harm to those individuals."
She says that HP includes adherence to the code of conduct in its contracts with suppliers. "We also ask suppliers to sign a separate agreement to ensure that they review the code of conduct and understand what they are committing to."
HP commodity managers are involved in the audit process. "We work with whoever manages that business relationship with the supplier on a day-to-day basis," says Glazer. "After a supplier is audited, we convey the audit results to the supplier through the commodity manager or person managing the relationship," she says.
In addition to social responsibility audits, adherence to the code of conduct is included in HP's quarterly supplier performance ratings along with technology, quality, delivery and other criteria. To maintain or grow business with HP, suppliers have to have high ratings in scorecards. Social responsibility accounts for 10% of the supplier's overall score, she says.
Constant vigilance
Buyers involved in social responsibility code of conduct say adherence to codes of conduct require vigilance. Some suppliers may be compliant for months or years, but then slip into non-compliance.
For example while Apple's incident with Foxconn happened two years ago, NGOs say there have been recent issues at the company's Shenzhen campus.
China Labor Watch announced in August the findings of a recent investigation and found that workers only had one day off every two weeks, did not receive the proper amount of overtime pay, were forced to work overtime and were unable to retrieve wages from a miscalculation in work hours. The group also said there were poor dormitory conditions and a lack of security at the dormitories.
"You can't assume anything when you source in an emerging market, whether it is product quality or social responsibility," says Gabriel. "Buyers have to beware and be vigilant. When you make a supplier visit you may see one thing, but don't assume that the prevailing conditions will continue day in and day out."
For more information on social responsibility, see the following:
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