Supply chain management

September 01, 2005

As the pace of globalisation picks up, managing supply chains in a responsible way is becoming increasingly complex. John Russell reviews the current trends.

Revelations of malpractice along companies’ supply chains are becoming the corporate world’s equivalent to tabloid sex-scandals. Companies are cast as the celebrities with something to hide, hounded by hacks eager to expose their dirty little secrets. The trend towards outsourcing to countries in the developing world has further complicated the supplier relationship. It is now a far more complex task for company managers to oversee the production process, yet increasingly they are held responsible for the conduct of subcontractors and other suppliers across the globe. Rising stakeholder concerns have put paid to the notion that the supplier relationship is a distant and purely contractual one. As companies are now finding, the extended supply chain demands extended responsibility.


The high profile brands of the apparel sector have adopted a novel tactic in response to allegations of misconduct – admit everything. Transparent social reporting is proving an effective way to silence the critics. In its 2004 social report, Gap responded to its critics with a high level of disclosure on working conditions throughout its supply chain.

Following in the footsteps of Nike (as we reported in Briefing 82) the global clothing giant admitted to several violations of its vendor code of conduct, revealing that over 50% of its factories in China failed to comply fully with local laws. In over a quarter of sites in India, employees had been made to work more than 60 hours a week. To address such abuses Gap has established an extensive factory-monitoring programme, aiming to inspect each of its 1,690 factories at least once a year. The work of vendor compliance officers resulted in the termination of contracts with 136 sub-standard suppliers in 2003. As Gap shows, management concerns along the supply chain are less a case of soul-searching than of fact-finding, as companies seek evidence to offset the impact of headline-grabbing stories of malpractice.


The fraught relationship between British American Tobacco and Christian Aid highlights the extent to which companies are now held to account. The NGO alleged that BAT has failed in its “duty of care” to contract farmers in Kenya as de facto employees. BAT responded in 2004 by quickly instigating a stakeholder dialogue, conducting interviews with tobacco farmers in Kenya. The BAT chairman and two members of the management board also participated, visiting farmers in tobacco growing areas. It is difficult to improve supply chain labour standards through a top-down method of external audit and inspection.

Monitoring can identify abuses, but only once they have occurred. Long-term improvement demands a bottom-up approach, integrating ethical concerns into supplier practice. Starbucks has led the way in this respect. Consolidation of the supply-base offers a stable platform for this development, while regular supplier conferences, training seminars and local representatives can foster closer relationships and embed standards throughout the supply chain.


Simply defining and understanding the scale of social impacts all the way down the supply chain is itself a huge task, and one that certain sectors have been quicker to recognise than others. Take the cocoa sector’s unsuccessful efforts to tackle child labour. In July this year the US-based Chocolate Manufacturers Association – whose members include Nestlé – was due to launch a certification programme to guarantee that the cocoa in its chocolate was not harvested by ‘child slaves’. But the deadline passed with little progress having been made. The cocoa industry has since given itself a further three years, until July 2008, to deliver on its promise of a credible monitoring and certification system, and then only for 50% of cocoa-growing areas of Cote d’Ivoire and Ghana.

The cocoa industry’s failure to guarantee the ‘ethics’ of its products shows the scale of the challenge facing supply chain managers. With two-and-a-half million cocoa smallholders in West Africa, monitoring cocoa production is an extensive, and expensive, task. The cost of auditing can run to as much as £1000 per day, per supplier.


Multi-stakeholder initiatives can be an effective way of driving-up standards. Coming together, stakeholders share knowledge and build commitment to collectively raising standards across an industry.

The Ethical Trading Initiative – a UK-based alliance between companies, unions and NGOs – is one such initiative. ETI works to promote good practice in labour standards, by monitoring and independently verifying the implementation of company codes of conduct. ETI working groups cover different countries and sectors, offering employers an opportunity to work through good practice alongside their stakeholders.

According to a 2004 report from AccountAbility and Insight Investment, there is a “strong correlation between ETI membership and those companies that effectively manage and report on their supply chain labour standards”. The report found UK retailer J Sainsbury, an ETI member, to be the leading food retailer when it comes to ethical sourcing. Like Gap, Sainsbury highlights its commitment to labour standards by showing where it has cracked down on non-compliance. When one ceramic manufacturer in Asia failed to complete a Home Worker Self Assessment form – to ensure that home workers were receiving the same protection as on-site staff – the company terminated the contract and found an alternative supplier.


Aside from monitoring compliance and developing closer supplier relationships, there is a faster route to good practice – buy it. Danone’s recent acquisition of Stonyfield Farm yoghurt, a US co-operative, may have set a precedent.

Commenting on the move, the food group’s chief executive Frank Riboud told the Wall Street Journal: “Stonyfield is more than just a balance sheet. Stonyfield represents an ethic and it’s an ethic that we at Groupe Danone have to adopt if we’re going to be successful in the 21st century”. If 21st century consumers express morality through money, then who is to say that money cannot buy morality?

This trend is visible in Cadbury Schweppes‘ acquisition of the Green & Black’s organic chocolate and its recent appointment of David Croft, the man behind the Co-op’s fairtrade range, as its new ethical sourcing manager. And in April Starbuck’s acquired Ethos Water, an ethical brand whose sales fund water projects in the developing world. Ethos bottled water is now on sale in all of Starbuck’s US stores. “By purchasing Ethos Water, customers can be part of a unique opportunity to help make a difference”, said a spokesperson for the coffee chain. Ethos Water’s two founders, Peter Thum and Jonathan Greenblatt, are now both vice-presidents at Starbucks.

In recent years companies have sometimes been forced to pay for the sins of their subcontractors. Now ‘guilt by association’ is giving way to ‘good by association’ as business looks to solve ethical problems by buying-in to those brands with a reputation for good practice. If ‘ethical consumption’ really is the next big thing on the UK high street, then takeovers may become the path to best practice.

Corporate Citizenship Briefing, issue no: 83 – September, 2005

John Russell is a writer and researcher for Corporate Citizenship Briefing and The Corporate Citizenship Company