Corporate Social Responsibility and Global Supply Chain Management: a Normative Perspective

Darden Graduate School of Business Administration University of Virginia

Working Paper Series Paper No. 04-05

Corporate Social Responsibility and Global Supply Chain Management: A Normative Perspective

D. Eric Boyd James Madison University College of Business

Robert E. Spekman University of Virginia, Darden Graduate School of Business Administration

Patricia Werhane University of Virginia, Darden Graduate School of Business Administration

This paper can be downloaded free of charge from the Social Science Research Network at:

http://ssrn.com/abstract=655223 Corporate Social Responsibility and Global Supply Chain Management: A Normative Perspective

D. Eric Boyd Assistant Professor of Marketing College of Business James Madison University

Robert E. Spekman Tayloe Murphy Professor of Business Administration Darden Graduate School of Business University of Virginia

Patricia Werhane Ruffin Professor of Business Ethics Darden Graduate School of Business University of Virginia

June 2004

Please direct all inquiries to: Robert Spekman, Tayloe Murphy Professor of Business Darden Graduate School of Business University of Virginia Charlottesville, VA 22906 434-924-4860 (phone) 434-243-7677 (fax) [email protected]

Corporate Social Responsibility and Global Supply Chain Management: A Normative Perspective

Abstract: Integrated supply chains are becoming an integral part of the competitive landscape as firms seek to create strategic advantages. Yet, along with the economic benefits derived from these more coordinated supply chains come certain social obligations. Many buying firms are developing codes of conduct as a way of managing a number of partner behaviors within the supply chain. The issues addressed here converge on the extent to which buyers ought to be responsible for the ethical behaviors of their suppliers. While the management of partner-corporate social responsibility is an important issue for firms, extant research offers little guidance. This paper develops a framework for considering the obligations of the more powerful supply chain member to the other members of the supply chain. We examine the extent to which one supply chain member should exert governance as it relates to social responsibility on the members of the extended supply chain. We provide both managerial and theoretical insight.

Key Words: Supply Chain, Business Ethics, Corporate Social Responsibility

Corporate Social Responsibility and Global Supply Chain Management: A Normative Perspective

Introduction

On May 12, 2004, the Gap released a report admitting to less than perfect working

conditions in as many as 3000 of its world-wide factories (Merrick 2004). Gap stated

that close to 90 percent of these contract manufacturers fail the retailer’s evaluation of

working conditions. Such a report is a major step for the Gap, the largest U.S. specialty

retailer of clothes with $15.85 billion in sales, because in the past it has been very

defensive of working conditions in its factories. The report states that between 10 to 25

percent of its factories in China, Taiwan, and Saipan subject their workers to

psychological coercion; 50 percent of the factories in sub-Saharan Africa run machines

without proper safety devices; and many factories regularly demand work weeks in

excess of 80 hours. Is this an isolated set of events? Hardly. Are such reports a long-

awaited wake-up call for purchasing and corporate executives? Absolutely. As firms

rely more heavily on outsourcing, contract manufacturing, and other strategies to reduce costs in their supply chains, a new set of issues surface that are not fully appreciated by supply chain managers who must manage suppliers that provide key materials to firms.

The decision calculus to adopt supply chain management has been developed elsewhere

(Davis and Spekman 2004); what changes the complexion of the problem is the increased attention given to supply chains and corporate social responsibility.

Increasingly, more firms are becoming involved in business networks like integrated supply chains. An integrated supply chain represents a vertically coordinated network of firms that engages in various activities associated with the production and

distribution of the firm’s products to its end-use customers. Rather than rely on vertical integration to accomplish each of these activities, these firms have begun to outsource non-core activities and now must coordinate and organize the flows of goods, paperwork, and money among these different partners. In fact, one often hears of the extended enterprise as an attempt to link technology and trust whereby supply chain members share a common goal and vision, exchange sensitive information and data, and link processes to achieve competitive gains that could not be achieved if each supply chain member acted independently (Economist Intelligence Unit, 2002). Such efforts are very often a response to a number of factors such as the globalization of competition, changing customer demands, the advancement of information technology, and attempts by firms to establish industry standards (Moller and Halinen 1999). Integrated supply chains improve a firm’s competitive capabilities by lowering production and transaction costs, accelerating product development, and providing the firm with access to needed resources and knowledge.

Collaboration among the different supply chain members is often orchestrated by one member who is the sphere of influence around whom the others converge. In many cases, a single firm, most often the buyer, assumes responsibility for managing the range of activity within the supply chain. At one extreme is Wal-Mart whose global reach and seemingly insatiable purchasing appetite has placed it first among the most influential business institutions in the world. Wal-Mart is not only the world’s largest retailer (and company), it is the single-largest employer in Mexico, accounts for 10 percent of China’s total exports to the United States, has over 20,000 suppliers world-wide, and is visited by

118 million shoppers each week (e.g., Fishman 2003; Neff 2003). At the opposite end of

the continuum is any small manufacturing firm that either outsources component

assemblies to foreign companies or who sub-contracts professional services to another

firm that might conduct data processing, software development, or customer service to

companies in India or elsewhere. To be sure, a great deal of media attention in the

United States and elsewhere has been given to the plight of computer and software engineers who have seen their jobs migrate to countries where labor costs are a fraction of U.S. wages.

Yet, with the migration of costs (and jobs) comes certain obligations. More and more organizations are expanding their responsibility to include managing the corporate social responsibilities of their partners within the supply chain (Kolk and Tudder 2002;

Emmelhainz and Adams 1999). To some degree, this movement is defensive and can be viewed as a reactive response to managing risk. Despite the gains that an integrated supply chain affords, many managers fear that such relationships lead to a lack of control and heightened vulnerability. Herein is the challenge facing senior managers: widespread use of extended enterprise concepts increases a firm’s dependence on its supply chain partners to achieve greater effectiveness and efficiency. At the same time, these practices expose most companies to greater risks. These extended enterprise-related risks compound the effects of conventional business risks that confront every company on a daily basis (e.g., Spekman and Davis 2004).

One dimension of risk relates to the notion of corporate social responsibility

(CSR) and the extent to which supply chain members’ reputations and images can be tainted by the actions of another member who engages in activities that result in public sentiment and outcry or, even worse, is accused of criminal behavior where liability

extends up and down the supply chain. Along with extended enterprise thinking come

additional consequences. Supply chain managers have begun to address issues related to

consumer confidence and trust that the goods and services have been provided without

compromising ethical or environmental standards (New, 2003). If we tout the advantages

of blurred boundaries between firms, we must also be prepared to manage the parallel

risks that reflect the consequences of our partners’ policies and actions on ethical and

environmental issues.

Focus of the Paper

Attempts to manage partner corporate social responsibilities raise several important questions for both supply chain managers and researchers. One critical question is whether firms should, in practice, direct the corporate social responsibility of

their partners. Another important question and the focus of this paper is what should buyers ask of their supply chain partners if indeed organizations accept the task of managing partner corporate social responsibility.

Our objective is to provide a normative discussion of CSR that can guide supply chain managers as they navigate the challenges of managing partner corporate social responsibility. Yet, to speak of corporate responsibility is too broad a concept, and we narrow the topic to include issues germane to ethical sourcing. We emphasize the issue of worker relations between a firm’s supplier and the supplier’s employees. The paper concludes by discussing the study’s implications for supply chain management.

What Is Corporate Responsibility?

Corporate social responsibilities in a general sense reflect obligations to society and stakeholders within societies impacted by the firm (Brown and Dacin 1997). Davis

6 and Blomstrom (1975) assert that CSR is the obligation of the decision maker to take actions that protect and improve the welfare of society along with their own interests.

One approach would follow the dictum “first, do no harm,” and the second would suggest that business should proactively provide positive benefits to society. Several factors drive firms to accept responsibility for managing partner CSR including customer and stakeholder expectations and the potential threat of legal liability. At its core, CSR argues that economics and social goals need not be in conflict. While governments can mandate that certain practices be adopted by businesses such as minimum wages, pollution, and air quality standards, regulators have also relied on tax credits and other incentives to achieve certain social goals. A more serious challenge is how to incorporate such behavior and attitudes as mainstream business practices.

This challenge is at times quite formidable despite the logic of following ethical sourcing. In the case of Wal-Mart and the Kathie Lee Gifford line of women’s clothing, news items first appeared in 1996 suggesting that garments bearing the Kathie Lee

Gifford brand were being produced in Honduran sweatshops. In addition, these clothing items carried a “made in the USA” label. The news of sweatshop practices by Wal-Mart suppliers damaged the Wal-Mart brand name and tarnished its reputation. The sweatshop issue also affected Wal-Mart’s ability to raise public funds. This problem played an important part in the removal of Wal-Mart public stock from the investment portfolios of socially responsible mutual funds like the Domino 400 Social Index. Consider further the more recent press accounts of undocumented workers who were employed to clean Wal-

Mart stores in the United States. As the subject of a federal probe, Wal-Mart argued that these workers were not in the direct employ of Wal-Mart and, in fact, were employed by

7 janitorial contractors who worked for Wal-Mart. Regardless of whose payroll they were on, Wal-Mart bore the burden of these allegations (Zimmerman 2003).

Public policymakers find themselves involved through activities like the

“Trendsetters” list established by the Department of Labor in 1995 and heavily endorsed by policymakers. The objective behind the Trendsetters list was to publicly recognize firms taking a proactive stance managing corporate responsibility within their respective supply chains.

It would appear that demand considerations and legal liability are the main reasons firms accept responsibility for managing their partners’ CSR. These issues appear to override any cost considerations involved in CSR management. This point is evidenced best in the comments of Melinda Johnson, head of Policy, Chartered Institute of Purchasing and Supply. Johnson states:

You have got to consider what is going on in the supply chain as a whole. You need to think about how the manufacturers treat their staff. There is such a drive on cost these days that often companies do not weigh the impact of poor working conditions on quality and their reputation.

The comment by Johnson points to an important tension in managing the supply chain.

On the one hand, firms employ supply chains because of the advantages available from outsourcing to suppliers. Yet, outsourcing results in less control over the supplier’s performance, and this lack of control can ultimately create problems for the firm that far outweigh any cost or strategic advantages gained from the supply chain. In the past year alone, major global brands like Nike, Adidas, and Benetton were accused of using child labor in Cambodia and Turkey and prison labor in China.

Numerous firms are beginning to create a greater sense of balance between the

advantages provided by supply chains and the loss of control involved in outsourcing to

suppliers by accepting the responsibility of managing partner CSR. Firms accepting this

responsibility will often develop a code of conduct tailored to the firm’s individual

supply chain partners. In other cases, the firm may outsource this activity to third-party agencies such as the Fair Labor Association and the Ethical Trading Initiative that have developed more generic codes of conduct for suppliers that can be applied across different supply chains. An important question is what should be asked of supply chain partners relative to the partners fulfilling their corporate social responsibility. A review of individual firm and third-party codes of conduct reveals considerable variance

(Emmelhainz and Adams 1999). The differences in supply chain partner codes of conduct raise the possibility that some firms may be asking more than what is required of their supply chain partners and in the process placing the supply chain at a competitive disadvantage. Alternatively, other firms may be asking too little of their supply chain

partners and thus creating liabilities for their supply chains, similar to the liabilities

previously discussed involving Wal-Mart and the Gap. Others feel it is just good business to engage in such practices as they are also consistent with firms’ mission and

values. In 2002, Starbuck’s signed a licensing agreement to sell only trade-certified coffee in Canada. This effort is part of their mission statement and exemplifies

Starbuck’s commitment to people and places that grow coffee (Starbucks 2002).

At the same time, consumers have taken up the fight, and many feel that they can affect how firms behave. Consumers are exercising their voices by supporting retailers whose policies give better deals to producers from less developed countries. In part,

these actions illustrate the increased activism among many consumers. Yet, the rise in

consumerism can be directly attributed to the availability of information through all forms of media (e.g., Strong 1996). Special interest groups and concerned citizens have access to targeted media that collects such information real-time from across the globe.

Firms must attend to stockholders and stakeholders who may not have invested money in the company but who clearly have a de facto investment in the air they breathe, the food they eat, and the communities they live in.

Practical Responses to CSR

The issue of CSR relative to any foreign operations arises often in managing supply chains because many companies source on a global basis. Major manufacturers have been producing goods in foreign countries for years and have come to rely on a global presence to balance their total labor costs, to gain access to raw materials, and even to hedge against currency fluctuations. Yet, the real issues are whether a business case can be made for corporate responsibility, or whether firms should engage in ethical

practices and demand similar behavior from their suppliers simply because it is the right thing to do (Roberts 2003). Given the Gap example mentioned at the beginning of the paper, it becomes clear that many of the contract manufacturers receive mixed signals as not every outsourcer is equally committed to the same level of ethical sourcing. In fact, some contract manufacturers might debate whether conformance to Gap’s code of conduct is in their best interest because other buyers do not make the same demands and are willing to look the other way. To the extent that firms share a common set of values, the debate becomes moot. If supply chain members commit to the same set of values as

would be expected in an integrated supply chain, compliance is part of the criteria for inclusion as a supply chain partner.

CSR issues related to worker relations encompass a range of concerns including collective bargaining, minimum wage rates, maximum work hours, and the enforcement of workers rights. Firms primarily follow two strategies in managing worker relations

within partner firms. One strategy is for the buying firm to craft a code of conduct

specific to the firm’s supply chain. Table 1 reflects the efforts of several individual

companies in addressing CSR associated with worker relations within their respective

supply chains. A review of Table 1 reveals the inconsistent manner by which worker

relations are managed across firms. For example, the rights of workers to freely associate in labor unions and bargain collectively is recognized by Hewlett-Packard but not by any

of the other firms identified in Table 1. We also can see the extent to which an individual

company addresses employee support by suppliers also varies. To illustrate this point

compare the efforts of Intel versus Hewlett Packard. Intel makes no explicit mention of

any of the four employee-relations areas, whereas, Hewlett-Packard addresses all four

areas in their supplier code of conduct.

[Insert Table 1 about here]

Alternatively, the Ethical Trading Initiative, Social Accountability (SA) 8000, and

the Fair Labor Association each represent third-party initiatives that firms can join and

use in managing worker relations within the supply chain. Table 2 details the CSR

identified in several popular third-party agencies and highlights the similarities and

differences that exist between third-party-sponsored codes of conduct relative to worker

relations. Each third-party code of conduct supports workers rights to organize and form

unions for purposes of negotiating with their employees within the supply chain. This similarity regarding workers rights to organize differs markedly from the picture revealed

in the corporate codes of conduct described in Table 1.

The third-party codes of conduct do, however, differ in several areas. The detail

in Table 2 regarding the issue of mandatory wages, for example, reveals that the third-

party codes of conduct differ in regard to whether suppliers within the supply chain are

required to pay a wage that provides workers with discretionary income. The Fair Labor

Association makes no mention of discretionary income whereas the other two codes of conduct in Table 2 specifically identify the provision of discretionary income as a CSR of suppliers. There also are monitoring differences between the third-party codes of conduct. The three third-party codes of conduct identify varying degrees of required monitoring and the monitoring mechanisms acceptable in meeting CSR.

[Insert Table 2 about here]

The discussion to this point has covered several CSR related to managing worker relations within supply chains and the different perspectives on the subject. The differences between firm-level and third-party-level codes of conduct reflect a diversity of thought regarding what exactly a firm’s CSR is relative to supply chain management.

The data suggest third-party-designed codes of conduct assign greater levels of CSR to firms than do the codes of conduct designed individually by firms. The incongruity between firm- and third-party-designed codes of conduct regarding the CSR presents a problem for supply chain managers. Should the manager adopt the lower level of CSR identified in individually designed supply chain codes of conduct, or should firms be held

12 to a higher level of CSR similar to that captured in third-party initiatives? In addition, how do these codes of conduct relate to implementing CSR into a firm’s supply chain?

Implementing CSR into Supply Chain Management

These codes of conduct provide a framework from which supply chain partners can begin to address ethical sourcing issues with a common set of principles. Once shared principles have been identified, they serve as a basis of assigning rights and responsibilities to companies within the supply chain. Keep in mind that in an integrated supply chain, rules and norms emerge during the process of establishing trust and committing to a common set of shared practices that govern the relationship and set the rules of engagement for the trading partners. Without such norms trust cannot emerge, and the supply chain lacks a common thread to hold it together. Such individualistic behavior invites opportunistic behavior, raises transaction costs, and lessens the known benefits that are derived from collaborative behavior. The challenge is to create systems that expose issues and do not shelter people from the realities of the marketplace that might adversely affect the working conditions for workers in less-developed countries.

In 2004, the Jewelers of America (JA) adopted a supplier code of conduct that committed to a framework for social, ethical, and environmental responsibility. In addition to concerns regarding carat weight, brand authenticity, and the like; consumers have expectations regarding health and safety, child labor, and the effects of gem mining on the environment. The European Commission has proposed a mandated framework that provides a holistic approach to corporate social responsibility. The intent is to begin a process to adopt a global standard. While corporate response might avoid risks to brand reputation and the negative press from such exposure, the motivation for such action is

13 less important. What is important is the recognition that along with the gains attributed to outsourcing and supply chain management is the fact that there are potential costs and risks from noncompliant partners.

Challenges

Critics suggest that the preceding discussion is inconsistent with the very real cost considerations that are driving firms from vertical integration to the use of supply chains.

Effectively run supply chains have been shown to provide very real cost advantage plus there are other less immediately tangible gains from supply chain management. But focusing only on cost underestimates the true potential of supply chains for managing current and future customer relationships. Social responsibility on the part of business is an important means by which firms build relationships with current and future customers.

This point is substantiated in surveys of managers who recently credited socially responsible strategies with providing a large and relatively untapped means of building and managing customer relationships (Benezra 1996). A major reason for why socially responsible strategies are so effectives is customers’ increasing use of social criteria in choosing among firms. A study conducted by Marymount University in 1995, for example, revealed that 69 percent of customers surveyed would not shop at retail establishments that sold sweatshop-produced goods.

Recognizing the importance of socially responsible strategies toward customer relationship management, leading companies are addressing social issues and seeing success with customers. The American Express Charge against Hunger campaign, for example, involved American Express donating a portion of the processing fees it receives on each American Express card transaction toward the fight against hunger. If American

Express had only considered the cost implications from donating, then the company may well have not gone through with the campaign. However, the effectiveness of the campaign resulted in a 10 percent increase in cardholder charges. Similar stories are associated with other socially responsible strategies including Starbuck’s donation of $2 per bag of coffee sold to growers in Ethiopia, Guatemala, Kenya, and Indonesia and

Nabisco’s two-year tie with the World Wildlife Fund to support saving endangered species. Environmental issues are central to the Body Shop’s supply chain management policies, so the Body Shop will not buy products that have been tested on animals. The

Body Shop’s policy requires would-be Body Shop suppliers to alter their practices or face losing business relations with the Body Shop. Hewlett-Packard addresses these product- related issues within its supply chain as part of its self-identified “product stewardship” and works with suppliers in several product-related areas, which include product design, material composition, packaging, recycling, and safety.

These examples are illustrative of how companies are building social responsibility into strategies that assist in customer relationship management. Ethical sourcing is not cause related per se, or is it intended explicitly to decrease the churn in a firm’s consumer base. We certainly believe that supply chain managers can begin to use their supply chains in a more socially responsible manner to enhance their firms’ relationships with customers. Yet, the heart of our argument rests on the belief that there is a moral obligation for supply chain managers to think about the conduct of their second-, third-, and fourth-tier suppliers if the total supply chain is to act in an ethical manner.

Firms are also building social responsibility into their management strategies as a

way of developing future markets and customers. Most supply chains generate lower

costs by involving suppliers from developing countries where the labor rates are cheaper.

Rather than seeing developing countries solely as opportunities for cost savings,

companies increasingly are viewing customers in developing counties as important

markets for selling products in the future. The view that customers in developing countries reflect future market opportunities underlies Hewlett-Packard’s strategy to bring technology to the poor through generous donations of computers and printers.

Johnson & Johnson is following a similar strategy as it tries to find ways to familiarize the poor with its products. Procter & Gamble has taken this strategy one step farther by developing products addressing nutritional deficiencies, waterborne diseases, and other

issues of importance to customers in developing countries. Supply chain managers can

utilize the framework described here as a basis for both developing new markets and

nurturing future customers through the advocacy of socially responsible worker relations

within developing countries.

Levi Strauss was founded over 150 years ago on the principles of quality and

integrity, and these attributes remain the hallmark of the firm. Beyond its commitment to

the local communities in which it does business, Levi Strauss was the first U.S. company

to adopt a global-sourcing policy that ensured that workers producing their products anywhere in the world would do so in safe and healthy working conditions and would be treated with dignity and respect. Other companies who chose to ignore human rights found the costs are far greater to remediate the problem than it is to avoid it from the outset. To produce at lower costs in foreign countries does not mean exploiting the wage

differential. Ultimately the CEO is responsible for the firm’s supply base and any

transgressions, at any level of the supply chain, are placed at his/her door. It is well

documented that ethical sourcing does matter, and firms that violate these expectations

jeopardize the consumer franchise.

The more well known the brand is means more is at stake. In 1998, Phil Knight,

founder of Nike, sadly proclaimed that the brand had become synonymous with slave

wages overtime and arbitrary abuse (Murphy and Mathew 2001). To solve this problem

Nike now has almost 100 people dedicated to corporate responsibility issues. Nike is one

of many firms in the clothing sector where such problems have loomed large. Yet, other

sectors of the economy have similar issues, so no one firm or industry can be insulated

from these considerations.

Beginning the Process

The challenges are formidable, but there are processes a firm could adapt to begin

sourcing in an ethical manner and take responsibility for its supply chain, end-to-end. At an operational level, purchasing personnel might take on roles that are not traditional within their job descriptions. Beyond having responsibility for buying goods in the “right quantity, at the right price, and delivered at the right time,” procurement now is the partially responsible for stewardship of the brand. Price is important, but firms cannot afford to potentially denigrate their reputations through benign neglect of their supply bases. Imagine the challenge Wal-Mart faces managing 20,000 suppliers and deciding how deep to extend its influence into the supply chain. The results to date would suggest that its corporate policy has been lax. Buyers and merchandise managers must attend to social and environmental issues in addition to managing their suppliers.

Even with corporate buy-in and an espoused commitment to the ethical treatment

of second-, third-, and fourth-tier suppliers, the implementation process is not nontrivial and despite agreement regarding doing the right thing, there will always be nay sayers. If one firm acts without the majority of their industry following, some will argue that the firm is placed at a potential cost disadvantage while our competitors reap the short-term benefits of noncompliance. While not a compelling response, it does demonstrate that some firms act because it is the right thing to do, and others react to the potential risks associated with noncompliance.

At the very outset, there must be corporate buy-in and commitment to the ideals

of CSR. If there is not support from the top, there will be no support at the operations

level, and commitment will never be built. In many instances, the real challenge is

changing corporate culture to recognize that there is an obligation to those foreign

contract workers who provide services to the firm. Recall that Microsoft is presently

settling cases where contract workers did not receive comparable benefits as employees,

especially their right to buy Microsoft stock at deep discounts. While the links to a

worker in China are far more tenuous, obligations still exist.

As managers begin to confront these considerations, it would make sense to

follow a process or methodology that delineates the steps required to implement a successful CSR program. The steps in the process broadly encompass:

• Look internally: Determine if your own organization is prepared to do what you

will ask of your external partners. The issues here are less tied to ethical sourcing

(although it is essential that it be done internally) and more focused on the

integrating factors that would permit seamless flows of information and goods

across parts of your business. Transparency and open/honest communication

flows are essential to the process. Also, consider the present culture and values of

the firm; senior managers must support the call to action or see the burning

platform that necessitates the requisite changes, so have your own house in order.

You cannot ask others to do what you cannot. The lack of internal consistency

will only hamper enforcement of an ethical-sourcing policy as suppliers will

quickly see the hypocrisy in asking them to follow a course of action your firm is

not willing to undertake also. Hewlett-Packard has been accused of having their

contract programmers work 80 hours but was paying them only for 40 hours

(Fererra 2003). The lawsuit potentially weakens Hewlett-Packard’s ability to

manage CSR within its supply chain because one could infer there is a lack of

credibility in its commitment.

• Define your code of conduct: A firm cannot manage its supply chain partners if

it has not articulated precisely what its expectations are, what it expects from its

suppliers and its suppliers’ suppliers. Table 1 provides examples of the supplier

codes of conduct for several companies. The important point is that the codes

represent the efforts of each company to put into writing a statement or set of

expectations regarding supplier corporate social responsibility. There can be no

ambiguity as to what the goals are, what the penalties are to those who violate the

letter and the spirit of the code, and what resources are available to help suppliers

(current or potential) become compliant. Also, make sure it is tied to your

strategy. If it appears that there is an inconsistency in goals (i.e., cut costs by

outsourcing and provide a platform for workers’ rights) your actions will be seen

as insincere.

As a way of completing the circle, you should publish a report of

corporate social responsibility on an annual or bi-annual basis. Companies like

the Gap and McDonald’s Corporation are publishing CSR reports as a way of

illustrating both their commitment to their codes of conduct as well and

highlighting the benefits that are derived from these efforts (Radhika 2003).

• Map the process: Show the entire flow of goods through the pipeline from the

simplest raw material to the most complex subassembly. Imagine building a

complete flow chart of how all materials move through the supply chain. Then,

replicate these maps for different product families or SKUs as each might have a

unique set of suppliers. This alone is a daunting task but is but the first step.

After the map is built, collect data on each of the firms, so that you know the

players. Then, conduct an audit to evaluate the quality of goods produced, costs,

commitment to workers’ rights, labor and wage practices, as well as local

regulations and management’s philosophy towards its workers. Companies like

the Body Shop use the mapping process as a means to identify a baseline from

which to measure future improvement, give suppliers an opportunity to provide

input, and identify specific problem areas (Sillanpaa 1998).

• Make sure each relationship fits with your strategy: Post audit, it might be

necessary to cull your list of suitable suppliers. If there is a lack of trust or if

there is a gap in values and beliefs that you hold dear, then drop the supplier.

There is no compelling reason to work with suppliers who do not share core

values. The price differential, quality etc. cannot be that advantageous to justify

working with a supplier who does not fit your profile.

• Have monitoring mechanisms/technology in place: How can you enforce

codes of conduct if there is no apparent way to measure behavior? Remember

what gets measured gets done! A closely related issue is the metrics used to

evaluate compliance. Do the metrics measure what they are intended to? Are

there contradictory metrics? Do supply chain members understand precisely

what is expected of them? While it would be noble to assert that suppliers will

self-police to ensure compliance, it would be incredibly naïve to think that this

would happen in all instances. Monitoring is probably more important in the

early years of the program. Given that shared norms and trust are expected to

grow over time, self-regulation could become more likely.

• Train your buyers and be consistent in how they are compensated: Too often

buyers are rewarded for variance to stated price although they are nominally held

to another set of standards or performance criteria. Price is important, no doubt;

but the ability to maintain an ethical code of supplier development and

management is equally as important. To ensure that such policies are followed,

buyers must have both an enterprise and supply-chain-wide perspective. They

must understand the second- and third-order effects of noncompliance, and they

must understand that, if they buy badly, their actions can literally kill a leading

brand. Clear signals must exist externally and must be communicated internally

as well.

• Communicate your code to your suppliers: Discussion must be done with

complete transparency in the information exchanged. If there is no trust among

supply chain members and they do not share both a common vision and a

commitment to workers’ rights, nothing will happen. There can be no exceptions

made, and the code must be enforced independent of the local customs,

governmental regulation, etc. A company’s actions and words must be consistent

over time. Set your course and do not waiver. Advise suppliers of the

consequences for noncompliance. Federated Department Stores, for example,

has articulated a three-step process of action the company will undertake when a

supplier violates its Supplier Code of Conduct. The actions include suspending

further shipments until compliance is documented, and measures enacted to

prevent future noncompliance. The issue here is communication, both of what is

expected of the supplier and the repercussions associated with noncompliance.

Questions of Governance

Although we can develop a series of steps through which a firm might progress in implementing an ethical sourcing program, there are governance issues to address as

well. These issues are likely to arise in relation to questions:

• Who performs the different activities that must be executed as part of the program? • Who reports to whom such as the operational teams, steering committees, champions? There is both the formal and the informal network that must be considered. Do not rely solely on the chain of command to implement actions since the informal relationship among supply chain members takes on added importance in situations where values and norms are considered. • Where does decision-making authority lay, and who makes what decisions? Do corporate managers advise, make decisions, or get informed of a decision related to workers’ rights? Where does decision-making authority rest?

• If there are violations and a remedial plan is a first step in correcting the problems, which partners are responsible for what issues? Decision-making responsibility and issues related to any action that could adversely affect the supply chain should be delegated to each supplier because each location must be responsible for its actions. Yet, some of these decisions might be embroiled in conflicts and tensions at the local level due to differences in perspectives and levels of commitment. To contain any crisis that might surface, managers should look for early-warning signs that might signal the problems ahead.1 Given the severity of

the problems that can occur and the damage to the firm’s reputation that is likely, we

advise hypervigilance. The following set of questions is illustrative of the issues that

should be monitored:

• Look at the people. - Do they have sufficient knowledge/expertise to implement the program? - Are they able to devote the time, or are they distracted by other issues? - Do they demonstrate support/buy-in or do they just give the tenets of the program lip service? • Look at the process. - Is the process jointly managed or not? - Will those involved in the discussions be part of implementation? - Are partners aware of each other’s situation, concerns, and challenges? - Have tough issues been ignored or swept under the carpet? • Program Design - Do shared objectives guide the process? - Has consensus been reached on scope, information sharing, and termination if noncompliance continues, etc? - Is the implementation plan doable? - Do the partner’s structure and processes support the objectives, reward the right behavior, and align with the program’s objectives? - Are expectations aligned regarding resource commitment, time frame, and outcomes? Answers to these questions should go a long way in helping supply chain

managers uncover potential problems before they become serious. These early-warning

1 This discussion is adopted from Jordan Lewis, Trusted Partners (New York: Free Press, 1999).

signs can prevent costly adverse publicity and potential legal actions. Also, early

intervention can be less expensive than attempting to fix a problem after it has run its

course. There is truth to the adage “an ounce of prevention is worth a pound of cure.”

Conclusion

The common belief is that tension exists between competitive opportunity and

human rights in managing a supply chain. Firms turn to outsourcing supply as a means to

lower product costs and thus remain competitive. Yet, the cost advantages available from

a supply chain often come at the expense of the workers within supplier firms. Some

firms simply shut their eyes and try to avoid facing these issues while others try to

resolve this tension by accepting responsibility for managing their contract

manufacturers’ or foreign suppliers’ relations with workers. This paper provides one

potential solution to firms choosing to follow this strategy in its consideration of several

important issues arising in the course of managing corporate social responsibility within a

supply chain.

We present a managerial framework for addressing the challenges associated with

developing an ethical sourcing program. We have described different codes of conduct

and have offered an approach to implementing a viable ethical sourcing program.

Although we believe our approach has merit and will assist managers to better understand the issues that contribute to such efforts, certain limitations remain, specifically the practical uncertainty of any normative discussion about the success rate. At this juncture, we have attempted only to map the process to help managers think more about these complex issues. We hope we have presented a sufficiently logical discussion that

24 contributes to the debate and provides guidance for those who wish to move from the normative to the realities of implementation.

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Table1: Recent Examples of Individual Firm Supply Chain Codes of Conduct

Federated Department McDonald’s Hewlett-Packard Intel Corporation(^) Stores(&) Corporation(*) Corporation ($) Collective No stated requirement. No stated requirement. Recognizes rights of No stated requirement. Activity of workers to organize into Employees labor unions in accordance with local laws and established practices. Mandatory Suppliers should pay at Employees should be “fairly Provide wages to workers No stated requirement. Wages for least the minimum compensated and provided that meet or exceed legal Employees required by law or the with wages and benefits that requirements. prevailing industry wage, comply with applicable whichever is higher, and national and local laws” shall provide legally mandated benefits. Mandatory Workers hours not to “except in extraordinary Workers shall not work No stated requirement. Limit on Hours exceed 60-hours per work business circumstances, more than the maximum week, and in cases where employees will not be daily hours established by local law does not required to work more than local laws. mandate maximum either (a) the limits on hourly work weeks, the regular and overtime hours worker shall not work on allowed by local law, or (b) a regular basis in excess 60 hours per week inclusive of a regular work week of overtime. plus 12 hours of overtime. Monitoring of Supplier self-verification Supplier self-verification Supplier verification No stated requirement. Supplier and Federated will make required on an annual basis through periodic self- Operations unannounced inspections and McDonald’s retains right assessments in regard to of supplier operations. to verify compliance. meeting supplier requirements. (&) Source: Federated Department Stores, Inc.’s Vendor Supplier Code of Conduct, downloaded on 4/13/03 from www.federated-fds.com/company/fds_code_of_conduct.pdf. (*) Source: McDonald’s Code of Conduct for Suppliers, downloaded on 4/14/03 from http://www.mcdonalds.com/corporate/social/marketplace/supplier/code/http://www.mcdonalds.com/corporate/social/m arketplace/supplier/code/. ($) Source: HP Supplier Code of Conduct, downloaded on 4/13/03 from www.hp.com/hpinfo/community/ environment/pdf/supcode.pdf. (^) Source: Intel Supplier Code of Conduct, downloaded on 4/13/03 from https://supplier.intel.com/static/supplier/CoCRev0.pdf.

Table 2: Recent Examples of Third-Party Supply Chain Codes of Conduct

Ethical Trading Initiative(&) SAI 8000 International Fair Labor Association($) Standard(*) Collective Recognizes rights of works to Recognizes rights of works to Employers shall recognize and respect Activity of organize and collectively organize and collectively bargain, the right of employees to freedom of Employees bargain, and also requires and also requires supplier to association and collective bargaining. supplier to facilitate parallel facilitate parallel means of worker means of worker collective collective bargaining where local bargaining where local law law prohibits worker organizing. prohibits worker organizing. Mandatory Suppliers should pay a living Suppliers should pay a living wage Employers shall pay employees, as a Wages for wage which allows workers to which allows workers to pay for floor, at least the minimum wage Employees pay for basic needs and basic needs and provides workers required by local law or the prevailing provides workers with small with small amount of discretionary industry wage, whichever is higher, amount of discretionary income. and shall provide legally mandated income. benefits.

Mandatory Workers shall not on a regular Workers shall not on a regular basis Except in extraordinary business Limit on Hours basis be required to work in be required to work in excess of 48 circumstances, employees shall (i) not excess of 48 hours per week hours per week and shall be be required to work more than the and shall be provided with at provided with at least one day off lesser of (a) 48 hours per week and 12 least one day off for every 7 for every 7 day period on average. hours overtime or (b) the limits on day period on average. Overtime shall be voluntary, shall regular and overtime hours allowed by Overtime shall be voluntary, not exceed 12 hours per week, the law of the country of manufacture shall not exceed 12 hours per or, where the laws of such country do week, not limit the hours of work, the regular work week in such country plus 12 hours overtime. Monitoring of Member companies accept the The company shall maintain The FLA accredits monitors to conduct Supplier principle that the appropriate records of suppliers’ independent external monitoring of Operations implementation of codes will commitments to social facilities used by companies be assessed through accountability, including participating in the FLA. monitoring and independent participating in the company’s verification; and that monitoring activities as requested. performance with regard to monitoring practice and implementation of codes will be reported annually. (&) Source: Ethical Trading Initiative base Code, downloaded on 4/13/03 from http://www.eti.org.uk/pub/publications/basecode/en/index.shtml. (*) Source: Social Accountability International Standard, downloaded on 4/14/03 from http://www.cepaa.org/Document%20Center/2001StdEnglishFinal.doc. ($) Source: Fair Labor Association Code of Conduct, downloaded on 4/13/03 from http://www.fairlabor.org/all/code/.