10th OECD ROUNDTABLE ON CORPORATE RESPONSIBILITY Launching an update of the OECD Guidelines for Multinational Enterprises 30 June – 1 July 2010, OECD Conference Centre, Paris, France “SUPPLY CHAINS AND THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES” BSR DISCUSSION PAPER ON RESPONSIBLE SUPPLY CHAIN MANAGEMENT Cody Sisco, Blythe Chorn, Peder Michael Pruzan-Jorgensen, Jeremy Prepscius, and Veronica Booth Business for Social Responsibility (BSR) This paper on “ Supply Chains and the OECD Guidelines for Multinational Enterprises” was commissioned from the corporate responsibility and consulting firm Business for Social Responsibility (BSR) as background information for the 2010 Corporate Responsibility Roundtable’s session on supply chains, which will be held at the OECD Conference Centre on 30 June (morning). The views contained in the BSR paper do not necessarily represent those of the OECD or its member governments. For further information or clarification on any of the issues covered in this paper please contact: Cody Sisco, [email protected]. OECD ROUNDTABLE ON CORPORATE RESPONSIBLITY “Supply Chains and the OECD Guidelines for Multinational Enterprises” BSR Discussion Paper on Responsible Supply Chain Management OECD Headquarters, Paris, 30 June 2010 BSR, a leader in corporate responsibility since 1992, works with its global network of more than 250 member companies to develop sustainable business strategies and solutions through consulting, research, and cross-sector collaboration. This paper was prepared by Cody Sisco, Blythe Chorn, Peder Michael Pruzan-Jorgensen, Jeremy Prepscius, and Veronica Booth at BSR. Please contact Cody Sisco at [email protected]. BSR | OECD Discussion Paper on Responsible Supply Chain Management 1 Table of Contents I. Introduction II. Supply Chain Opportunities and Challenges and Multinational Enterprise Responses A. The Value of Supply Chain Relationships for MNEs B. Key Actors and Types of Supply Chain Relationships C. The Macroeconomic Impacts of Supply Chain Relationships D. Responsible Business Conduct Challenges in Supply Chain Relationships E. Current MNE Approaches for Responsible Supply Chain Management F. Challenges in Responsible Supply Chain Management III. Translating Multinational Enterprise Responses into Broader Operational Principles and Standards for Responsible Supply Chain Management A. Opportunities for Defining Responsible Supply Chain Management B. Investment Nexus C. Sphere of Influence D. Impact E. Due Diligence F. Materiality G. Continuous Improvement H. Towards a Comprehensive Framework for Responsible Supply Chain Management IV. Developing Guidance on the Application of the OECD Guidelines to Supply Chain Relationships A. Current Guidance on Responsible Supply Chain Management in the OECD Guidelines B. The Imperative for Revisions to the Guidelines on Responsible Supply Chain Management C. Opportunities to Provide Additional Clarity and Guidance on Responsible Supply Chain Management D. Considerations for the Role of the National Contact Points V. Conclusion BSR | OECD Discussion Paper on Responsible Supply Chain Management 2 I. Introduction 1. BSR (Business for Social Responsibility) is pleased to submit this discussion paper on the application of the Organisation for Economic Co- operation and Development (OECD) Guidelines for Multinational Enterprises to supply chains to the OECD in support of the Annual Meeting of the National Contact Points on 30 June 2010. 2. The purpose of this paper is to provide context and recommendations for discussion at the roundtable on corporate responsibility. This seminar will help clarify and develop appropriate guidance on the application of the OECD Guidelines for Multinational Enterprises (the Guidelines) to supply chain relationships in the context of the update that adhering governments have agreed to undertake in 2010-2011. BSR | OECD Discussion Paper on Responsible Supply Chain Management 3 Definition of Supply II. Supply Chain Opportunities and Challenges and Chain Multinational Enterprise Responses There are multiple 3. The scale and pace of growth in global supply chains is unprecedented. definitions of the term Trade liberalization, decreased restrictions on capital movement, and technology supply chain. advances which have sharply lowered transportation and communication costs have enabled geographically fragmented production processes, trade in services, 1 For the purposes of this and foreign direct investment by multinational enterprises (MNEs). paper, the term “supply chain” is used to refer to A. The Value of Supply Chain Relationships for MNEs the network of organizations that 4. Supply chain relationships generally create significant value for MNEs. As cooperate to transform growing competition in domestic and international markets forces MNEs to raw materials into finished become more efficient and to lower costs, sourcing inputs from more efficient goods and services for producers, either domestically or internationally, can be an opportunity to consumers. improve margins. This enhanced efficiency can stem from a number of sources, including lower labor costs, greater access to raw materials, and more advanced Other definitions conceive of manufacturing and service provision processes, among others. supply chains as flows of materials that are 5. Another major motivation for building supply chains is the opportunity for processed, transported, and entry into new markets. Demographic shifts and rapid growth in developing otherwise transformed by a economies present tremendous growth opportunities for MNEs. Developing series of organizations into supply chain relationships in these economies allows MNEs to build a local higher value products. presence in order to build brand awareness, gain market insights, and reduce Supply chain and value costs associated with delivering final products and services to local customers. chain are related but distinct concepts. 6. MNEs also build supply chain relationships to gain access to strategic assets, which include skilled workers, technological expertise, and the presence The value chain concept of competitors and suppliers with valuable knowledge or experience. Access to was first described and these assets can improve product and service quality and support innovation. For popularized by Michael example, access to foreign knowledge is a key element in shifting research and 2 Porter as a series of development (R&D) activities to the supply chain. activities undertaken by a company that generate and B. Key Actors and Types of Supply Chain Relationships add value to products. These activities include 7. To maximize these opportunities and to create efficiencies in inbound logistics, manufacturing and service provision, MNEs have developed a variety of forms of operations, outbound supply chain relationships. In any one supply chain relationship, there are likely logistics, marketing and to be a number of unique actors: sales, and services, and they are supported by activities including firm » MNE: The MNE is the large, global company that is the buyer of a product infrastructure, human or service in the supply chain relationship. It may or may not be the resources management, ultimate retailer and so may face procurement and sustainability standards technology development required by other MNEs. and procurement. A » Supplier: The supplier is the company, which could be a large, global company‟s value chain is enterprise or a small or medium-sized business based in one region or part of a larger value system that includes the value chains of upstream 1 World Trade Organization, “World trade developments,” in World Trade Statistics 2009, (2009), suppliers and downstream www.wto.org/english/res_e/statis_e/its2009_e/section1_e/its09_highlights1_e.pdf. channels and customers. OECD, Moving up the Value Chain: Staying Competitive in the Global Economy, (2007), (See Michael Porter, Competitive www.oecd.org/dataoecd/24/35/38558080.pdf. 2 Advantage: Creating and Sustaining Wendy Tate, Lisa Ellram, Lydia Bals, and Evi Hartmann, “Offshore Outsourcing of Services: An Superior Performance. New York: Free Evolutionary Perspective,” International Journal of Production Economics, 120, (2009): 512-524. Press, 1980.) Peter Maskell, Torben Pedersen, Brent Petersen, and Jens Dick-Nielsen, “Learning Paths to Offshore Outsourcing - From Cost Reduction to Knowledge Seeking," DRUID Working Paper 05- 17, Danish Research Unit for Industrial Dynamics, Copenhagen Business School, (2007), www3.druid.dk/wp/20050017.pdf. BSR | OECD Discussion Paper on Responsible Supply Chain Management 4 locale, which sells goods (including raw materials, semi-finished, component, and intermediary products) or provides services to a MNE. Suppliers that sell directly to a MNE are known as first-tier or direct suppliers.3 Suppliers that sell to other suppliers are known as sub-tier suppliers; they may be several times removed from the MNE but provide a good or service that is an element of the good or service that is ultimately sold to the MNE. » Licensee: Licensees purchase the rights to use MNEs‟ brands, usually to produce goods that bear MNEs‟ intellectual property or to provide services on behalf of MNEs. Licensees may perform the production or service provision in-house or further outsource to a supplier. » Agent: Agents identify and negotiate with suppliers and licensees on behalf of MNEs. Agents typically act fairly independently of MNEs, although each relationship is unique. » Trader: Traders typically make markets