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Enterprise risk management

Managing social standards in global supply chains: risk identification and mapping

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Globalisation has radically transformed the rules for global businesses. Since the late 1980s/early 1990s, companies have extended their supply chains into countries and regions that were previously off limits because of political or economic factors. The reality is that there are just a handful of countries that are now considered out of bounds for global multinationals.

This has provided many benefits, to the companies themselves, to the countries of the developed world and to the countries in which these companies operate and source their products. Yet, these changes have not been uncontroversial. With the dramatic growth in the corporate footprint, questions have been asked about the impacts that these companies have on the societies and communities in which they operate, and on the people that they employ and that depend on them for employment.

Changing risks

The challenges faced by companies in the 21st century are not just related to the fact that they now operate in or source from many more countries than they did in the past. Five challenges are of particular importance.

With their multiple levels of subcontracting, in particular in countries or regions where labor laws are either nonexistent or not enforced, global multinationals can be significantly exposed to the risks associated with inhumane practices and inadequate working conditions. The U.S. Department of Labor, for example, has produced a list of 136 goods produced in 74 countries that use forced labor, child labor, or both. These goods include everything from strawberries, coffee, chocolate and sugarcane to footballs, bricks, garments, tobacco and gold.

Supply chains have become more and more complex.

Individual products now often comprise inputs from many dozens of suppliers. This raises questions about whether global companies are actually able to monitor and ensure the integrity and performance of their suppliers.

Demands on suppliers have intensified.

In turn, this has exacerbated the pressures on the companies and the employees in supply chains, too often resulting in downward pressures on wages and working conditions and upward pressures on working hours.

The range of issues that needs to be considered and managed by companies has grown.

In recent years, nongovernmental organisations and others have called on companies to address issues as diverse as the living wage, local content and HIV/AIDS. In many cases, these are issues that have proven extremely difficult for companies to manage in their own operations and factories, let alone in their supply chains.

Ever-closer media scrutiny and advances in communication technology have meant that companies cannot hide from their own practices or those of these suppliers.

This heightened scrutiny has also meant that the argument that companies do not have responsibility for the impacts of their suppliers is no longer seen as credible, not least because it is companies’ reputations that are affected by the actions of their suppliers.

Legislation.

Companies now face a complex patchwork of national and international legislation that looks to hold them to account for the social issues in their supply chains.

Changing business perspectives

These are extremely difficult challenges. While companies have struggled to develop management systems and processes that enable them to respond effectively to these challenges, there are signs of material changes in companies’ approach to the management of social issues. The most fundamental change has already happened in most global companies, namely the explicit recognition that social issues are business issues and that business issues are social issues. This has led many companies to accept that – whether they like it or not – they do have responsibility for their supply chains and that they need to strengthen their oversight and management of their supply chains.

Others have gone further. Some have broadened or reframed the objectives of their supply chain management efforts from a narrow focus on costs and efficiencies, to a wider focus on resilience, security and quality of supply. Others recognize that in the quest for higher social standards, there is a need to work collaboratively with suppliers and other stakeholders (such as NGOs and trade unions) to implement schemes aimed at, for example, developing opportunities for advancement, ensuring equal and appropriate representation, and improving legal protection for workers.

Finally, some are looking at whether, and how, they can ensure that ethical values, as well as economic considerations, are appropriately integrated into the decisions that they make and the management practices that they adopt.

How can companies identify social issues in their supply chains?

Different social issues will be relevant to different companies depending on, for example, the specific countries they operate in or source from, the specific products or services that they source, their business model and the commercial pressures that they face. The consequence is that companies will need to go through their own processes of identifying the social issues-related risks and opportunities associated with their supply chains.

Companies often feel that they are expected to engage with their entire supply chain. However, given the scale of most companies’ supply chains, this is generally unrealistic. Many companies therefore chose to focus, at least initially, on their most important suppliers; these are often those that the company sources directly from, has significant spend with and/or views as critical to production. They may, in addition, focus on particular “hot spots” in the supply chain (e.g., suppliers in particular subsectors or regions that are seen as particularly exposed to these issues).


Risk identification and prioritisation process

A generic process for identifying, assessing and prioritising risk in supply chains.

Infographic plots out effective risk management with data mapping, issue and tool identification, risk assessment, and prioritization.


What are the key social issues for businesses?

While each company will face different risks, with different relevance to their business, it is likely that most or all of the following will be relevant to all supply chains:

Child labour

One of the main reasons for the high prevalence of child labour is the burden of debt, which forces families to send their children to work. Children often work in export-oriented industries such as garments and footwear, glass manufacturing, leather tanning, stone quarries, and gemstones.

Collective bargaining and labour relations

Collective bargaining is a key means through which employers and trade unions can establish fair wages and working conditions. It can also provide the basis for sound labour relations.

Employment security

The growth over the past several decades of “nonstandard work,” a term which includes temporary contracts, temporary agency and dispatched work, dependent self-employment and marginal part-time work. Employment security is both about the protection of workers against loss of earned income as a result of job loss and about the protection of workers against fluctuations in income.

Equality and discrimination

Hundreds of millions of people suffer from discrimination – on the grounds of, amongst others, age, race, gender, sexual orientation – at work. This not only violates a most basic human right, but has wider social and economic consequences.

Forced labour, human trafficking and slavery

Forced labour takes many different forms, including debt bondage, trafficking and other forms of modern slavery. Almost 21 million people are victims of forced labour, with the majority involved in domestic work, agriculture, construction, manufacturing and entertainment.

Freedom of association

The right of workers to join and form trade unions so that they can bargain collectively is a fundamental human right. Trade unions have played a significant role in protecting workers’ rights and improving working conditions.

Health and safety at work

Safety and health conditions at work are very different between countries, economic sectors and social groups. Deaths and injuries at work take a particularly heavy toll in developing countries, where large numbers are engaged in activities such as agriculture, fishing and mining. Throughout the world, the poorest and least protected – often women, children and migrants – are among the most affected.

HIV/AIDS

Around 33 million people worldwide are living with HIV. Stigma and discrimination against people living with and affected by HIV and AIDS threaten fundamental rights at work, undermining opportunities for people to obtain decent work and sustainable employment.

Informal sector

The informal economy comprises half to three-quarters of all nonagricultural employment in developing countries. Women, migrants and other vulnerable groups of workers who are excluded from other opportunities often have little choice but to take informal, low-quality jobs.

Labour migration

Many countries rely on migrant workers to help them plug their labour shortfalls. While migrants’ remittances provide a vital source of finance and foreign exchange for households and governments in their countries of origin, many of the estimated 232 million migrant workers around the world are denied the same rights as national workers and remain particularly vulnerable to abuse and exploitation.

Wages

Wages are undoubtedly among the most important conditions of work and employment at the enterprise level. In many countries, government-set minimum wages fall far short of what many estimate to be a living wage. The reality is that the vast majority of the people in emerging economies making the products we consume struggle to survive on wages that are barely enough to cover their daily subsistence needs.

Working time

Excessive hours of work and the need to protect workers’ health and safety by limiting working hours and providing adequate periods for rest and recuperation, including weekly rest and paid annual leave. However, a variety of factors in recent years has led to new trends and developments in both working time and work organisation.

Practical challenges in detecting social issues?

Managing social issues in supply chains is extremely complex. Even identifying the major or most relevant social issues can be a major challenge for multinational corporations. The reasons include:

  • Lack of visibility in the supply chain: As one moves down the supply chain, it is inevitably much harder to detect these issues or to exert influence to improve conditions.
  • Lack of robust data and records: For example, it is often difficult to gather robust information on basic issues such as employee date of birth.
  • Cultural norms: In many cultures (including Western cultures) perceptions of women and their role and status in society are deeply embedded; these may lead to lower pay, lack of voice, fewer opportunities, sexual abuse and other forms of discrimination.
  • Social handicaps: In many countries women are likely to be less well-educated than men, and therefore have lower literacy and skill levels and be less aware of their rights. They are also likely to be less confident to try to seek information or training.
  • Deliberate misrepresentation: Suppliers can deliberately conceal or misrepresent issues, e.g., through asking children to go home when they know auditors are coming, through falsifying documents and records. This is not just an issue with suppliers; workers themselves may also want to protect their jobs – practices such as using fake identity cards are not uncommon.

How can companies effectively manage supply chain risks? A generic framework

There is now a robust body of knowledge and experience on how companies may effectively manage their supply chains in a way that protects the company’s interests while also maximising the social contribution made by companies. Perhaps even more importantly, much is also known about how not to manage social issues in supply chains.

Supply chain risks – as with other business risks – need to be managed through an iterative process. This begins with an acknowledgement of the key issues associated with a company’s supply chain operations. Thereafter, the company will need to focus on the implementation of formal policies and management processes, and ensure that stakeholders both contribute to and remain informed about its progress through effective engagement and communication strategies.


Generic supply chain risk management process

A framework for companies to understand, identify, manage and control supply chain risks.

Infographic shows supply chain risk management process, starting with secure top management buy-in and ends with supplier engagement


Conclusion: Wider strategic considerations

The wider strategic context means that simply managing social issues will not necessarily deliver the business outcomes (e.g., reduced reputational risk, better supply-chain resilience) that companies want to achieve. Nor, given the breadth and complexity of the social issues involved, will it necessarily guarantee the sort of social outcomes sought by employees, suppliers or civil society.

In conclusion, three core principles should underpin multinational corporations’ supply-chain management efforts. First, companies should properly understand – and, in turn, act on – the role that they play in creating or exacerbating social issues in their supply chains. Second, companies need to identify ways in which they can develop new buying practices that support – rather than undermine – suppliers’ ability to provide decent pay and conditions for their workers. Similarly, in response to complaints from suppliers about ”audit fatigue,” we are beginning to see the emergence of industry-wide audit-sharing initiatives, such as Sedex. Third, companies need to see their suppliers as partners, and develop their suppliers’ capacity to manage social issues. This may, for example, be through training and awareness-raising, through helping suppliers to build effective management systems, or through encouraging suppliers to recognise and engage positively with trade unions.


About the authors

Nicky Amos has over 20 years’ experience in managing and directing corporate responsibility in global companies, including The Body Shop International. Amos advises organizations on the development and implementation of sustainable development strategies, materiality assessments, stakeholder dialogue, and sustainability reporting and communication.

Dr. Rory Sullivan is an internationally recognized expert on responsible investment. He is strategic advisor, Ethix SRI Advisors and a Senior Research Fellow at the University of Leeds. Sullivan has written/edited seven books on finance, environmental and development issues, including Valuing Corporate Responsibility (2011) and Responsible Investment (2006).


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