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Ethical supply chains: Why retailers need them and who is watching

Tuesday, 12 November 2013 | By Yolanda Redrup

The past 20 years has seen consumers take on a new role, ethical watchdogs. Scandal after scandal has played out on the front pages of newspapers as revelations of labour exploitation and environmental destruction have come to light.

These revelations have brought forth a new era where consumers are asking corporations to be transparent and accountable.


Since the late 1980s, there has been a shift in consumer shopping habits toward ethical consumerism. Aided by the internet, consumers have become curious. They want to know how something is made, where it’s made and who it’s made by.


No longer are companies able to use underage labour, engage in deforestation or use cotton from Uzbekistan without someone, somewhere, finding out and making the news known.


But despite the increasing scrutiny of retailers, tragedies have continued. On April 24 this year the Rana Plaza factory in Bangladesh collapsed, killing a total of 1129 people in what became known as the deadliest garment factory incident in history.


In response to the accident, a global push began for retailers to sign the Bangladesh Fire and Safety Accord (a legally binding contract in which 1600 factories will be inspected and safety training conducted), but only nine of the 29 brands which were manufacturing products in the factory have signed the agreement.


With consumer campaigns more powerful than ever thanks to the popularity of social media, knowingly or unknowingly having an unethical supply chain can have a direct, significant impact on a business’s bottom line.


SmartCompany spoke to University of New South Wales Business School economics professor Tim Harcourt, Baptist World Aid advocacy manager Gershon Nimbalker and Dearin and Associates founder Cynthia Dearin about the importance of ethical supply chains and how to go about creating one.


Consumer campaigns


Thirty years ago business owners may not have been afraid of consumer sentiment toward their brand, but now they should be.


In business, monetary imperatives often win out over ethical obligations, but revelations of child exploitation, unsafe working conditions and mistreatment of animals has caused consumers to take account, directly impacting bottom lines.


“There has been a growing groundswell of public opinion saying companies do have to pay attention to ethical sourcing,” export expert Cynthia Dearin says.


“The important point to remember is that the bottom line is still what really counts for companies, but we saw it with Nike, consumer campaigns can have an impact. Nike was having hundreds of critical articles written about the people in its supply chain being exploited and in 1998 its profits dropped by 69%.”


In a May 1998 speech to the US National Press Club, Nike founder Phil Knight said the brand had “become synonymous with slave wages, forced overtime, and arbitrary abuse”.


Nike now conducts regular independent audits of its factories, has devised multiple codes of conduct (which are freely available) and shares its audit tools online.


Since Nike, there have been many other examples of successful consumer campaigns – the fair trade movement of the 1990s/2000s, the ceasing of child labour in cocoa farming and the 2011 suspension of live cattle exports witnessed in Australia.


Chocolate companies such as Cadbury’s, Ferrero Rocher and Nestle have all certified that all cocoa used in their products hasn’t involved forced labour.


Following the live export suspension, domestic cattle prices slumped by around 12% thanks to a surplus of cattle in the market.


Last year football manufacturer Sherrin was also forced to retract half a million sports balls which had been made in India using child labour for as little as 12 cents a ball. Following the incident it audited its supply chain.


Tim Harcourt says consumer boycott campaigns have strengthened thanks to the internet.


“Consumers have more power now and they know more thanks to the internet,” he says.


“When I first looked into consumer campaigns in the early ‘90s I thought they’d fizzle out a bit, but now with access to internet, companies are having to respond.”


Australian fashion retailers’ report card


In the wake of the Rana Plaza factory collapse, Baptist World Aid Australia published a report of 41 fashion retailers operating in Australia, looking into their supply chain policies, transparency, monitoring and training of staff and stance on workers’ rights.


To give an overview of the fashion industry, Baptist World Aid gave each retailer a score ranging from A+ to F for each of the four categories.


Of the retailers included in the report, four received Fs in every category: David Jones, Lacoste, Skechers USA, Supre Holdings and Speciality Fashion Group (although the group has since provided Baptist World Aid with more information which would alter its grades).


Of the 41 companies, only two received straight As, 3Fish and Etiko; however, other companies performed reasonably well including Adidas, Inditex, Timberland and Hanes.


When examining the ethics of the supply chains, 61 questions were asked to each business about the three stages of its supply chain: the first line manufacturers (cut-make-trim manufacturing), textile production and cotton farming.


Gershon Nimbalker says of the 41 companies, only 40-41% knew most of their first line manufacturers and looking further down the supply chain, the numbers got worse. Only 24% knew their textile producers and only 7% knew who farmed their cotton.


“It’s something the industry is struggling with. You need to know who your first line suppliers are and then work backwards,” he says.


“There are a few approaches to knowing your supply chain, some retailers develop their own from start to finish, while others take part in trace projects or make sure everything comes from certified sources through fair trade.”


The majority of the large retailers failed to trace their supply chains back to their origins, with the exception of Timberland.


“It’s clear once a business wants to find out how their products are made they can,” Nimbalker says.


“Chocolate companies have done it through closed supply chains where they know it from beginning to end, and they should be doing the same thing in fashion. It’s very uncommon for fashion businesses to do this, but it’s not as hard for them as, say, technology retailers, where there are many more steps in the supply chain.”


The investigation by Baptist World Aid took place over 18 months. The brands were assessed based on their own publications alongside relevant independent reports, questionnaires sent to the brand for information and comment, which were reviewed. Non-responsive companies were contacted by phone and email multiple times.


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The grades served as an indication of the extent to which the companies had developed a set of management systems that could reduce the risk of labour exploitation.


Only two of the 41 companies reported making sure all employees in the supply chain received a living wage, a finding Nimbalker says was shocking, but not unexpected.


“It was expected in the sense that this is a core issue. It’s an issue workers in developing countries talk about most, but paying a higher wage affects the bottom line of companies,” he says.


“But production costs are generally a fairly low percentage of the total cost, so these businesses could still be quite profitable, but they’re not interested in changing.”


Major ongoing issues identified in the report included the use of child labour in the Uzbekistan cotton fields and ongoing worker exploitation in Bangladesh.


“Some companies like Pacific Brands, Kmart and Kathmandu are taking steps in the right direction, but many aren’t. Thousands of kids are still working in the Uzbekistan cotton fields in poor conditions, with sewerage leaking into the canals.


Of the businesses assessed, 37% had taken steps to use responsible purchasing practices and 59% had a policy addressing subcontracting and homework, but only 15% of businesses published the names of their cut-make-trim suppliers.


In a positive, 56% of businesses were conducting unannounced audits on at least 75% of their supply chain.


“Businesses have no legal obligation to conduct audits against labour rights standards, but if a consumer body decided to buy ethically, they’ll let them know.”


Tips for creating an ethical supply chain


While creating an ethical supply chain may seem a daunting, expensive task, all the experts agreed the cost of doing nothing is far greater.


“You can’t afford not to,” Dearin says.


“If you’re attached to a Bangladesh factory which collapses, it will affect your brand. Consumers will start to look for somewhere else to shop.”


From a best practice perspective, Nimbalker says 3Fish, Etico, Pacific Brands and Cotton On are good examples to follow when it comes to constructing ethical supply chains.


“They’ve invested the effort to have a good code of conduct and they knew at least who their cut-make-trim suppliers were and had a decent auditing process,” he says.


“They use things like offsite worker interviews where the employees are taken to a safe, comfortable space, unannounced visits so the factories can’t hide their child labourers and independent audits from credible bodies.”


For the fair trade brands, 3Fish and Etico, these companies also ensured workers were paid the living wage, had good dispute resolution procedures in place and had a grievance policy where workers felt free to report issues without reprisal.


Nimbalker recommends retailers preference suppliers which are renowned for their ethical standards and engage with them from the outset, but to create an ethical supply chain more than this is needed.


A 2004 research paper by Mick Blowfield from the US Centre for Corporate Citizenship found food retailers need to better consider the pricing of goods. Blowfield found if farm-gate prices are equal to or less than the costs of production, this can force the initial producer to exploit labour or engage in environmental mismanagement in order to reduce costs, rather than shut down production.


“In the agricultural sector it’s more complicated. Deforestation can occur because it’s cheaper for farmers to clear more land to expand production, then to improve productivity in a smaller space,” Dearin says.


“Equally if the farm-gate price for goods is too low, they’ll look for ways around this. Farmers will deforest rather than intensify. But for fashion retailers it’s more black and white because there are so many different sources – we know it’s possible to both make a t-shirt and allow the worker to be safe.”


When developing a code of conduct, retailers can look to the Organisation for Economic Cooperation and Development or International Labour Organisation for adequate minimum standards.


The ILO standards include provisions like freedom of association, allowing people to unionise, no child labour and no forced labour. Systems can then be built around this code to ensure all workers are protected.


Harcourt says the best way to examine a supply chain and build a code of conduct is through the eyes and ears of the workers.


“Workers themselves know where things can go wrong, they’re at the coalface. Use the internal eyes and ears as much as you can. Particularly with corruption in an organisation, it’s the employees who are aware of it,” he says.


Dearin says interviewing workers is crucial, as a common problem with Western organisations codes of conduct is they’re out of touch with the issues workers actually care about.


“A lot of things companies put into their ethical codes are great, but they don’t always address the issues that other people overseas see as important,” she says.


“Surveys with collectives in different countries like Indonesia and Kenya and have raised concerns and preferences and priorities of what the local people identify as key issues, in contrast to what’s addressed in Western codes.”


A study of social priorities in the Indonesian and Kenyan cocoa and tea industries found land-tenure security, fair and transparent legal systems, stable long-term buyer-seller relations and fair pricing and timely payment were the top ranked social issues, but these were not addressed in western businesses code of conducts.


Equally Harcourt says people should not expect other countries to adopt Australian standards.


“No one is saying to impose our minimum wage on workers in Indonesia or Bangladesh, it’s about improving their safety standards and meeting their living requirements.”

This story first appeared on SmartCompany.