By Bill Valentino
Supply chain management is a key business process focused on identifying and streamlining the ways to reduce costs, grow revenues and manage assets. It is a business process that begins with needs and ends with monitoring and evaluating the suppliers and relationships who meet those needs. It is a two-way network, a system of organizations, people, activities, information and resources involved in moving a product or service from a supplier to a customer.
Strategic supply and purchasing management, while meeting immediate vital operating needs of companies are also focused on the long-term survival and prosperity of an organization. Imbedded in the supply and purchasing process are risks that fundamentally affect the overall survival, competitiveness and bottom line of every business.
In ideal risk management, a prioritization process is followed where the risks with the greatest loss and the greatest probability of occurring are handled first.
In the supply chain there are operational risks – the interruption of goods and services: financial risks – significant changes in the price of goods or services: but “reputational risk�? can be even more serious than operational or financial risks because the loss of reputation can be catastrophic for a company.
Because the reputation of a company’s supply chain members has the greatest potential to effect its own reputation, this risk places new responsibilities on supplier and supply, not only to monitor environmental and social concerns but also to influence them.
Supply chain management focuses on bottom-line impact. This is where Corporate Social Responsibility in a MBA toolkit becomes closely linked as a tool in a business process that directly impacts financial and operational results of a company. In the context of CSR this is done by mindfully managing the reputational risks and challenges that companies, especially those with globally extended supply chains, inevitably face.
All businesses exist in the space between two entities – suppliers and customers. No organization can exist without them. For this reason, supply networks, are becoming the major determinants of corporate survival and success. Having risen to the level of strategic management policy and thinking, supply chain and purchasing management are being recognized for the impact that they are having not only on the strategic goals and objectives of companies but also on their results and bottom lines. Weaving CSR into the business processes of supply and purchasing management demonstrates how in a worldwide and hyper-competitive business environment that value creation and enhancement constantly require innovative approaches.
Effective purchasing and supply management contributes significantly to organizational success. The acquisition of materials, services and equipment of the right qualities, in the right quantities, at the right prices, at the right time and on a continuing basis is essential to the survival and success of any business. But supply chains are no longer just about technology, warehouses and distribution centers, or logistics. Today, “companies are increasingly turning to emerging social and environmental performance and process standards that provide a detailed and effective set of processes and policies by which companies monitor, adjust and report on corporate social and environmental activities throughout the supply chain.�? (Dale Neef – “Supply Chain Imperative�? ) This is in essence an important function of CSR, a new mindset for action and a catalyst for creating and maintaining efficient and transparent ethical supply chains.
A corporation’s ethics and risk management framework are at the heart of an ethical supply chain. CSR supports and facilitates this framework by implementing actions such as: a) helping to establish a company’s value statement and a comprehensive code of conduct that governs employee behavior (b) developing internally an ongoing business case for action on social and environmental issues (c) generating measurable and verifiable indicators of performance (d) facilitating the adoption of internationally endorsed processes and performance standards (e) developing programs for building awareness and support both for company and supplier employees, and (f) providing and communicating thought leadership and coordination across all key functions of a company to support the creation and management of a comprehensive ethical supplier program.
Without a basic CSR generated ethical framework companies lack the ability, the management focus, and the necessary ground rules for dealing with adverse behavior in their supply chains which can potentially create great damage to the economic viability, operations and reputation of every company. Taking responsibility for the management of an ethical supply chain that extends to a corporation’s supplier community is an important shift in thinking that has great importance to companies and to the global economy because it marks an important new mindset for modern corporations.
This new mindset, simply stated, is that with expanding and increasingly fragmented global supply chains come new and often unanticipated responsibilities. All companies today have a supply chain in some form that involves some form of social or environmental impact. They all need to actively and strategically manage not only their own ethical, social and environmental practices and policies but also those of their suppliers and subcontractors. Using CSR as a tool, modern corporations need to establish an ethical supply chain in order to reduce risk, protect reputation, live up to stated values, enhance the productivity of suppliers and reduce social and environmental impacts. Here is where CSR is playing a pivotal role. The reality facing companies is that lasting damage to a company’s reputation, brand value, and its long-term profitability are at stake especially when a huge gap exists between the stated goals of a company and the reality that exists in their local and global supply chains.
In the present global business landscape, outsourcing and the relocation of manufacturing and production bases to cheaper labor markets overseas have been the key features of the emerging global economy. But outsourcing is not limited to just low-skill labor. High –skill work is being outsourced to developing markets as well. Companies today understand that they can take advantage of inexpensive and flexible labor in developing economies, reducing their production costs, increasing profits and making their stock more valuable to investors.
But in this increasingly global business environment, companies are facing a new set of challenges that can be summed up by the reality that the globalization of the modern enterprise is occurring through many companies who are now either buying products from, actively engaged in outsourcing production or assembly from subcontractors that are located in low-cost labor markets.
Companies today need to be concerned with actively managing or at least monitoring and be aware of the ethical, social and environmental practices and policies of their suppliers and subcontractors in these low-cost labor markets. The reality is, fundamental changes are occurring in the world economy that are forcing nearly every company, especially manufacturing and distribution companies, to begin to reassess their relationships with their suppliers in their local and global supply chains.
Companies have to take responsibility for the quality of a product even though they don’t make it themselves. The same applies to the working conditions in the factories that make them and the environmental impact they have because of their operations. This is not a problem that is going to go away soon nor is it going to be resolved by the governments in countries where these factories reside.
In companies where there already exists an ethical supply chain framework there are corporate codes of conduct that clearly require suppliers to adhere to high employment standards and national labor codes. Many companies have even put in place independent monitoring systems for inspection of suppliers in order to ensure that these standards are met. Despite these precautions, labor violations, excessive hours, dangerous working conditions, overcrowded and dirty living conditions and accommodations continue. The reason for this is that governments in the developing world want and need the investment capital, and they have often been too eager to turn a blind eye to sweatshop conditions, official corruption or environmental exploitation in order not to scare away corporate buyers or investors.
If just viewed from a humanitarian point of view, companies must be concerned with these issues purely for the reason that every company has vested interest in avoiding working with a supplier that purposely exploits the environment or its workers. In the end there is no other better force for good, apart from the buying capability of a buying company itself. This is a key factor that enables companies to curb these types of practices through good management of an ethical supply chain.
Companies are facing a new era in monitoring and reporting of the social and environmental activities within their extended supply chain and even beyond that. This requires fundamental rethinking of corporate strategy and actions that involve many more than just public relations efforts.
The reasons why companies must pay close attention to their social and environmental issues within their extended supply chains is they are being driven by certain key factors: the relocation of manufacturing bases to developing countries, growing NGO and activist pressures, media scrutiny and the instantaneous and ubiquitous nature of the Internet, and increased scrutiny by investors
A fundamental force at work in the global economy is the worldwide relocation of manufacturing bases. Many companies are either sourcing their products directly from overseas suppliers, or have relocated large portions of their manufacturing base to operations in low-cost labor markets. Integral to the process of globalization for companies however is the expansion and increased fragmentation of their supply chains. Today products are purchased, manufactured, assembled and sold without regard to borders.
A dramatic shift of responsibility toward external parties has been effective in streamlining processes and has had the effect of reducing the social and environmental impact and footprints of many companies substantially. But this has come at a cost. The success of companies is more and more dependent on collaboration with and the performance of their suppliers. But what happens when those suppliers are found guilty of poor environmental, product safety or employment practices? Guilt by association becomes the new norm and companies are painfully realizing that by outsourcing or shifting production they are not able to rid themselves of all the legal, ethical and quality responsibilities accompanying these processes. This remains true even when suppliers are located in foreign countries and are both organizationally and legally separate from them. What is critical under these new circumstances is the increased need for monitoring and evaluation of supplier relationships, to be certain that their behavior is not endangering corporate reputation through illegal or unethical social or environmental practices.
Accompanying this, are continued higher expectations of companies by stakeholders to understand and act upon social and environmental exploitation issues that inevitably emerge through a presence in developing markets.
Another critical factor is the explosive growth in the number of activists, pressure groups and NGOs that now actively monitor both domestic operations and extended supply chain operations of corporations worldwide. These include development agencies, single-activist groups, corporate watchdogs; labor rights activists, and wide ranging environmentalist agencies such as Greenpeace and the WWF.
The public is beginning to see the rise in authority and legitimacy of NGOs as a valuable counterbalance those corporations whose purpose might be only for profits and seem to avoid dealing with social and environmental exploitation or other issues in countries where they operate.
An effective tactic used by pressure groups is the development of rankings for companies in various ratings and benchmarks. The Best and Worst lists can be influential and sometimes damaging to companies.
In the setting of well publicized major corporate scandals during the last decade, business leaders today are gradually coming to realize the powerful and often legitimate role that activists and NGOs play in helping to shape and regulate ethical business behavior.
While some companies view NGOs as adversaries to be avoided at all costs, it makes more sense to engage NGOs via CSR and utilize it as an important tool to win over NGO support. CSR does this by showing how companies are meeting global responsibilities and exercising moral leadership not only in the global markets were they are active but more importantly also in their local ones.
Another key factor is the increased scrutiny of media, which uses the threat of public shame, to excert influence on an altogether new and unprecedented scale. A single negative headline article can cost a company millions by ruining its reputation at a stroke.
Another major factor is investors who are increasingly avoiding investing in companies that have a reputation for permitting unacceptable social or environmental activities in their supply chain. For investors, the slightest hint of a scandal or wrongdoing can trigger a rapid sell off of stocks.
The development of Socially Responsible Investment (SRI) movement reflects different types of investment concerns. SRI, which is investing in listed companies that can adhere to higher standards of ethical, social and environmental performance provides another compelling reason for companies to demonstrate their commitment to exemplary behavior via CSR in these areas.
Ethical indexes such as the Dow Jones Sustainable Asset Management Index the FTSE4 Good are just two examples of how companies are being monitored according to their policies concerning corporate governance, environmental reporting, corruption, human rights issues, new green technologies and environmental product design and disposal policies.
While supply chain management focuses mainly on increasing long-term value by improving revenues, decreasing cost or both, its contribution should not be perceived as being only focused on cost. The realization that CSR implemented within supply chains and with suppliers can focus on value and revenue enhancement via the mitigation of reputational risks, demonstrates how this can help organizations to increase revenue and or decrease costs.
Volumes could be written about supply chain management and CSR but it all boils down to a simple saying which fits so well here “you are the company that you keep�?. This says it all! When companies begin to strategically integrate CSR into their supply chain management by monitoring the risks associated with their partners in the supply chain they go beyond just the scope of supply chain efficiency to becoming gradually the normal way of doing business for companies to be sustainable in the long-term.
About the author:
Bill Valentino, continuously working for Bayer in China since 1987, holds a MBA from Thunderbird, the Gavin School of Management, and a MA in Technology and Communications from Columbia University, New York. He co-directs the Tsinghua-Bayer Public Health and HIV/AIDS Media Studies Program and is a Senior Guest Lecturer at the Center for International Communications at Tsinghua University. He is also currently the Chairman of the European Chamber’s CSR Working Group and a long-standing member of the AmCham CSR Committee in Beijing.
