Overview

Today, every company risks reputational, economic, and legal consequences if its suppliers engage in inhuman or illegal employment practices, violations of human rights, corruption, or environmentally harmful activities. 

Customers are also becoming more aware of and sensitive to ethical issues. As a result, many companies are proactively building safer and more ethical supply chains.

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The tragedies that have occurred in Bangladesh’s supplier factories1 over the last few years have generated increasing awareness around Corporate Social Responsibility (CSR) and especially supply chain social responsibility.

Incidents such as the fire at the Tazreen Fashion Factory which killed at least 117 people, and injured more than 200 others, as well as the Rana Plaza factory building collapse which killed more than 1,000 workers in the Bangladesh capital of Dhaka have forced leading retailers and brands to take a deeper look at the risks in their supply chains, and the weaknesses in their supplier audit procedures. 

In the last two years, companies have spent significant amounts of time and effort in revamping their CSR strategies, and collaborating with other organizations to drive improved supply chain social compliance. 

Regulators have also upped the ante with new laws around human trafficking and child labour, including the proposed Business Supply Chain Transparency on Trafficking and Slavery Act, as well as the amendments to the Federal Acquisition Regulation (FAR). 

In response, organizations are adopting new strategies to close the gaps in their social compliance processes, and ensure ethical sourcing practices and safer supply chains. Let’s examine some of these strategies in detail. But first, a look at the outcomes of the Bangladesh supplier factory mishaps.

Bangladesh Factory Safety Incidents - Lessons Learned

The fact that the Bangladesh factory fires and collapses occurred despite the existence of supplier audit and compliance programs suggests that the traditional approaches to supplier governance and compliance are just not effective enough.

It’s imperative that organizations take a renewed look at their supplier governance programs to determine if and why they fail to spot potentially dangerous risks across the supply chain. It’s also crucial to examine which internal business practices and processes lead to teams working with high-risk suppliers and factories.

In the case of the Bangladesh factory incidents, one of the factories didn’t have the mandatory permits2. In addition, it was constructed poorly and housed several heavy electric generators on the top floor which ultimately led to the building’s collapse3.

These findings question the effectiveness of supplier audits, as well as the ability of sourcing organizations to track whether audit findings have been addressed by suppliers, and whether proper corrective and preventive measures have been implemented.

Today, every company risks reputational, economic, and legal consequences if its suppliers engage in inhuman or illegal employment practices, violations of human rights, corruption, or environmentally harmful activities.

Customers are also becoming more aware of and sensitive to ethical issues. As a result, many companies are proactively building safer and more ethical supply chains through the following steps:

Collaborative Initiatives for Safer Factories

Companies are increasingly joining hands with each other to transform traditional social responsibility programs. For instance, the Bangladesh supplier factory incidents led to the formation of the Accord on Fire and Building Safety in Bangladesh, Alliance for Bangladesh Worker Safety, and the National Tripartite Plan of Action on Fire Safety.

These three groups have individually and collaboratively developed fire, electric, and building inspections standards. They are also overseeing inspections and audits in a variety of factories. The Accord covers more than 1,600 factories4, the Alliance looks after close to 600 factories5, and Tripartite is expected to inspect the remaining 2,000 factories.

In their continuing pursuit towards advancing factory safety, the Accord and Alliance have together completed inspecting nearly 1,700 garment factories in Bangladesh6. The Accord revealed that it had identified more than 80,000 safety issues in 1,106 factories, which led to over 400 Corrective Action Plans (CAPs) being finalized by the factories and company signatories7.

The Alliance estimated that it would cost $250,000 on average for safety improvements at each factory8. The group has conducted more than 100 verification visits, and finalized close to 300 corrective action plans. They have also launched a pre-approval policy, requiring all new factories to be registered, inspected, and evaluated for compliance with key building and fire safety standards9.

Increasing Involvement from Senior Management

In many organizations, there is a greater level of visibility into and awareness of supplier social responsibility at the senior levels, including the C-suite and Board. Companies are also becoming more involved with other parties such as governments, NGOs, and trade bodies.

CSR is likely to have a more significant role in business strategy and goal-setting. It will certainly be a major deciding factor in how a product or component is procured. Already, decisions regarding supplier relationships are being made only after answering critical questions such as - is my supplier providing quality goods, is my supply chain secure, and is my supplier environmentally and socially responsible?

Stronger Supply Chain Due Diligence

Organizations need to look beyond their immediate suppliers, and gather complete information on their sub-contractors, sub-suppliers, factories, and even mills. They also need to identify and analyze all the risks associated with supplier factories.

The key is to ask the right questions. What are the services or products provided by the supplier? Where are the supplier factories located? Are those high-risk areas? Who are the sub-contractors? What is the production capacity? Which other brands do the suppliers work for?

Based on these questions, organizations can conduct a risk assessment of each supplier, and gauge their risk profile. Audits and monitoring activities can also be designed and prioritized based on the supplier risk profiles.

Extensive collaboration between compliance monitors, suppliers and factories is essential in proactively identifying, monitoring, and mitigating supplier risks. Organizations also need to take steps to identify the root cause of compliance issues, track audit findings, monitor the implementation of action plans, and train suppliers.

Reduction in Costs, Complexity, and Duplication of Effort

In today’s complex business environment, the number of departments within an organization that interact with the supply chain is significant. However, many of these departments are allowed to adopt their own processes to manage and assess their respective suppliers. This fragmented approach can result in multiple redundancies and inconsistencies.

The focus should be on reducing the duplication of effort, which can best be achieved when departments share supplier audit findings, reports, and performance scores with other. This helps the organization gain a 360-degree view of supplier compliance and performance. It also helps suppliers understand which areas in their business operations need to be improved. And finally, it enables brands and suppliers to effectively collaborate on action plans and tasks, set proper expectations, and help each other complete corrective actions in time.

The Use of Technology to Drive Efficiency and Integration

As businesses encounter increasing social responsibility expectations which extend well beyond the first tier of the supply chain, technology will play a critical role. Many brands and retailers have adopted technology to integrate their supply chain governance, risk, compliance (GRC) and audit management programs, and thereby enhance visibility into supply chain social responsibility.

Technology can also be leveraged to define supplier hierarchies, and map suppliers to the corresponding sub-suppliers, contractors, factories, products, and services, as well as the associated risk and compliance obligations. This tightly-knit information model improves supply chain transparency and accountability, and makes it easier to trace issues back to the responsible supplier.

In addition to these benefits, technology brings significant improvements to the efficiency of supply chain governance by streamlining and automating key processes such as supplier information management, supplier registration and on-boarding, supplier risk assessments and scoring, audits, corrective action, and performance evaluation. 

Some advanced technology solutions offer the capability to integrate with reliable industry sources to aggregate, validate, and enrich supplier data, supplier risk information, certifications, and other key data.

Technology can also enhance social compliance audits by facilitating a systematic, standardized, and closed-loop approach to the audit lifecycle – right from audit planning, to audit execution, management of audit findings, reporting, and issue remediation.

Apart from these processes, many organizations use technology to integrate supplier social responsibility initiatives with other supply chain assurance functions including risk management, product safety compliance, sustainability, and security compliance - thus creating a unified supplier performance scorecard.

Conclusion

As the world grows less tolerant of irresponsible and unethical supply chains, organizations are called to step up to the plate, and take greater responsibility for the actions of their suppliers. Part of that involves expanding and reforming CSR and social compliance programs in the supply chain.

The key is to facilitate greater collaboration with other organizations and also with suppliers for effective information management and documentation, due diligence, timely audits, corrective action plans, regular risk assessments, and continuous improvement.

With better collaboration, as well as greater supply chain accountability and transparency, organizations will be well-positioned to improve social compliance and social responsibility across the supply chain.

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