Monitoring Suppliers: A New Solution to the Conundrum

Monitoring Suppliers: A New Solution to the Conundrum

Last week an article and editorial in the Financial Times newspaper highlighted the many methods that Chinese suppliers use to cover up poor health and safety practices. The revelations were sobering, if not surprising. The reality is that getting developing world suppliers to comply with international social and environmental standards remains a formidable problem.

There are many reasons why current attempts to improve supplier behavior are not working very well. As the Financial Times article pointed out, suppliers, weighed down by multiple uncoordinated surveys and questionnaires, simply respond with unverified assurances of compliance.

They anticipate inspections, pre-select employees for interviews and rely on fear of retribution to assure that employee complaints remain unvoiced. Living wage issues, for example, are easily sidestepped by requiring longer hours than are shown on the time clock.

Buyers Share Responsibility

All that is true. But part of the responsibility for lack of improvement must also be shared by the multinational buying corporations. Despite common cause, these have made little coordinated effort to ensure that the monitoring, audit and improvement processes have been effective.

Most buying companies, for example, still insist that suppliers respond to company-specific questionnaires and surveys. Because they may have contracts with a multitude of foreign firms, suppliers are accordingly forced to spend huge amounts of time, resources and money replying to hundreds of CSR questionnaires and surveys each year. And because questions and expectations vary widely (depending on individual company codes), issuing a single, uniform response is impossible.

Moreover, social and environmental monitoring and auditing is seldom a company's core competency. Despite the fact that some organizations field cripplingly expensive supplier compliance teams of often 80-plus employees, companies readily admit to the difficulty of assuring good supplier behavior. See, for example, GAP or Nike's 2004 CSR reports. Inspections are often cursory -- a single day -- and results are poorly documented.

And, of course, because companies are doing their own monitoring and auditing, even when they publish their survey findings they are often accused of massaging the results. There is always a suspicion of conflict of interest.

The activist community, NGOs and ethical investment groups, put pressure on buying companies to monitor supplier behavior. For the most part, however, they have not the resources -- money, focus or expertise -- to actually improve supplier behavior themselves.

Reputation Management

Despite passing stringent environmental, health and safety (EH&S) laws, developing world governments have little incentive to enforce these laws or expose poor behavior in their suppliers. After all, they need the revenue and are wary of exposing wrongdoing that could damage their national or economic reputation.

Finally, when violations are found or admitted to, suppliers are usually expected to foot the bill for improvements themselves. No incentive there, then. And all of this is expected while buying companies continue to reduce lead times, pressuring supplier management for ever higher output at ever lower prices.

In short, the entire process is ill-conceived, costly and inefficient. No wonder social and environmental performance among developing world suppliers remains poor.

The real problem is that, lacking the key market mechanisms of motive, profit and collaboration that drive success in any normal endeavor, the whole mechanism for overseas supplier monitoring is based on a fundamentally flawed business model.

The incentives are wrong and duplication of effort is costly to companies and suppliers alike. Instead of focusing on real improvements that could eliminate environmental, employment and safety violations, and enhance productivity, the monitoring process simply overburdens suppliers and buying companies with an ineffectual paper chase.

Collaborative Monitoring

There is one approach -- for lack of a better term, the collaborative monitoring model -- that will help overcome many of these problems.

In this collaborative model, a group of buying companies in a vertical industry - say the clothing industry - collaborate in an effort to certify all of their common suppliers to an acceptable set of standards (for example, the ILO principles and the SA 8000 certification). They jointly fund the monitoring and certification process through an independent professional third party.

When supplier EH&S improvements are needed, these are funded in part by the suppliers themselves. Significant contributions also come from a common fund, set aside by member buying companies according to their revenue and their relative percentage of trade with the supplier.

These improvement projects are then overseen and administered by independent service providers -- i.e., professional process and EH&S consultants. This ensures that even as violations are corrected, the suppliers benefit from real environmental, health, safety (and usually productivity) improvements. Certification and monitoring for continued compliance is left to independent professional certification groups, which are paid, again, from a common fund.

Advantages All Around

The advantages of this collaborative approach are obvious. Buying companies save money because they no longer have to field a large team of employees dedicated to supplier monitoring. They simply contribute a portion of the supplier monitoring team costs to the certification and monitoring effort.

Buying companies can also distance themselves from the monitoring, auditing and certification process itself. Contracts with an approved supplier would no longer carry the hint of a conflict of interest that permeates the supplier monitoring process today.

Suppliers, too, have every incentive to sign on. They save money because they no longer have to respond to multiple, uncoordinated surveys and inspections. They also get assistance and professional support in improving their EH&S business activities.

The focus is on process improvement and certification by independent professionals rather than dubious surveys and individual company-sponsored inspections administered by corporate CSR teams. Therefore social and environmental practices in their supply chains are improved.

Of course, once certified, suppliers become highly sought-after as business partners, as they are able to assure buying companies that they are compliant with recognised social and ethical standards.

BSCI

In fact, a variation on this collaborative model now exists with BSCI (Business Social Compliance Initiative) that has been put together in cooperation with the Foreign Trade Association.

Based in Brussels, BSCI is a collaborative effort among European companies from the retail and other industries that have joined together to monitor supplier compliance, and to help suppliers certify to the SA 8000 standard. The initiative involves coordination of monitoring activities and a shared supplier compliance database.

Their goal is to oversee real social and environmental improvements among common suppliers and to eliminate much of the duplication of effort and excessive paperwork that plagues supplier monitoring efforts.

It is a model that seems to benefit all parties -- companies, suppliers, employees and environmentalists -- and is destined to be the origin of a new and more effective method for supplier monitoring.

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Dale Neef is a strategic management consultant specializing in ethical supply chain and risk management issues. He is author of The Supply Chain Imperative: How to Ensure Ethical Behavior in Your Global Suppliers.

This column has been reprinted courtesy of Ethical Corporation magazine. It was first published on May 9, 2005.
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