Learning from Apple's supply chain management mistakes

[Editor's note: We continue to see fallout from the Apple-Foxxconn labor law scandal this week, with a leading environmental advocate imploring companies to make environmental compliance a requirement for their suppliers. This story from SocialFunds.com further explores the business case for sustainable supply chains presented in a recent report from the European Sustainable Investment Forum.]

The risks associated with corporate supply chain management were highlighted recently when an audit of Apple's primary Chinese supplier uncovered numerous violations of working conditions.

Following the investigation by the Fair Labor Association (FLA), both Apple and Foxconn Technology Group committed to full legal compliance regarding work hours, as well as remedial action addressing health and safety, worker representation, and compensation.

However, until full legal compliance is achieved, the attention of sustainable investors and human rights advocates will remain focused on Apple, increasing the computer giant's reputational risk in the event that Foxconn fails to deliver on its commitments. "There's a lot that Apple and especially Foxconn have to do now," Bennett Freeman, senior vice president for sustainability research and policy at Calvert Investments, told SocialFunds.com. "Progress on supply chain issues is more often incremental and takes years rather than months."

A recently published Procurement Report from the European Sustainable Investment Forum (Eurosif) details the challenges to corporations in managing the widespread trend toward outsourcing brought about by globalization, especially in the clothing and electronics sectors.

"The outsourcing and offshoring of manufacturing to emerging and developing countries has resulted in challenges to raise environmental and social standards in these countries," the report states. And to complicate matters further, "The scope of environmental and social challenges in supply chains has expanded from direct suppliers to further up the supply chain involving sub-suppliers and raw material suppliers."

Recent regulatory actions, as well as global standards for the conduct of companies, have highlighted the business case for sustainable supply chain management. As the report points out, the Dodd-Frank financial reform bill mandates that companies in the electronics and other affected industries report on the sources of conflict minerals, and the California Transparency in Supply Chains Act requires that large companies doing business in the state publish policies that address slavery and human trafficking in their supply chains.

Additionally, while the Guiding Principles on Business and Human Rights, endorsed last year by the United Nations Human Rights Council, are aspirational, the document clearly establishes that companies have a responsibility to honor human rights in their operations.

The business success of consumer goods companies "depends greatly on the reputation of their brands," Eurosif observes. "The brand value can make up more than 50 percent of their market value."

The report recommends that businesses develop codes of conduct addressing environmental and social issues, implement auditing programs to ensure that standards are being met, institute corporate social responsibility (CSR) training for their suppliers, and engage in industry collaboration.

For investors, the report advises that they first assess the exposure of companies in their portfolios to risks associated with supply chain management. Companies that achieve best practice by implementing Eurosif's recommendations should be better positioned to lessen the financial risk to investors.

"As supply chains are getting more and more complex, investors are increasingly scrutinizing how companies manage the risks related to the different tiers of suppliers," François Passant, Executive Director of Eurosif, stated. "A particular focus should be placed on environmental and social risks as these can have direct reputational and financial impacts."

This article originally appeared at SocialFunds.com and is reprinted with permission.

Photo of Shenzhen clock factory by BartlomiejMagierowski via Shutterstock.com