Sustainability - Setting the standards for the supply chain

Organisations have to seriously examine their approach to managing, measuring and reporting on supply chain performance, says Paul Druckman.

Consumers and commentators are increasingly making companies accountable for issues far beyond their traditional sphere of control. This increase in accountability is also important for investors in their assessment of companies. Nowhere does this apply more dramatically than in the supply chain.

As the ICAEW's recently published report, Sustainability: The Role of Accountants, points out, suppliers are more frequently being subjected to standards set by the purchasing organisation for adherence to specified production criteria. For example, in 1999 Marks & Spencer published its 'Global sourcing principles', setting standards for its suppliers to improve conditions for workers overseas. More specifically, in the belief that its customers would show a preference for timber products sourced from environmentally sustainable forests, B&Q requires its principal suppliers to include this constraint in an auditable environmental policy and reserves the right to review the operation of such policies.

New risks and responsibilities

In increasingly global markets, the procurement of products and services from organisations based far away from a company's home location is commonplace - even for SMEs. While delivering significant cost and other benefits, it has also added new risks and responsibilities. Those risks and responsibilities are associated with, for example, human rights and adverse environmental impacts, as well as complex operational challenges if organisations fail to manage their supply chains effectively.

There is acceptance that boundaries of responsibility now go beyond directly-owned operations, and consideration of issues within the supply chain are viewed as management best practice and a critical part of risk management in today's business climate.

Tackling these issues, which are commonly bracketed together under the heading 'sustainability' can be a daunting task. Organisations are faced with mounting regulation, standards and guidance aimed at improving social and environmental performance within both the organisation and its supply chain. This is combined with pressure from stakeholders to demonstrate accountability for activity along the supply chain, and performance is expected to a far higher degree than mere compliance.

Investor interest

Interest in supply chain issues is building within the investment community.

This is particularly evident in the number of sustainable investment indices now including supply chain criteria in their rating of companies' sustainability performance. For example, Business in the Community's corporate responsibility index requires companies to outline how they apply responsible behaviour when developing, purchasing, selling and/or marketing their products and services. Also, in November 2004, enhanced supply chain requirements were incorporated in the FTSE4GOOD index.

Businesses also face increasing scrutiny from the media and non-governmental organisations (NGOs) on supply chain issues. No-one can forget past media exposes alleging unethical supply chain practices such as child labour in the clothing industry, and the severe blows to share price, brand equity and staff morale that were dealt to associated companies as a consequence.

Additional pressure comes from consumers and customers, reliant on third parties to deliver products and services to the marketplace, who are demanding more detailed information on organisations' sourcing practices. This means that these issues are not confined to larger listed entities, as they increasingly require SMEs in their supply chain to adopt best practice.

These drivers, coupled with demands for improved corporate accountability and transparency, mean organisations have to seriously examine their approach to managing, measuring and reporting on supply chain performance.

They have chosen to approach the management of sustainability issues in the supply chain in a variety of ways. Focus to date has predominantly been around suppliers' compliance with specific company codes of conduct.

The majority of these codes are based on a set of internationally recognised labour standards enshrined in the International Labour Organisation (ILO) conventions covering issues such as equality and discrimination, forced labour, child labour and freedom of association. Risk analysis and prioritisation of the supply base, staff training on supplier sustainability requirements, supply chain monitoring and auditing are also central to many supply chain management programmes.

These approaches provide valuable insight into sustainability issues within supply chains, but often give only a 'snapshot' view of supplier performance. Alone, they cannot ensure that supply chain and reputational risks are being managed effectively or that desired improvements are being achieved.

Collaborative approach

As a result many groups working on promoting the improvement of supply chain labour standards are advocating multi-stakeholder initiatives which explicitly draw on the ILO core conventions and actively encourage companies and other interested parties to engage on these issues. No one party has all the answers, so a collaborative approach is a sensible means to providing practical and workable solutions.

High-profile organisations active in this area include:

•    NGOs, colleges and universities and the Fair Labour Association (FLA), a non-profit organisation that combines the efforts of industry. The idea is to promote adherence to international labour standards and improve working conditions worldwide through an independent monitoring system that holds its participating companies accountable for the conditions under which their products are produced.

•    The Ethical Trading Initiative (ETI), an alliance of companies, NGOs and trade union organisations seeking to promote and improve the implementation of corporate codes of practice covering supply chain labour rights and working conditions. Their ultimate goal is to ensure that the conditions of workers producing for the UK market meet or exceed international labour standards.

•    Social Accountability International, whose first social accountability system, SA8000, provides a voluntary standard based on international workplace norms in the ILO conventions and the UN's Universal Declaration of Human Rights and the Convention on Rights of the Child against which suppliers can be certified.

These mechanisms have proved successful in raising the profile of supply chain issues and in providing mechanisms for companies to engage on these issues and drive performance improvements in their supply chains.

There is no doubt that many businesses now recognise the benefits of effectively managing sustainability issues within their supply chain - improving supplier performance, building stronger relationships and protecting brand reputation, thus avoiding potential stakeholder criticism.

Buyers beware

However, new allegations are emerging that suggest companies' own buying practices are contributing to and exacerbating sustainability issues within the supply chain. This is a real challenge for companies and requires innovative approaches and active involvement and engagement with suppliers across a range of issues. Reliance on the plethora of codes and certification of practices alone may be insufficient to ensure a supply chain that can meet the demands of consumers, commentators and investors. Ultimately the benefit has to be a sustainable process that meets these stakeholders' demands.

This article has focused primarily on the human rights issues of supply chain management. The environmental issues of the supply chain are currently lagging behind those of human rights, but I predict that these will increase in importance over the coming years.

Paul Druckman is president of the ICAEW.

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