Supplier development

Audit Safe?

by Lora Cecere on March 17, 2013 · 1 comment

It takes many shapes … like the deaths of nine unknowing consumers. In 2008, 762 people became dangerously ill in 48 states from contaminated peanut butter in the United States. The recalls permeated the food industry. Over 3800 products from 361 companies were recalled.  It should not have happened. The PCA factory that manufactured the peanut butter was certified as safe by the American Institute of Baking (AIB).

Audit safe graphic

Fatal fires are also a grim reminder. 262 workers died in Pakistan in September 2012 in a factory fire. The factory had a SA8000 certificate of approval; but when the fire started, locked exit doors doomed factory workers to a fiery death.  Just two months later, more than 100 people died in a garment fire in Bangladesh in November 2012.  A Walmart garment order was on the cutting room table. Walmart has worked hard on ethical sourcing. It was an order being manufactured by a supplier of Walmart.  The factory had recently passed an ethical sourcing audit.

Over the last ten years, supply chains have become more complex.  Companies are more dependent on a network of suppliers and suppliers’ suppliers.  Supply chain risks abound.  Supply chain leaders may have outsourced their supply chains, but they cannot outsource the risk. They are responsible. The management of this risk has grown in importance in boardroom discussions, but best practices remain elusive.  One thing that we do know is that audits do not work. A supply chain  cannot be made audit safe.

In a recent study, completed by Supply Chain Insights in cooperation with GreenBiz Group, we see that sustainability leaders and supply chain teams are not aligned on the effectiveness of supplier audits.  While both groups see that working with suppliers on ethical behavior and tying the behavior to contract terms is the most effective, supply chain leaders have more belief in supplier third-party audits than their sustainability counterparts.  What is clear is that expectations on sustainability behaviors require taking responsibility for the relationship.  In the words of one supply chain leader, ”We have to do the hard work.” This includes the setting of clear expectations and ensuring that there is compliance in contract terms and conditions.

What is a suitable alternative to an audit?  We believe that unstructured text mining is a potential answer, but only 3% of supply chain leaders are using unstructured text mining and supplier sensing to mitigate supplier risk.  In the use of unstructured text mining, publicly available documents are continuously scoured for information on factory performance. This includes local filings, social sentiment, and local news.

Contract management also offers promise. Companies need to put their money where their mouth is.  In the words of a presenter on this week’s Sustainability webinar, “We tie desired supplier behavior to contract terms. We consider everything else as just communication.”

For more on our work on corporate sustainability check out our recent report.

Also, for insights on the recent book tour of Bricks Matter, follow our progress on the Bricks Matter website.

 

“Supply chain sustainability” is the management of environmental, social and
economic impacts and the encouragement of good governance practices,
throughout the life cycles of goods and services.

Supply Chain Sustainability (definition)
United Nations Global Compact

The first corporate social responsibility statement was published by Dow Chemical in 1996. Since then, how have supply chain leaders and corporate sustainability leaders defined supply chain initiatives? What are the priorities? Where are the commonalities? Are they aligned? How has the focus on carbon reduction, water usage minimization, zero waste, conflict minerals, and labor practices changed supply chain? What has it meant to supplier development? We wanted to know, so we worked in concert with GreenBiz to get answers from 64 supply chain leaders and corporate sustainability officers.

Within an organization, it can be known by many names: the green supply chain; the good citizenship report; Corporate Social Responsibility (CSR) policy; or fair trade. The programs can have different names, but the goals are focused on creating a better balance between the corporation’s efforts to manage profit, people and planet. For many, this can be a stark contrast to the traditional supply chain goals of the right product at the right place at the right time.

To meet the stated corporate goals for sustainability programs, it is critical for supply chain and corporate sustainability teams to work well together. The success of one is dependent on the success of the other. Over the last ten years, corporate sustainability goals have transformed supply chain objectives causing companies to rethink their definitions of supply chain excellence. Much is in flux.

While the importance of these programs has grown over the last decade, in recent research, that will be presented this Friday during a Supply Chain Insights webinar, we find two disconnects. The first is the ability of the company to meet its stated goals based on the scope of activities. As shown in figure 1, 92% of companies surveyed have a public statement or declaration of goals and policies for corporate sustainability. It has also grown in importance to the definition of the brand promise. In fact, today, 74% of manufacturers connect their success in sustainability to their brand statements. For many, the goal is to use sustainability as a brand advantage.

Many companies are vulnerable.  The greatest impact on corporate sustainability (often 60% to 65% of resources consumed) is outside the company’s four walls; yet, as shown in figure 1, only 20% of companies are focused on the entire value network (from the customer’s customer to the supplier’s supplier). While the most common focus is on the enterprise, the greatest corporate risk lies outside the four walls of the enterprise, and companies are staking both their corporate and brand reputations on their abilities to deliver.

The second disconnect is decision making. The two sets of processes lack common processes and definitions for governance. Many of the decisions are ad hoc. As a result, when given a choice between supply chain and corporate sustainability policies, as shown in figure 2, over 50% of companies will choose the supply chain priorities. The primary drivers of the decisions are profitability and customer service.

Supply chain versus corporate social responsibility

At first, progress is easy.  The traditional supply chain and the sustainability objectives align closely in the beginning. As companies adopt CSR programs, initial results reduce costs and improve waste, and all is well between the two groups.  However, as the programs become more systemic, especially in the area of supplier development, pressures on program alignment increase. For example, the most sustainable decision on a supplier may be higher cost. Companies are currently struggling with the right mechanisms to get balance and alignment between the two programs.

What do you think?  We hope to have you join us for our webinar this Friday, March 15th at 10:00 AM eastern.  Join the audience polling and listen to the joint discussion of the results.  I will be joined by John Davies, Vice President and Senior Analyst of GreenBiz, and guest panelists Peter Murray, Supply Chain Development and Innovation Leader of DuPont, and David Lyons, Sr. Vice President, Operations & Supply Chain of Wells Dairy. All have great insights. A sneak preview of the results is available on slideshare.  To Register click this link: https://supplychaininsights.webex.com/mw0307l/mywebex/default.do?siteurl=supplychaininsights&service=6.