Low-cost country (LCC) sourcing is now a commonplace strategy for shrinking bottom line labor and material costs in most consumer products industries, including apparel, footwear, toys, and other manufactured products. Organizations continue to scour global markets for even lower labor rates, moving from Western China to the Pearl River, and now to Vietnam, Indonesia, Malaysia, Cambodia, and North Africa. With overseas factories moving to new locations with lower labor costs, monitoring and controlling working conditions, environmental compliance, and quality control becomes an ongoing challenge. The on-going tariffs levied by the Trump administration in 2018 against China has also made this option significantly more expensive for sourcing. But there is another reason why global sourcing must be approached with caution, and a full understanding of the impact of this strategy: sustainability.
Within the rubric of “Corporate Social Responsibility,” environmental infractions have generally received the bulk of attention from the international press. Recently, however, CSR and sustainability has also come to include the “human factor” implicit in this definition. Humans are also part of the environment. Although many organizations have sought to play down the importance of labor and human rights (LHR) violations in their CSR initiatives, this is beginning to change.
A set of policies outlining a position related to environmental issues is becoming increasingly noticeable in the press. Recent laws passed by the UK, Australia, and states like California are now requiring human labor policies as laws that impact corporate purchasing policies. Other laws include the use of recycled material, strict compliance with local, state, and federal regulations, and proper disposal of waste material. The Clean Air Act of 1990 imposes large fines on producers of ozone-depleting substances and foul-smelling gases. As a result, buyers must consider a supplier’s ability to comply with environmental regulations as a condition for selection. This includes, but is not limited to, the proper disposal of hazardous waste.
A good example of environmental policy involves the chemical industry, which traditionally has been a major source of industrial pollution. This industry knows that if it does not adopt a set of environmental policies, then government regulators will initiate strict regulations. Dow Chemical, for example, considers environmental concerns a critical feature of its policies and procedures. As a member of the Chemical Manufacturers Association, Dow is a participant in Responsible Care, a program initiative that addresses a community’s concerns regarding chemicals, including their manufacture, transportation, use, and safe disposal; health and safety issues; prompt reporting of environmental accidents; and counseling of customers. Supplier evaluation involves assessing the environmental policies of suppliers (primarily other major chemical companies). A key element of evaluation involves understanding and assessing the environmental risk associated with the particular chemical being purchased. Dow searches for suppliers that are green, according to industry standards.
It is now critical for organizations to apply the same level of due diligence they apply to the environmental performance of suppliers to another dimension of corporate sustainability: Labor and Human Rights. Labor and human rights is much trickier to monitor through purchasing policies. The conventional view is that most companies have policies governing ethical treatment of people at suppliers’ facilities, but this is not always the case. For example, companies on their websites often extol the virtues of their ethical, child-free, factories. However, our research suggests that most organizations do very little to truly monitor human rights violations in their low-cost country supply chain manufacturing locations. Supplier audits are the general tool used to try to control violations of labor laws, but finding evidence of”forced labor” is very difficult to unearth. To placate human rights activists, organizations have issued flashy corporate codes of conduct that appear on web pages or color brochures, along with pictures of smiling children and green pastures. But are these organizations truly monitoring these conditions? These organizations will be facing much more scrutiny in the next two to three years, and those that do not pay attention will feel the effects on their share price.
Moreover, there is increasing pressure from the value-norm driven community (the UN, Doctors Without Borders, human rights activists, customers, and the media) to consider human rights as a component of socially responsible management. This is also a growing demand from institutional investors (CALPERS, AFL-CIO, and pension fund managers), who are concerned about where their investment dollars are going, and if it violates the ethical and institutional mission of their stakeholders. In this economic climate where investors are aware of these issues, fund managers can no longer only be concerned solely about the financial bottom line, but are increasingly concerned about sustainable strategies that span labor and human rights issues. As such, organizations can no longer ignore abuses and problems with a shrug, but must be able to provide demonstrable evidence through performance metrics, action-based community initiatives, and supply chain audits that they are doing the “right thing.” But audits will no longer be enough. Action will be required, and we will have more updates on this topic soon…