Labor & Human Rights Supply Chain: Market Research Aerospace & Defense Sustainability Report

h2. Introduction & Key Issues

p. Aerospace & Defense is an industry dependent on high dollar contracts to deliver high end products such as airplanes, fighter jets, tanks and other high dollar items. Since the main driver of this industry is high cost items, most of the companies in this industry follow guidelines set by their customers, as well as the laws in places they operate and do business.

p. Most companies are focused on obeying the laws, but are not as focused on being a leader in human rights or protecting the environment. The reason for this is the majority of sales in this industry are to governments or other corporations, and not to individual consumers. Since the Aerospace & Defense industry is not dependent on consumer sales, they do not have to worry as much about their sales being negatively impacted by bad PR as companies in other industries, such as Apple, which is currently fighting a PR battle on human rights issues.

p. Taking a closer look at how companies in the Aerospace & Defense industry handle their supply chain we see the main focus being on obeying the laws. Most of the companies in the Aerospace & Defense industry seem to have a higher focus on human rights versus sustainability & the environment, but much of the enforcement and guidelines are not well defined or accessible to outsiders. Once again, a main driver of the lack of clarity for outsiders is the fact that this industry is not dependent on consumer sales.

p. To determine how well the Aerospace & Defense industry is doing through their supply chains in regards to human rights, the Chart in Appendix A was used to score the fortune 500 companies in the industry on multiple criteria. The rest of this paper will focus on the different areas that were graded and make generalizations on what was found industry wide. The main focus of this paper is not to say what companies are better than others but to highlight strengths and gaps in the supply chain for human rights and environmental sustainability in the hopes of driving continuous improvement

h2. Methodology and Rating System

p. When reviewing the Aerospace & Defense companies, the blank review document in appendix A was used to score companies on how responsible they are within their supply chain. The main issue that surfaced when scoring companies in the Aerospace & Defense sector was disclosure of information. Since these companies don’t sell as much product to the general public as other industries, most of the companies did not have information readily available.

h2. Labor Rights

h3. Code of Conduct

p. The majority of the companies in the Aerospace & Defense industries had a code of conduct that was easily accessible on their website. The code of conducts industry wide had a lot of detail and stressed following the laws. As far as the 8 core ILO conventions are represented in the code it was a mixed bag. Many of the code of conducts cover a few of the items but none seemed to stress all 8; the better organizations mentioned five or six.

p. As far as the penalties for the company or a supplier not following the code of conduct, the penalties were vague at best for most of the companies. Governments are a big customer for the Aerospace & Defense industry which created a tendency for the individual organizations to be dependent on the government to set the guidelines & rules for the industry to follow.

p. Best Practice: Boeing included a separate and distinct clause in its subcontracts with its suppliers entitled “Code of Basic Working Conditions and Human Rights” that requires the suppliers to comply with the laws regarding basic working conditions and human rights of the jurisdictions applicable to the suppliers’ performance under the contract. This subcontract term further encourages the suppliers to adopt and enforce concepts similar to the Boeing Code of Basic Working Conditions and Human Rights. Finally, this term must be flowed down to sub-tier suppliers.

h3. Contracts

p. The majority of the companies that have anything available on contracts appear to mention having to follow the code of conduct in the contract. The main penalties listed were the possibility of termination of the contract if the code of conduct set forth was not followed, but this was not listed for all of the companies that mention the code of conduct. Some companies had clear penalties listed out by severity.

p. Best practice: Boeing notes that in the event that the suppliers commit any material violation of law relating to basic working conditions and human rights in their performance of work of their subcontracts with Boeing, Boeing has the right to terminate those subcontracts for default.

h3. Reporting

p. n regards to auditing it appears that most companies had either an internal or external auditing system, but not necessarily an auditing system for violating human rights. In fact one company specifically stated that it would not audit its suppliers. It seems that the majority of companies in Aerospace & Defense industry are more concerned about following human rights laws and not setting guidelines to follow.

p. A couple of companies had websites set up to report violations but little data was available on how companies handle reported violations.

h3. Supplier Enforcement

p. In the Aerospace & Defense industry the majority of suppliers are required to follow the code of conduct set forth by the buying company. The only listed penalty is termination of contract, but it is unclear how often that happens or what the severity needs to be for a termination of a contract to occur. As far as how many suppliers are aware of the code of conduct it depends on how well they read their contract. One would think that on a major order a supplier would examine the contact to make sure they don’t do anything to violate the terms of the contact.

h3. 2nd Tier Suppliers

p. No companies in the Aerospace or Defense industries appear to have any guidelines for Tier 2 suppliers that can be connected to audit trails that prove enforcement. A few organizations mentioned flowing down requirements to sub-tier suppliers but did not make enforcement figures accessible for verification purposes.

h3. Evaluations

p. When it comes to auditing suppliers it is unclear on the frequency in which companies in the Aerospace & Defense industry conduct audits. As far as independent audits are concerned, no clear data was available. We’d like to see more information on how companies ensure their suppliers are compliant with codes of conduct.

h3. Tracking Mechanisms

p. The tracking mechanisms for violations of human rights are murky at best. Some companies have websites to track violations but what is tracked is not specifically stated. Most companies do not have any reporting. A few companies established hot-lines used for reporting of perceived violations.

h3. Miscellaneous

p. Most companies in the Aerospace & Defense category did not seem to have any training programs available to suppliers. A lot of the companies did seem to have internal training programs for a number of different subjects but Human Rights did not seem to be one of them. Some companies have online training programs available internally. We’d like to see these made available to suppliers as well.

p. Best Practice: United Technologies Corporation makes training available to company management, employees, and certain third parties regarding human trafficking and slavery issues, including training with respect to recognizing and mitigating risks within the supply chain. Those with direct responsibility for supply chain management are required to take this training. This would be better if it was specifically stated that sub-tier suppliers had to undergo the training as well.

p. As far as community involvement is concerned, all companies in the Aerospace & Defense industry are involved in the communities in which they are located. Programs ranged from programs for veterans to programs for the local homeless, as well as programs for childhood development. Community involvement is the one area that the Aerospace & Defense industry seemed to shine. Since a lot of items are sold to the military most companies seemed to have some sort of programs geared towards helping the veterans in the community. We could not find any examples of company involvement in the places where their suppliers are located but since most of the companies have several locations across the US & world, the companies do have a large reach into several communities.

h3. Lawsuits

p. In regards to lawsuits for human rights violations, the industry did not appear to have any recent major violations. The majority of lawsuits concerning the Aerospace & Defense industry had to do with labor disputes, mainly union labor disputes. OSHA did fine Honeywell for a labor dispute where it got rid of union labor and replaced the union workers with temp workers which resulted in an explosion from the labor not being experienced and trained well enough to handle Uranium.

h2. Environmental Sustainability

h3. Policy

p. The majority of Aerospace & Defense companies did not even mention environmental sustainability in the code of conduct. The main thing referenced in terms of the environment was to follow the laws but not much more.

p. When it came to penalties for suppliers for not being sustainable, it appeared that as long as the suppliers followed the laws, the majority of companies in Aerospace & defense category would still do business with that supplier. Since the environmental policy of most companies is not well defined beyond following the laws, no penalties are listed for non-compliance with the code of conduct for environmental sustainability. Even in the contracts, hardly anything is mentioned about the environment.

p. Best Practice: Boeing’s is developing a comprehensive plan resulting from an in depth dialog, both internally and with a group of representatives from its global supply chain, that, once fully implemented will embed environmental requirements across the full spectrum of Boeing’s macro procurement processes. The plan will call for consideration of supplier environmental programs in source selection decisions.

p. Another Best Practice comes from Lockheed Martin: Their “Go Green” initiative extends to their supply chain partners. Their “Greening the Supply Chain” team works with compliance and contracts organizations to suggest language for new or follow-on proposals as appropriate to reflect Green initiatives. They also take part in REACH-Registration, Evaluation, Authorization (and restriction) of Chemicals – A European legislation with global impact, REACH requires companies to provide hazardous chemical data to their EU customers.
Reporting
Since most of the Aerospace and Defense companies don’t have a strong sustainability guideline in their code of conduct it is unclear if that is even looked at in an audit. If sustainability is looked at in an audit, it is even more unclear what is being audited. The only thing that an Aerospace & Defense company may look at in an audit is making sure it’s suppliers do not violate the laws.

p. Many of the companies we reviewed were audited for the Global 500 CDLI 2010 report. This audit places high emphasis on disclosure of environmental footprint exhibited by each organization. A few companies ranked in Band B which reflects that the integration of climate change has been recognized as a priority for strategy but not all initiatives are fully established. Lockheed Martin, according to the CDLI website has moved from Band B performance in 2010 into Band A Performance in 2011. Band A Performance constitutes having a fully integrated climate change strategy driving significant maturity in climate change initiatives. [This was a news release in Feb of 2012, but the full 2011 data set is not yet available.]

p. When it comes to negative press, most of the companies are not the greenest companies, yet surprisingly a couple of organizations seemed to have a good record despite not having a strong guideline for suppliers. ITT industries was ranked 30th of the fortune 500 companies for its green-score. Raytheon had a major spill near St. Petersburg but appeared to react quickly and does have a middle of the road green-score.

h3. Auditing

p. In terms of auditing of suppliers it is unclear the frequency or what is being audited in the Aerospace & Defense industry. The one thing that appears to be important is making sure no laws are violated. With that being said, the strength of a country’s sustainability laws will determine how the Aerospace & Defense companies behave when operating in that country.

p. In regards to supplier enforcement for sustainability nothing clear was available for Tier 1 or Tier 2 suppliers.

h3. Miscellaneous

p. No training programs appeared to be available for instituting sustainability or a green strategy towards the environment.

p. For community involvement, the Aerospace & Defense industry’s programs did not appear to be as strong as its human rights programs. Most of the companies listed vague metrics of what they are doing to cut waste. Almost all the waste cutting measures appeared to be internal. Honeywell, which had some of the worst press for environmental sustainability, appeared to be one of the few companies that had an external program and had a habitat that it preserved.

h2. Score Overview

h2. Industry Results Overview.

p. The main stumbling block seen across the Aerospace & Defense industry sector was a lack of information disclosure. A lot of companies had good policies in place, but it was not clear to an outsider what the consequences for not following their code of conduct were. This could be by design to help protect as much information as possible from competition. The one thing industry wide that was easy to find was the code of conduct. The one thing companies in this industry could do to score better would be just having more information available to the public in regards to their supply chain.

h2. Interpreting The Results

p. Just because a company scored poorly on a certain metric doesn’t mean that they are not performing well in their actual decision making for their supply chain. Some information was difficult to obtain, making it very difficult to score the different companies. This metric should be used as tool to help understand what a supplier, competitor, and most importantly a customer, would see when trying to get more information about one of these organizations.

p. If a company scored poorly in an area, that company should think about how important having that information public is to the company. If a company has a stellar human rights record they should make sure their customers can easily obtain that information. While the Aerospace and Defense companies may not have to worry as much about poor PR as other industries, their customers, such as airlines & government officials, need to worry about it for their own bottom line. If a major airline gets bad PR from buying aircraft from a company that has a horrendous human rights and environmental sustainability track record, it could affect future profits.

h2. Issues With Scoring

p. The biggest issue regarding scoring across the board seemed to be hunting down the information and comparing that information to what other companies had available. Some companies seemed to try to hide as much information as possible, while other companies, such as Boeing, seemed to try and get as much information public as it could without sharing any trade secrets. The difference could be in the customer. With defense contacts, very few people outside the military see the end product while a company like Boeing’s product is seen by billions of people around the world as a means of transportation.

h2. What’s Next?

p. If you are reading this report you may ask yourself why I should care about any of this. You may decide that this is not important to your company’s growth or future. However, the information found in this research project is a snapshot of what customers and potential future customers can see. If a company has a negative image it may have no effect in the short-term if it has good relationships with its customers, but, if the negative image is passed on to the customer through association it could lead to cancellation of large contracts that could force an organization out of business. The key moving forward is to make sure suppliers understand what is expected of them and that customers understand the added value of doing business with a company that values human rights and environmental sustainability.

p. These Fortune 500 companies need to take a leadership role and require their suppliers to adopt their codes of conduct regarding human rights and sustainability as well as demanding their first tier suppliers push these requirements down the supply chain. Incorporating ratings of suppliers into procurement software such as Oracle or SAP will help drive suppliers towards abiding in human rights and sustainability practices. These organizations also need to develop an auditing format that is transparent with data available across the industry for other organizations to see, allowing penalties for non-compliance to ripple across the industry. By incorporating human rights and environmental sustainability metrics into high levels of the procurement process, organizations can drive compliance and help mitigate human rights issues across the globe and help the world go green.

h2. Sources

* Boeing, http://www.boeing.com/, 3/11/12
* General Dynamics Corp, http://www.generaldynamics.com, 3/11/12
* Lockhead Martin Corp, http://www.lockheedmartin.com/, 3/11/12
* Northrop Gunman Corp, http://www.lockheedmartin.com/, 3/11/12
* United Technologies, http://www.utc.com/Home, 3/11/12
* Honeywell, http://honeywell.com/Pages/Home.aspx, 3/11/12
* ITT Industries, http://www.itt.com/, 3/11/12
* Raytheon, http://www.raytheon.com/, 3/11/12
* Rockwell, http://www.rockwellautomation.com/, 3/11/12
* Alliant Techsystems, http://www.atk.com/, 3/11/12
* L-3 Communications, http://www.l-3com.com/, 3/11/12
* Precision Castparts, http://www.precast.com/, 3/11/12
* Textron, http://www.textron.com/, 3/11/12
* Goodrich, http://www.goodrich.com/Goodrich, 3/11/12
* Newsweek Green Score Rankings, http://www.thedailybeast.com/newsweek/features/green-rankings/2011/international.html, 2/20/12
* Carbon Disclosure Project: https://www.cdproject.net/en-US/Results/Pages/CDP-2010-disclosure-scores.aspx, 3/11/12

“Download Appendix”:https://scm.ncsu.edu/as/scm/i/channels/articles/scm/appendix-labor-human-rights-supply-chain-market-research.pdf