Responsible supply chain management
Introduction
Many companies in which Insight invests source the products they sell from the developing world, mainly because of the cost advantage those countries offer. In principle, this is a business strategy that Insight supports: it can reduce costs, enhance margins and, ultimately, boost profitability and returns for shareholders. Moreover, the expansion of manufacturing and agricultural production capability in developing countries can bring much-needed economic and social development and help to raise their populations out of poverty.
However, taking advantage of these economic benefits means the supply chains of most companies are becoming increasingly long and complex. A large general retailer in the UK may have in excess of 20,000 suppliers in a hundred countries. A multinational food producer may rely on hundreds of thousands of farmers – or even more than a million, in the case of Unilever. Other firms consolidate their buying, dealing directly with a handful of wholesalers or agents in, for example, London or Hong Kong. Those wholesalers or agents can, in turn, deal with thousands of factories and farms that rely on subcontractors and home-based workers to fulfil orders. For example, supply chains for surgical instruments, footballs and apparel have been traced back to workers’ homes in villages in Pakistan, Bangladesh and Morocco.
These long complex supply chains pose difficult cultural, managerial, logistical, environmental and ethical challenges for companies. They can give rise to significant operational and reputational risks that can undermine any potential gains companies may generate from sourcing more cheaply, as well as potentially impact negatively on the welfare of the people who produce them and the local environment.
Insight launched its engagement on responsible supply chain management in 2002. Our objective is to encourage companies with significant supply chain risks and impacts according to international best practice standards. We have run a series of projects, each one focusing on a different aspect of environmental and labour standards supply chains challenges. Our engagement has included:
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Benchmarking companies’ governance and management of labour standards
In April 2004, Insight and AccountAbility published a comparative assessment of the performance of 35 FTSE 350 companies with respect to their management of supply chain labour standards, based on their own disclosure on these issues. The report "Gradient: Promoting Best Practice of Supply Chain Labour Standards" covered six sectors with extensive developing country supply chains: general retailers, food and drug retailers, food producers, telecommunications, tobacco and beverages. Companies were assessed using against a range of criteria developed by AccountAbility and Insight relating to governance and risk management, policies, resource commitment, stakeholder engagement and auditing suppliers.
The results were not very encouraging. Thirty-one of the 35 companies scored below 50 percent overall and sixteen scored below 25 percent, indicating that many companies were a long way from achieving best practice. The food retail sector achieved the highest score, with an average of 37 percent, with the beverage and tobacco sectors scoring most poorly overall. Thirty-one of the 35 companies recognised the importance of social, environmental and ethical issues to their businesses, as evidenced by their discussion of these issues in their annual report and accounts or in other literature. Fourteen companies either did not disclose a supply chain labour standards policy or code or had a weak code that did not reference core International Labour Organisation (ILO) conventions.
Only one company aligned its staff incentives to performance on these issues – potentially indicating a significant disconnect among the other companies between high-level policy commitments and their integration into standard management processes. While 26 of the companies had declared a commitment to auditing programmes in their supply chains, only eight had committed to auditing across the full supply chain.
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Responsible pricing and buying practices
For many companies, managing supply chains so as to maximise buying power, flexibility and efficiency, while upholding any commitments to responsible supply chain management they may have made, can be a substantial challenge.
In February 2004, Insight launched a report, produced in conjunction with consulting firm Acona, entitled "Buying Your Way into Trouble? The Challenge of Supply Chain Management". The report – prepared on the basis of a series of interviews with companies, ethical trading specialists and purchasing specialists, and two ‘validation workshops’ with approximately 20 company representatives from companies – focused on the question of whether current supply chain management practices, and the drive for ever-greater efficiency, put pressure on suppliers' factories or farms, essentially forcing them to contravene some of the ethical standards in order to meet buyers' requirements.
The report identified three elements of modern supply chain management as having particular impact on suppliers' ability to uphold labour standards:
- The need to produce quickly and at low cost: time and speed.
- Issues around flexibility and seasonality.
- The search for lower prices and better deals: cost and risk.
This report explored how each of these characteristics links to, and may undermine, commitments in typical supply chain labour standards codes of practice. A key conclusion was that some companies may inadvertently be pursuing a buying strategy that creates tension, or in some cases directly conflicts, with their commitments to ethical sourcing. The report also indicated that, ironically, pressures of this kind are quite often placed on suppliers needlessly. They result simply from bad buying practices - inefficiencies, indecision, badly designed incentives and a lack of trusting business relationships. Such failures are therefore doubly undesirable: they cost companies money and undermine their commitments to source responsibly. It would appear, therefore, that companies would benefit from taking a more integrated approach to the challenge of maintaining a competitive, low-cost supply base, while upholding their commitments to trade ethically.
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Specific supply chain research and engagement projects
We have also undertaken work on a range of specific supply chain issues:
Worst forms of child labour – an issue for listed companies?
The ILO estimates that 246 million children around the world work. Of these, 180 million work in appalling and dangerous conditions, known as the ‘worst forms of child labour’ (WFCL). Some children are forced to work against their will, in bonded or slave-like conditions in the carpet or other manufacturing industries or on agricultural plantations. This type of employment is of particular concern because it is exploitative, often leads to physical or psychological harm, and denies children their human rights, including their right to an education.
In 2002, Insight commissioned research from Impactt Ltd, a London-based consulting company that specialises in human rights and supply chain issues, to assess where and in which supply chains the WFCL occur, and whether it was likely to be a significant issue for companies in which Insight invests.
Impactt found that while there is evidence to suggest that WFCL does occur in export supply chains, it is a small fraction of the total, and is highly fragmented by region and by product. Around five percent of all child workers (12 million children) are thought to work in the formal economy, in export-related jobs. The number working in the worst forms is estimated to be nine million. By far the majority, however, work in the informal sector, in small-scale manufacturing or on family farms, which may or may not be linked to the formal sector through sub-contracting and sourcing components.
The fragmentation of WFCL makes it very difficult for companies to identify it in their supply chains and to address it effectively. As a result, Insight decided to focus its engagement on other aspects of labour standards in the supply chain, while bringing this issue to the attention of companies we spoke to operating in sectors where it was most likely to occur and encouraging them to ensure that they did not have this type of child labour within the supply chain and to support sector-wide initiatives aimed at eliminating WFCL.
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Shrimp sourcing
Over the past several decades, the international community has actively promoted shrimp farming throughout Asia and Latin America as a means of economic development and poverty alleviation. According to the World Bank, farmed shrimp currently accounts for 30% of worldwide shrimp production, up from only 5% in the early 1980s. Most farmed shrimp is exported to the UK, continental Europe, Japan and the US to meet growing consumer demand. Although shrimp farming has made significant contributions to the economies of many developing countries through job creation and foreign exchange generation, the financial benefits have not always trickled down to the communities most in need.
In 2003, the Environmental Justice Foundation (EJF), a London-based non-governmental organisation (NGO), published a report highlighting the negative social, economic, and environmental impacts of intensive shrimp farming in developing countries. The evidence provided by EJF strongly suggested that these intensive shrimp farms had frequently contributed to an alarming increase in environmental and human rights problems. Of particular concern were:
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The destruction of seabeds and mangrove forests, the pollution of drinking water and agricultural land, and the depletion of wild fish stocks.
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Conflicts over land rights, illegal land takings for the development of shrimp farms, and associated violence, intimidation, and murder.
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The exploitation of workers, including poor working conditions, sexual abuse of female workers, and child and forced labour.
Insight wrote to a number of UK companies that import and retail seafood to determine whether they were aware of the issues raised by EJF, whether they had identified any problems associated with sourcing shrimp from countries identified as problematic by EJF, and whether their sourcing policies addressed the environmental and human rights issues associated with shrimp production specifically. Several of the companies were well aware of the specific social, economic and environmental risks associated with intensive shrimp farming in developing countries and had taken steps to address these concerns. Another company response was disappointing (as it did not answer our questions), and two companies were unresponsive. See page 4 of our Autumn 2003 bulletin for a summary of the companies' responses.
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Responsible pesticide use in the supply chain
Pesticides can safeguard crop yields by reducing competition from weeds and attacks by pests and diseases, thereby helping improve or protect the quality of produce and reducing labour input. Despite these benefits, a range of health and environmental problems are associated with pesticide manufacture, transportation, use and disposal. For example, the World Health Organisation (WHO) estimates that, globally, 20,000 unintentional deaths of agricultural workers occur from 3 million pesticide poisonings per annum, most of which are preventable. Similarly, the UK Environment Agency highlights that pesticides contaminate rivers, reservoirs and groundwater, requiring expensive water treatment which costs the water industry in the UK over £100 million a year.
Consumers are increasingly expressing concern about pesticide residues on foods. The publication of residue testing data by Britain’s Pesticide Residue Committee (PRC) has placed a particular onus on supermarkets to ensure that the residues on their produce remain within permissible limits.
Insight believes it is in the supermarkets’ interest to establish effective systems to monitor and manage both pesticide residues on products and the working conditions of the agricultural employees in their supply chains. Following a series of discussions with supermarkets and other stakeholders, in early 2006, Insight published a best-practice framework, "A proposed best practice framework for pesticide use in the supermarket supply chain", for supermarkets to use to manage business risks associated with pesticide use in their supply chains.
Among our recommendations are that every company commit to best-practice in Integrated Pesticide Management (IPM), which involves careful consideration of all available pest control techniques. The framework also suggests that these companies adopt relevant ILO labour standards and the Food and Agriculture Organisation’s International Code of Conduct on the Distribution and Use of Pesticides.
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Sustainable palm oil
In September 2005, Friends of the Earth UK and several other environmental NGOs produced a report entitled "The Oil for Ape Scandal" which highlighted how palm oil production is destroying rainforests and threatening the survival of many species, including the orang-utan. The report encouraged companies and investors to play an active part in helping to develop more sustainable forms of palm oil production and provided recommendations for palm oil producers, palm oil buyers and investors, as well as the UK, Indonesian and Malaysian governments.
In our view, it is important that companies are able to guarantee a legal and sustainable palm oil supply. This will help them to avoid being targeted by environmental groups campaigning on this issue and help them to demonstrate their commitment to minimising the environmental damage related to their businesses. In early 2006, we therefore asked eight companies in which we invest and that we thought were likely to use palm oil what steps they were taking to move towards sourcing sustainably produced palm oil.
We were encouraged by the positive response that we have received from the majority of the companies we approached. Marks & Spencers, Tesco, and RHM confirmed that their main suppliers where members of the Roundtable on Sustainable Palm Oil (RSPO). J Sainsbury confirmed that a number of its own-brand suppliers, such as Northern Foods, are already members of RSPO, and the company is actively encouraging others to join. Sainsbury is also participating in the British Retail Consortium forum on palm oil to explore the opportunities for influencing change at a UK and EU level. Reckitt Benckiser confirmed that its current supplier of soap noodles – a primary ingredient in soap, incorporating palm oil – are members of the RSPO.
For further information on our work on palm oil please see our briefing article.
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Publications
Reports
"A proposed best practice framework for pesticide use in the supermarket supply chain"
"Gradient: Promoting Best Practice of Supply Chain Labour Standards"
"Buying Your Way into Trouble? The Challenge of Supply Chain Management"
Briefings
"Insight encourages companies to source sustainable palm oil"
"Insight proposes best-practice framework for pesticide use in supermarkets' supply chains"
"RFID: the Holy Grail of supply chain management", Page 8
"Pesticide benchmark for supermarkets welcomed", Page 8
"New pesticides benchmark for supermarkets", Page 7
"Promoting responsible supply chain management", Page 8-9
"Is your brand teflon-coated? Managing global supply chain risk", Page 1 & 10
"Shrimp farming, biodiversity and human rights: quite a cocktail", Page 9
"Promoting responsible pesticide use in agricultural supply chains", Page 12
"Upholding little humans' rights: The Worst Forms of Child Labour", Page 10 - 11
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